BANKRUPTCY, THE MOST EFFECTIVE FORM OF DEBT RECOVERY
Picture this. You are a service provider who has undertaken work for a client. However after much back and forth it becomes apparent the client is not going to pay. Finally, you go to court to get an order acknowledging your debt. But once this is done, it hits you. What next?
The above is an unfortunate and common sight in business, and the reality is that getting the court order is only half the battle. Often, getting paid is still a long way off.
So, returning to the question, what next? The title of this article spoils the conclusion somewhat, but it is important to remember that debt recovery is a spectrum of options, ranging from lenient to severe. It is essential to read the situation and apply the best option.
For instance, in small debt matters, where legal costs stand to overshadow the debt itself, a summons for oral examination may be appropriate. This mechanism is only a questioning by a registrar regarding the debtor’s financials. But it is cheap to arrange and intimidating to the debtor. Sometimes the mere threat is enough to scare a debtor into repayment.
Alternatively, where the debtor is employed, an attachment of earnings order may be more appropriate. Cut the middleman out and get a court order requiring the debtor’s employer to direct a portion of their income to you. An employer is unlikely to refuse a court order, and unless the debtor quits, this guarantees repayment in some form.
But for most matters, where the debt is sizeable, bankruptcy is the most appropriate option. This is because bankruptcy is using a sledgehammer to break a peanut. Indeed, the effects of bankruptcy include:
A trustee is appointed to manage your financials. Meaning you have no financial independence. If you earn over a certain threshold the trustee can seize this to discharge debts;
You can no longer travel overseas without permission. In fact, it is an offence to do so;
Your name will permanently appear on the National Personal Insolvency Index, meaning any interested party can see your financial history;
You are required to disclose your bankruptcy when trying to take out a loan, which makes getting finance all the harder; and
Your belongs and property may be sold to discharge debts (with some exceptions including household goods, tools used in earning a living and vehicles under a certain cost threshold).
Relevantly, the fear of bankruptcy’s consequences, rather than the money realized from it, is generally where the value of this recovery mechanism arises. If a debtor sees bankruptcy coming their way, they will often make efforts to repay the debt, simply to stave off disaster.
In fact, the law is designed to accommodate this. Where a debtor makes a request for an instalment order (i.e. a repayment plan of fixed sums at regular intervals) before a notice of bankruptcy is issued, the notice is rendered void. Moreover, even where a notice of bankruptcy has been filed, a debtor can still make an application for an instalment order. Such a request will not automatically render a notice void, but it will give the debtor grounds to argue in court that it should be. It also gives the debtor the opportunity to enter negotiations with the creditor.
Ultimately, debt recovery is a context specific procedure, and no solution will fit all situations. Nevertheless, when considering your options as a creditor, it may be well worth considering bankruptcy first.
This article is intended only to provide a summary of the subject matter covered. It does not purport to be comprehensive or to render legal advice. No reader should act on the basis of any matter contained in this article without first obtaining specific professional advice.
DISCLAIMER: We accept no responsibility for any action taken after reading this article. It is intended as a guide only and is not a substitute for the expert legal advice you can get from De Marco Lawyers and other relevant experts.