Incurring Debts from Delinquent Clients
Debt is a very normal part of running a business – whether you are offering products or services, you may have clients in debt to you, or you may indeed be in debt to others, such as suppliers.
Bad Business debts don’t happen by accident, and while it may be a hard pill to swallow, incurring these debts can be a two way street. By following strict business practices (outlined
below), you will be able to avoid incurring bad business debt.
However, as a business owner, if you have a client who has missed a payment/s, it is important to know your rights when it comes to recovering these debts.
Statute-barred debt and statute of limitations are two terms that many small and medium business owners are not familiar with. The lack of clarity between these two terms and how it can make an impact on the business’s cash flow is a matter which needs to be addressed sooner rather than later.
Statute of Limitations in Australia
Many business owners may not be aware of this but attempting to recover or collect debt from unpaid or overdue invoices has a time limit – this is the statute of limitations. While it varies from
state to state, the general premise of the law is basically the same: you can’t go after debts after a certain amount of time.
When Does the Period Begin?
For the most part, the period begins as soon as a debt becomes overdue. For example, if the due date is on 1st of February and the client has not complied with the payment schedule, the statute of limitations begins on the 2nd of February and ends after a certain period.
Here’s a bit of good news for business owners: the statute of limitations can reset or start anew as long as the client has acknowledged in writing that there is debt to be paid, has made a payment, or has entered a payment arrangement.
While resetting the time period for paying off debt is indeed convenient, not all states in Australia allow this. The limitations can be reset for any number of times in South Australia, Queensland, Western Australia and Tasmania, while in New South Wales, ACT and the Northern Territory, once the limitations have expired there is no more chance of attempting to recover debt.
How Long Is It In My State?
For most states, a simple contract would have a limitation set to six years. Simple contracts are debts usually handled by a debt collection agency such as credit cards or business debts. In the
Northern Territory, their time frame is just three years. Find out how other states handle statute of limitations:
- Australian Capital Territory – Limitation Act 1985
- New South Wales – Limitation Act 1969
- Northern Territory – Limitation Act 1981
- Queensland – Limitation of Actions Act 1974
- South Australia – Limitation of Actions Act 1936
- Tasmania – Limitation Act 1974
- Victoria – Limitation of Actions Act 1958
- Western Australia – Limitation Act 1935
Not all debts follow the given general time frame and can in fact stretch to as long as 15 years. Usually debts in real estate that include mortgages a 15-year statute of limitations applies. Heading to court may work in your favour in a sense that the debtor will be ordered by the judge to pay their debt. A court judgement may reset the statute of limitations to 12 years for most states in Australia, except in Victoria and South Australia where a 15-year limit is enforced.
Whilst the statute of limitations is running, the business has the legal right to recover unpaid debt. A debt becomes statute-barred when the time limit has elapsed. A business or creditor may not pursue a debt anymore, and may even get into trouble if they mislead the debtor into paying.
Can I Still Collect Statute-Barred Debt?
The short answer is yes.
New South Wales is the only state that cancels all debts when the statute of limitations lapses. In other states, the debt still exists. The only problem is that the best you can do is ask for payment.
Pursuing a debt after the statute of limitations has passed will most likely not work in your favour. The debtor can easily contest your claim and you will have no choice but to cease all efforts in attempting to recover the debt.
Keep Debt at Bay: Follow These 4 Steps For Less Business Debt
Keep business debt to a minimum by following these smart practices:
- Have your terms of trade professionally written Your terms of trade will outline how the transaction will transpire and will include details such as payment schedule; what happens when the client misses a payment; and how they can be legally pursued. This document will be legally binding when both parties have signed the contract.
- Keep in touch Communicate with your clients regularly and remind them of any outstanding invoices. Have your email automatically send a payment reminder a few days before its due date.
- Check the books Some small business owners fail to check their accounting records and actually forget that a client or two owes them money. Go through your books every week to see if there is something amiss. As soon as you notice a discrepancy, reach out to the client. The longer you wait, it is more likely that the client will not pay their debt.
- Credit history check Not all clients mean well and it will save you a lot of time and money if you perform a credit check before transacting with them. Their credit history will tell you a lot about their spending habits and how diligently they have been paying their bills.
Contact JMA Credit Control
Another line of defense that you can set up for your business is to get in touch with a professional debt collection agency like JMA Credit Control. With over 5 decades of experience
under our belt, we specialise in debt recovery, credit reporting, helping businesses set up terms of trade, and credit insurance.