It is a Tuesday morning and the phone rings. The caller identifies herself as a debt collector and says your business owes $14,500 on an equipment lease that ended three years ago, plus interest and fees. She asks for payment today and mentions court action if you do not cooperate. You are not sure the amount is right, you are not sure the debt is even yours, and you have no paperwork in front of you.
What is actually at stake
An unpaid debt does not disappear because you ignore it. The original creditor, whether a bank, supplier, lessor or service provider, can sell or assign the debt to a specialist collection agency, and that agency can enforce it in your name's place. If a court action runs its course, a judgment against you or your business can lead to garnishee orders over your bank account, seizure of assets, and for a large enough debt, bankruptcy or company wind-up. Interest, fees and legal costs usually keep accruing while you delay.
The flip side is that a debt collector is heavily regulated. Collectors must follow strict rules about when and how they contact you, and they cannot harass, coerce or mislead you. The debt itself may not even be enforceable. Limitation periods, errors in the amount claimed, or a broken chain of assignment from the original creditor can all mean you owe less than is claimed, or nothing at all. The real trap is responding the wrong way. Paying a disputed amount, or acknowledging the debt in writing, can turn an unenforceable debt into an enforceable one.
Five steps to work through the demand
Hold off on paying until the debt is verified
The collector's first demand is not a court order, and you are not obliged to pay on the spot. Before you commit to anything, ask the collector to put the claim in writing and provide:
- how the debt accrued and under what agreement;
- a copy of the original contract or lease;
- a statement showing how the amount was calculated, including payments made, interest and fees; and
- proof that the collector is entitled to collect, such as a deed of assignment from the original creditor.
Debt collectors routinely chase debts that have been bought in bulk, and the paperwork sometimes does not survive the transfer. If the collector cannot produce the original agreement or show it is the correct assignee, that is a legitimate reason to dispute the claim. Do not admit the debt over the phone, do not agree to a payment plan on the spot, and do not hand over bank details until the amount is confirmed in writing. Every conversation should be treated as evidence that could be used later, so keep notes of who you spoke to, when, and what was said.
Check whether the limitation clock has run out
Most debts are only enforceable for a limited number of years after they fall due. In New South Wales, an action on a contract cannot be brought more than six years after the cause of action accrued under s 14(1)(a) of the Limitation Act 1969 (NSW). The Northern Territory applies a shorter period of three years under s 12(1)(a) of the Limitation Act 1981 (NT). Other states and territories have their own limitation legislation, generally six years, so the applicable period depends on where the contract was made.
Two qualifications matter. First, the clock runs from when the debt became due, not from when the collector first called. Second, the clock can restart. Under s 54 of the Limitation Act 1969 (NSW), a written acknowledgment of the debt or a part payment "confirms" the cause of action, so that time running before the confirmation no longer counts. That is why the first step matters so much. A small payment to "keep the collector happy" can wipe out a limitation defence that was almost complete. If the limitation period has expired and no judgment has been entered against you, the collector can still keep asking, but you have a complete defence to any court proceedings, and you should state that defence in writing.
Know the rules the collector must follow
The ACCC and ASIC debt collection guideline, RG 96, sets out how the Commonwealth consumer protection laws apply to collectors and creditors. Under the guideline, telephone contact is limited to a maximum of three calls a week or ten a month, between 7:30 am and 9:00 pm on weekdays and 9:00 am and 9:00 pm on weekends, with no contact recommended on national public holidays. Face-to-face contact should be a last resort, and workplace contact should be confined to your normal working hours or 9:00 am to 5:00 pm on weekdays. The ACCC's consumer guidance is equally clear about what a collector must never do:
- use physical force or coercion;
- unduly harass or hassle you;
- mislead or deceive you; or
- take unfair advantage of a vulnerability, which can amount to unconscionable conduct.
These prohibitions, which sit within the consumer protection provisions of the Competition and Consumer Act 2010 (Cth), apply just as much when a collector contacts someone connected to you, such as a spouse, business partner or family member. Collectors must also protect your personal information under the Privacy Act 1988 (Cth). A collector may contact a third party only to locate you, and must not disclose the debt to them. If a collector discusses your debt with staff, neighbours or family without your consent, that is a privacy complaint you can take to the Office of the Australian Information Commissioner. The regulators do enforce these rules. The ACCC took a debt collector to the Federal Court for misleading debtors in ACCC v ACM Group Limited (No 2) [2018] FCA 1115, and the elements of undue harassment and coercion were considered in ACCC v McCaskey [2000] FCA 1037.
If a collector breaches these rules, you can ask that all contact be in writing, report the conduct to the ACCC, and complain to the Australian Financial Complaints Authority if the debt relates to a financial product such as a credit card or loan.
Respond in writing, and negotiate from a position of facts
Once you have the paperwork and know where you stand, you have two paths:
- If the debt is verified and you owe it: the honest route is usually the cheapest. Tell the collector what you can genuinely afford, and propose a payment plan. Collectors are often willing to accept a lump sum that is less than the full amount to close the file, and in genuine hardship cases, where income is low and the situation is unlikely to change, a waiver is possible. Get any arrangement in writing, including confirmation that interest and fees are frozen, and never set up a direct debit you cannot sustain. If you cannot afford to pay anything, free and confidential financial counselling is available through the National Debt Helpline on 1800 007 007.
- If you dispute the debt: put your grounds in writing and ask the collector to hold collection activity while the dispute is resolved. Common grounds include that the debt is not yours, that you have already paid it, that the amount is wrong, that the limitation period has expired, or that the collector cannot prove the debt was validly assigned. Ask for the original agreement and a full statement of account. Keep copies of everything you send, and send it by a method you can prove was delivered. A collector that keeps pursuing a debt you have disputed in writing, without providing the documents you requested, is behaving the way the regulators expect collectors not to behave.
Take court paperwork seriously, whatever you decide
A letter of demand is a precursor, not a judgment. But if the dispute is not resolved, the collector can sue. If you receive a statement of claim, application or other court document, the deadlines to respond are short and non-negotiable. Ignoring the paperwork does not make it go away. It produces a default judgment, which is far harder to undo, and a judgment debt brings enforcement options including garnishee orders, seizure of assets and, for larger debts, bankruptcy or company wind-up.
There are also limits on how far enforcement can go. Repossessing goods that secure a regulated credit contract is governed by the enforcement procedures in the National Consumer Credit Protection Act 2009 (Cth) and the National Credit Code in Schedule 1 of that Act. Under s 91 of the Code, a credit provider cannot repossess mortgaged goods without a court order where the amount still owing is less than 25 per cent of the credit provided or $10,000, whichever is lower, unless it reasonably believes the goods are at risk of being removed or disposed of. If a collector or creditor turns up to seize goods, ask to see the paperwork, do not obstruct them physically, and call a lawyer immediately.
When to bring the debt to a lawyer
Many debts can be resolved by the steps above. But bring a lawyer in early if the amount is material to your business, if the debt is disputed and the collector is threatening proceedings, if a limitation question is close to the line, or if the debt is secured against assets or guaranteed personally by a director. These are the situations where a mistake is expensive.
If you brought the situation to us, we would start by reviewing the demand alongside the original agreements and any guarantee or security documents. We would verify the chain of assignment, checking that the collector actually owns the debt it is chasing. We would assess limitation periods and any defences, including whether the amount claimed includes interest or fees that were never agreed. If the debt is valid, we would negotiate a settlement or repayment arrangement that suits your cash flow and includes a full release. If proceedings have started or are threatened, we would respond within the deadlines, defend the claim if there are grounds, and manage the enforcement risk. Where personal guarantees or insolvency are in play, we would advise on the exposure before it becomes a bankruptcy or wind-up application.
The habit that protects you: verify before you pay
The most expensive mistake in debt collection is also the most common. Paying a cent towards a disputed debt, or signing anything that acknowledges it, can restart the limitation clock and convert an unenforceable claim into a live one. A collector's demand is a request backed by a threat, not a finding against you. Your first move should always be to ask for the paperwork, in writing, and to work through the five steps before you commit to anything. That single habit protects you whether the debt is genuine or not.
If a debt collector has contacted you about a business debt, the position to remember is this. Debt collectors must follow strict rules about when and how they contact you, and they cannot harass, coerce or mislead you. Debts are only enforceable for a limited period, generally six years, or three in the Northern Territory, and a written acknowledgment or part payment restarts the clock. You are entitled to proof of the debt and of the collector's right to collect it, and you can dispute the debt in writing on grounds such as payment, error or expiry of the limitation period. If the debt is genuine, negotiate a realistic payment plan or settlement in writing, and get free financial counselling from the National Debt Helpline if you need it. If court paperwork arrives, respond within the deadlines and seek legal advice immediately. A lawyer's review is usually the difference between a negotiated resolution and a default judgment.