I have debts, what are my options?
When faced with a claim by a creditor that you owe them an unpaid debt your options, generally are:
Be Careful with Open Correspondence (i.e. not marked “Without Prejudice”)
It is wise (unless it is your intention to do so) to not admit in open correspondence that you cannot pay your debts as and when they fall due, or that you are suspending payment of debts owed to creditors generally. If you do, creditor/s may be able to simply bypass the statutory demand or Bankruptcy Notice procedure (i.e. presumption of insolvency following any non-compliance or other action thereto) and apply for a winding up (of a company) or a sequestration order (of an individual) in reliance on your correspondence alone.
If you are at all unsure about how and when you can properly use the “Without Prejudice” legal concept and associated principles, please obtain legal advice.
Don’t let creditors squeeze you and always obtain legal advice if you are entering into a binding agreement
Whilst it may sound obvious, do not agree to any compromise that leaves you worse off than you were to begin with.
“Buying time to pay” can be very expensive.
If you are making any concession (e.g. that the debt is owing (in part or whole), that you need more time to pay, that you are unable to pay your debts as and when they fall due – i.e. you are insolvent)) you should be aware that these concessions may be used against you later and you should very clear about what you are getting in return for that concession. If you are contemplating signing a Deed of Settlement and Release or any other similar document you should always read the document very carefully and seek legal advice about the effect of that document before signing it.
Further, the content of your texts and emails can in certain cases be held to constitute a legally enforceable agreement, so be careful in your communications. For further information on how to avoid being bound prior to a final agreement, see our recent article.
If you dispute a debt, be very careful about agreeing to any kind of compromise that limits your ability to challenge the debt at a later date.
Often creditors will write to a debtor and propose a payment plan. If the debtor responds and agrees to the terms/ proposes a different payment plan which is accepted by the creditor, they can later be found to have ‘admitted’ the debt and be precluded from disputing it.
Further, borrowing from new/mezzanine/caveat lending/short term finance providers to pay out existing creditors can often be financially detrimental to the debtor. You should obtain financial advice from a qualified person before resorting to this option.
Be wary of scams/ non-financial counsellors
In a similar vein, unfortunately there are unscrupulous operators who target people who are experiencing problems with debt. Be cautious with any kind of unlicensed fee charging debt management provider.
These consultants often charge high fees for little or no benefit to the debtor. They are often unlicensed (no AFSL or ACL) despite often appearing to provide services that require a licence from ASIC.
The services of a financial counsellor are available for free.
Don’t engage in illegal phoenix activity
It is unfortunately common for debtors to resort to illegal phoenix activity as a “way out”.
There are many ways for this to occur. Often businesses and/or their directors experiencing financial distress will either receive unsolicited contact or be lured by the apparent attractiveness of quick/easy fixes on the Internet from advisors of different sorts offering their services. It is crucial to look into the background and professional associations of any person proposing this kind of activity.
If you engage anyone to advise you regarding issues arising from a failing business, they should be an insolvency practitioner, accountant or lawyer, and they should have the relevant professional qualifications and memberships.
If at any time you are transferring assets away, you should ensure that you receive full market value or the best value for the assets. Transferring the assets for no value or at an undervalue, is a hallmark of so-called “phoenix” activity whereby individuals seek to avoid the consequences of insolvency by spiriting away items of value. “Phoenix” activity that defeats legitimate debts is illegal and can result in the transaction(s) being set aside and civil and/or criminal liability for those involved. If you have any concerns regarding potential “phoenix” activity, you should immediately seek legal advice.
The COVID-19 crisis
Notwithstanding the above, there are very unique options currently available to debtors – during the COVID-19 crisis.
These are often specific to the nature of the debt or creditor involved.
In the commercial/retail lease arena:
In respect to residential tenancies:
With various options available to you and other forms of relief under the law (i.e. increased thresholds to statutory demands/bankruptcy notices and time periods to comply) you may be able to successfully survive through these unprecedented times.
Further, those seeking to pursue you for debts should be wary that many of the avenues for relief are currently non-functional and will likely remain non-functional with extensions to COVID-19 protection measures. In the alternative, negotiation in order to make progress on settling debts to the extent that you are able should be pursued.
The reprieve will only be temporary. At a certain point in time, the stimulus and other protective measures will be wound back and it is expected that insolvencies will rise.
Accordingly, now is the time to negotiate and/or explore your options. If you need assistance understanding how to apply for, or make best use of the various COVID-19 protections and measures to assist your business, please contact Gavin Parsons & Associates on (02) 9262 4471 to book a free consultation and discuss how we can assist you.