Before I cover how the statutes of limitations can effect debt negotiation, let me summarise what this legislation actually is.
The statutes of limitations refers to the time a company or individual has to recover a debt. For most credit contracts this is six years, the only exception is the Northern Territory where the period is reduced to three years. It should be noted that with court judgments this term is extended to twelve years. This goes a long way to explain why many credit providers will obtain a judgment towards the end of the recording period of a default, in an attempt to keep the debt recoverable.
Time starts to run from the date on which the right of action accrued. While it’s not always straightforward, a right of action usually accrues when a debt becomes due, either because the contract requires payment by that date or because the debtor defaults on regular installment payment obligations set out in the contract. Time may be re-started if the debtor:
- Makes a payment
- Acknowledges the debt in writing.
Given this, if the debtor does not acknowledge the debt in this way the credit provider will lose their ability to recover the debt after the limitations period expires.
It is important to note that even if a debt is discussed verbally, it is not in itself an acknowledgement of debt. This is particularly relevant with collection companies who understand this and will try very hard to have the debt formally acknowledged.
Now back to debt negotiation. It is common for debt collection companies to purchase old debt from credit providers, this is due to the fact that as a rule of thumb the older the debt the less they will have to pay for it.
For example, let’s say a debt fell into arrears with the credit provider in 2008, the credit provider tries unsuccessfully to recover the debt and after a period of time they write the debt off. Two years later they are approached by a debt collection company who offers to purchase their old debts. From the credit providers point of view some money is better than no money and they will often sell their old debts at a fraction of the current balance. Debt collection companies will then try to recover the full amount from the debtor.
It is illegal for a creditor or debt collection company to try to recover debt when it is subject to the statutes of limitations however this does happen. The truth is that as not many people understand this legislation there has been many examples of debt being paid after the statutes of limitations period has expired.
From a debt negotiation perspective the older the debt the better. If a debt is approaching the statutes of limitations debt negotiation companies will point this fact out to the creditor or debt collection company often resulting in a significant reduction of the debt.
If you are approached by someone regarding an outstanding debt, first ask yourself when the debt first fell into arrears, if this is approaching six years you may have more negotiating power than you think.