When should I use bankruptcy action to collect a debt against a consumer?
In the debt collection process, bankruptcy is but one available debt collection tool that can be pursued in the recovery of a bad debt.
This article seeks to explore in what circumstances creditors should pursue this debt collection tool.
Firstly, a debt needs to be above the minimum statutory limit amount which is $5,000. This was raised from $2,000 with the introduction of the Bankruptcy Amendment Act (2010). However, just because your debt is over this amount, does not mean you should necessarily consider Bankruptcy action.
Commencing the Bankruptcy process is expensive, so before you start your action, you should have an understanding of;
There are some far less costly mean of collecting a debt that do not involve Bankruptcy. It is assumed that when you are considering this as an option other non-legal collection attempts have been exhausted. These options include:
These alternative avenues are not always available. We can provide examples of asset rich consumers that have been property owners but have had not assets to seize (cash or physical), nor earned over the garnishee threshold. Where these debtors refuse to negotiate for payment, Bankruptcy may indeed be your only option if you want to collect your debt.
There is no point in undertaking Bankruptcy action if your debtor has no means or assets that could satisfy your debt.
In order to establish if an action will yield a return, you should:
This is perhaps the most difficult aspect of making a decision to commence bankruptcy proceedings are not. Whilst there are scenarios that will make this an obvious choice, often it will be very grey and determining the true financial position of the debtor impossible. Instead, relying on your best guess after extensive searches and research has been undertaking. It only takes one large undisclosed debt to turn your action from being one that will generate a return, to one that will lose you money.
This is a simple yet important step. As this bankruptcy process requires personal service of documents, not knowing the location of your debtor can lead to expensive untimely delays in the process, and in extreme cases, your actions expiring due to time limitations.
There are debtors that will actively avoid personal service of documents, so it should be established before proceedings are commenced where your debtor is located and what their possible attitude to service may be. Previous contact logs are an excellent starting point for this.
A basic Veda address search and White Pages search will often assist you in confirming your debtors location.
Where your debtor has skipped, you may need to review previous credit applications or engage a specialist skip tracing agency to locate your debtor should the basic searches not yield a result.
In the next article outlining the bankruptcy process in debt collection we will explore when you should consider using bankruptcy for a commercial debtor.