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At LCollect we believe that knowledge is power. Every month our debt collection blog gives you practical tips, stories and news from around Australia and the world.

Is It Legal to Charge Interest to a Debt?

Thursday, November 29, 2018 - Posted by Michael McCulloch

It's a question that we come across on a regular basis from our commercial clients and one that is more common than you may think.

Interest is the price (charge) paid for the use of someone else's money. For commercial clients, it is a charge that your clients pay when they don't pay that your invoice by the due date. When they don't pay you on the due date, they are effectively borrowing money from your organisation.

While those in the finance industry often have very well worded Contracts and Terms and Conditions that allow the calculation of an annual percentage rate (APR) many small business owners struggle to understand the requirements and while they understand the practical value of incurring interest they worry about the practicalities of applying additional interest fees or charges to an outstanding account.


Can you charge interest to a debt?

The short answer to this question is yes provided your terms and conditions permit it. There are however strict requirements you must meet in order for your claim for interest to be legally collectable, and we would recommend you seek legal advice to ensure your interest charges are recoverable.



What are the requirements?
There should be a provision in your Contract, Agreement and / or Terms and Conditions for the calculation of interest that the customer has agreed to prior to monies being advanced for the goods or services you have provided. This provision should be easy to understand, outline to the customer exactly when interest charges may apply, how they are calculated, the date that interest may start to accrue on the debt and should be a fair and reasonable rate.


What is a fair and reasonable rate?

A fair and reasonable rate can be difficult to determine however most businesses charge between 5% to 10% per annum. The interest charge should be at a rate that is a genuine estimate of the cost of the late payment to your business (ie your banks overdraft rate). Anything higher than this may not be enforceable. 

The Local Court of NSW currently prescribes a pre-Judgment interest rate of 5.50%. This rate is 4.00% above the cash rate last published by the Reserve Bank of Australia and is reviewed every 6 months. The current rates can be found at Interest Rates Applicable After 1 July 2010.


Should you charge interest?

Charging interest to a debt can have pros and cons, and is ultimately a commercial decision. Where a customer knows that interest may be charged on an overdue account or invoice it is often incentive enough for them to pay on time. On the other hand you may alienate a particular customer who may take their business elsewhere. While you may offer a better product or service than your competitor, applying interest to a debt could be the very reason you lose business.

In a situation like this it is often better to communicate to your customer that their payment is late and granting an extension for payment before charging interest and being flexible enough to agree to waive these charges if a customer can be retained.


Is there a minimum amount I can charge interest on?
In NSW the Uniform Civil Procedure Rules 2005 states the following:

36.7 Payment of Interest
(2) The Local Court may not order the payment of interest up to judgment in any proceedings in which the amount claimed is less than $1,000.


While interest may be charged on a debt less than $1,000, assuming that this is clearly set out in your Contract, Agreement and / or Terms and Conditions, it will, if legal proceedings prove necessary, be at the discretion of the Court as to whether or not interest will be awarded.

Have a question about interest, fees or charges? We recommend that you speak with Collection Law Partners or a qualified legal practitioner.

Disclaimer: This article is general information only and does not constitute legal advice and is not intended to be relied on in any way.

Five Tips for Collection Call Results

Monday, February 27, 2017 - Posted by Michael McCulloch

For some, picking up the phone to ask people for money doesn't come naturally and them out of their comfort zone. They don't feel confident with the process and fear embarrassment or failure.



If debt collection is part of your job responsibilities you can become more comfortable and successful by following a few basic tips.


1. Always Be Prepared

Take your time to read through any relevant notes that you may hold and make a quick summary before the call including details of the product / service provided, the amount owed, the current arrears, details of the last payment and / or the payment due date and any reasons for non-payment that have been offered up before. Having a very basic fact sheet allows you to control the call. You want the call to flow seamlessly so the conversation doesn't get sidetracked by a question you can't answer.

Also know exactly who you are calling, and we don't mean the customer personally as such;

  • What's their payment history like? 
  • Do they usually pay on time? 
  • Are payments getting later and later? 
  • Are late payments uncharacteristic? 

These little bits of information will generally allow you to create a quick mental profile of the account and the customer.


2. Think Positive
Your mental state has a strong impact upon how you handle a collection call and how the customer may respond to you. If you were frustrated by the last call take a moment to compose yourself and think the next call will be better and you'll get the result.


3. Speak Profesionally
We take our voices for granted but the tone, pitch, inflection and the speed at which we speak can be a powerful tool. Try to record a collection call and listen to yourself. Make the necessary adjustments and try again. This will not only improve as to how you come across to the customer but it will build your confidence.
Speak slowly and use a lower pitched voice and pause more often than you usually would.


4. Take Control
Calls can be managed in such a way that you can control the customers response. Some tips we've come across over the years include:
Addressing the customer by their name. This personalises the call and shows on your part respect and commands their attention. Don't overuse their name though as this starts to sound contrived and annoying.
Ask open-ended questions to try and get as much information as you can from the customer. If the customer has promised a payment ask how the payment is being made, which bank is the payment being made through, etc
Listen carefully to how the customer responds to those open-ended questions. As you gain more and more experience you'll be able to pick up small clues as to whether or not the customer is serious about making the payment.
Using silence can really control a call. Take you time to respond to a question or statement from the customer. Those silent moments will often prompt a customer to fill the void which leads to more information being obtained.
Stay focused on the purpose of the call. Some customers will try and avoid payment by complaining about the product or service they've received. This is purely a tactic. Be polite and even validate their opinion but always steer the conversation back to the purpose of the call which was their unpaid account. Don't let the customer manipulate you through their anger or use of derogatory language. This can be a ploy as well to upset you and end the conversation. It can be difficult however stay calm and try and remind the customer that you can't resolve the situation if they're yelling. If this tactic doesn't work indicate to the customer that it may not be a good time for them to continue the conversation and arrange an alternate time to call back to discuss the debt. Alternatively place the customer on hold for several moments. A few moments of silence can often calm the customer and you can return to the call to work toward a resolution.


5. Get A Commitment
A call that doesn't obtain payment in full or a repayment arrangement is often a wasted call. Why did you call in the first place? To obtain payment of the account.
If the customer can't commit to payment and needs more time make sure you control the timing. Instead of asking, "When can you get back to me?" ask, "Will you call me back by Friday?"
Also don't hang up the phone without summarising the result of the call: Reiterate their commitment, your expectations and the consequences if your expectations aren't met. Place an emphasis on urgency and stress the importance of the customer calling when they said they would or making the payment on or before the due date.
Finally if the customer doesn't follow through on their commitment make sure you follow through on the consequences or it's unlikely that the customer will take you seriously the next time you make contact.


Following our advice will help improve the effectiveness of your collection calls. Every customer is different and what works for one may not work for another but if you focus on the facts and listen to the customer you'll be a debt collection expert in no time at all.

Default Notices and Delaying Legal Action

Tuesday, August 09, 2016 - Posted by Michael McCulloch

As you are aware the National Consumer Credit Protection Act 2009 ("NCCPA") dictates that in a majority of cases you are required to issue a Notice pursuant to s88 and s92.

This Notice advises the customer of their Default and subsequently what is required to remedy the Default and the time-frame in which they have to comply with the Notice. We have seen, over the years, a number of accounts where a Judgment has been obtained only for a further Default Notice to be issued.

What is the impact of this on the debt collection process?

Once the customer has failed to satisfy the Default Notice refer to the Acceleration Clause within the Notice that specifically states:

"..... your liabilities under the Credit Contract will be affected by the Acceleration Clause in the Credit Contract which means you will then have to pay us immediately all moneys owing under the Credit Contract"

Effectively if you were to issue a further Default Notice you are giving the customer a further 35 days in which to remedy any Default. During this period no enforcement action can be taken in which to recover the debt including enforcing a Judgment in the Court.

Have you got a question about this article? Need some more information? Please contact us.


LCollect Mobile Portal

Wednesday, May 11, 2016 - Posted by Michael McCulloch

In our on-going commitment to offering our clients and customers the best possible online experience we have recently invested in the development and launch of our mobile portal which you can access by simply visiting www.lcollect.com.au via your smartphone or tablet.

These sites have been developed to work across several platforms including iOS for Apple, Android, Windows platforms and Blackberry. Our new mobile sites will automatically resize according to your screen size and the orientation of your device. With smartphones and internet enabled devices being so popular our mobile portal provides you, our client, and customers another avenue to deal with us and lessen the excuses customers may provide for non-payment of their debt.

For our clients we have provided a summary of our services, the ability to read our debt collection blog via Twitter and subscribe to our blog where you can have the latest debt collectio news, stories and tips delivered to your inbox each month.

Our customers are also well provided for with a majority of forms now being able to be completed including a Statement of Financial Position, Electronic Direct Debit and Authorisation of a 3rd Party.

Got a suggestion or an improvement? Let us know here.


Postponement of Enforcement Proceedings

Tuesday, August 25, 2015 - Posted by Michael McCulloch

We often come across examples where requests are made to our office for the issue of Default Notices. Having reviewed the request we then find that the same debtors have been issued with the same Notices several times over the course of their loan.

Effectively as a Creditor you are teaching the debtor to pay upon receipt of the Default Notice and not as their Contract stipulates. The debtor will often make contact, make arrangements to clear the arrears however fall into arrears again. The next month you will be issuing another Default Notice, the debtor will contact and make an arrangement and the cycle continues. As a Creditor how can you end this cycle and take control of the account?

Under Section 94 of the National Consumer Credit Protection Act 2009 the debtor can propose an application, verbally or in writing, to postpone action under a Section 88 or Section 90  (i.e. they make an arrangement to clear the arrears). The application must be made by the debtor prior to the s88 or s90 Notice expiring.

As the Creditor you must respond to the request made by the debtor within 21 days of the application and advise of the decision, either accepting or declining the application, the name of their relevant EDR scheme and the debtors rights under the scheme.

What happens though if you wish to accept the debtors proposal but don't want to get caught in the cycle of issuing another Default Notice?

As a Creditor you can issue a Section 95 Notice of Postponement under the Act.

This Notice indicates to the debtor the conditions of the postponement and advises the debtor that the Creditor is not required to give any further Default Notice under the NCCP Act. The Notice however only applies to the debtor that originally negotiated the postponement and does not apply to other debtors, mortgagors or guarantors under the Contract unless these parties have consented to the negotiated postponement.

You can find out more about this service by contacting us.


A Debt Collectors Psychology

Monday, July 27, 2015 - Posted by Michael McCulloch

Often we are asked how do you get results in debt collection.

The answer is a fairly easy one. Discover the problem and resolve the issue. This is where communication skills are the key to your success. Treat each debtor with a level of respect and dignity and find positive ways in which to obtain payment.

Think of the human brain as a tape recorder. While we as people may forget certain events the brain remembers and will still react to a situation, often attaching a feeling, to this event. This is the way their brain has been trained and unfortunately for us often the debt collection event is attached to an emotive feeling. Feelings of despair, anger or frustration, etc

Our role as debt collectors is often to re-train the debtor and attach a positive feeling to our communication. So how do we do this? We need to look at Transactional Analysis.

Everyone has 3 ego states:

Parent Ego State
This is a nurturing and judgemental state. The parent ego state corrects us and guides us. They tell us what to do, when to do it and how to do it. The parent ego state can be critical.

Adult Ego State
This is objective and logical thinking. This is where information is sorted, decisions made and problems solved.

Child Ego State
This is our emotional side. All of our emotional responses develop from this state including anger, revenge, happiness, love, hate, etc

So how do we re-train the debtor?

We communicate with words that come from the adult ego state. We are logical, ask questions that start with WHO, WHERE, WHAT, HOW and WHY. These information gathering questions solve problems. The more we stay in the adult ego state the better chance we have of getting the debtor into the same ego state and getting a positive result and payment.

If we communicate with the debtor where we take an parent ego state the debtor will immediately go into a child ego state. The result is one where the debtor will typically lose control and your account remains unpaid, complaints made and generally no progress is made.

How can we get the debtor back from the child ego state?

Place the Call on Hold: Re-evaluate the conversation. Return to an adult ego state and start asking the right type of questions.

Discontinue the Call: Re-evaluate where we went wrong and how we can improve the next time we speak to the debtor or on the next account.

Transfer the Call: The debtor will go immediately back into the adult ego state. You've allowed the debtor to calm down and they will look forward to speaking with another person.

By utilising these tools you will collect more debts, reduce complaints and make the debtors experience with you a positive one.

Updated debt collection guidelines issued by ACCC and ASIC July 2014

Wednesday, July 09, 2014 - Posted by Philip Harvey

The Australian Competition & Consumer Commission ("ACCC") and the Australian Securities and Investments Commission ("ASIC") released an updated guide to debt collection on 8 July 2014.

It is important to note that this guide to debt collection applies to debt collection agencies, in-house collection departments, Government agencies, Solicitors and others. It is not uncommon for internal collection departments or Solicitors to tell us that this debt collection guide does not apply to them. We refer them to page 1 of the Debt Collection Guideline.

In a previous draft of the guide, debt collection contact hours for telephone contact had been significantly reduced. The new guide to debt collection contact hours are not the same as the draft after many industry concerns were flagged with the regulators. 

Debt Collection Contact Hours

  • Phone: Monday to Friday 7.30am to 9pm. Weekends 9am to 9pm with no contact recommended on public holidays
  • Face to face: Monday to Friday 9am to 9pm. Weekends 9am to 9pm with no contact recommended on public holidays
  • All workplace contact to be the debtors normal working hours if known, or 9am to 5pm weekdays.

The updated guide goes through court prosecutions that occurred since the last publication that give good examples of breaches of the Competition and Consumer Act and collection practices that should not be followed.

The emergence of social media is and emerging technologies is also dealt with. We note that it can be difficult to "future proof" such a Guideline at the rate of technological changes we have been seeing, It is important to stick to the core principles underpinning the Guide to Collection when dealing with these new spaces.

For your reference  a copy of the guide available for download here.

 


PPSR and Debt Collection Warnings

Thursday, June 05, 2014 - Posted by Philip Harvey

The importance of internal processes and procedures that are correct when a debt is written off before being outsourced for collection cannot be emphasised enough.

 

In 3 similar examples of consumer credit files, involving 3 different lenders, the security interest was made void on the PPSR (Personal Property Security Register) through their actions. In one of the examples, upon being referred a written off debt for collection we were no longer able to collect the debt at all because of our clients actions.

 

In the most extreme example of what can go wrong in the collection of a debt, upon receipt of a new debt to collect it was noted that debt was secured by a motor vehicle The PPSR reflected our clients interest correctly. We repossessed the security 6 days later. Having waited for the Notice After Taking Possession of Mortgaged Goods to expire, we sought to sell the vehicle through an auction house. The auction house notified us that our client's interest was not listed on the PPSR.

 

We were concerned this was some form of error and immediately checked the PPSR and with our client what had happened. The collections manager informed us that they had done nothing to remove the PPSR listing. However, digging a bit further it was discovered that when a file is written off to a zero balance a report is generated for the loans team for zero balance loan accounts. This report then goes to an operator who is responsible for updating and removing listings on the PPSR. The listing is then subsequently removed, as it was in this case. Once a PPSR listing is removed the security is lost.

 

It got worse. The debtor was under a Part IX Debt Agreement. Our client was not part of the Part IX because of the security interest. In addition to removing the PPSR listing, a paid in full letter was issued to the debtor. The debtor subsequently forwarded this to the Trustee.

 

Putting this example into monetary values;

  • The vehicle was valued at $6,000. Our client was not entitled to any of the proceeds (the car was actually reclaimed by the debtor in this example). 
  • The Part IX debt agreement was for 60% of the value of the debts, our clients 60% equated to over $6,000.
  • Total loss to our client was over $12,000 plus the costs of the repossession.

 

Generally, the three examples of our clients removing their PPSR interest have some form of the following processes in place;

  • A bad debt is written off to a zero balance by the collections team.
  • The collections team puts a flashing file note showing the debt has been written off and outsourced for collection.
  • A report is subsequently generated of loans with a zero balance by a different team.
  • This report goes to a designated person whos role it is to update the PPSR register.
  • Any security interests are removed
  • A paid in full letter is issued

 

We are aware that some of our clients have additional steps in place to prevent this from occurring which include;

  • Changing the address on the debtors file (and making a file note as to why) to a designated internal address
  • The automated report from our understanding is altered, with exclusion criteria around the above designated internal address, such that any zero balance account with this address is not captured in the reporting.
  • Should this not work, and someone still tries to send a paid in full letter, the letter itself gets posted back to the lender, thus the debtor does not received a paid in full letter.


Debt Collection for Professional Services: Understanding Specific Risks

Thursday, May 29, 2014 - Posted by Philip Harvey

As with any progressive businesses with growth aspirations, the importance of strong cash flow in Professional Service organisations should not be underestimated. In particular, the two elements of credit control and debt collection play critical roles in maintaining strong cash flow.

This article aims to provide guidance on the processes required for credit control and debt collection within the professional services sector. It can be used as a starting point that organisations can then use to develop a framework for maintaining strong cash flows.

Understanding the different risks of your client base

Before professional services organisations can design an effective credit control and debt collection process, they must first understand the different levels of risk arrears within their existing client base. This will require a ‘Risk Analysis’ approach to collections that which will be unique to every organisation.

 

Once the client base has been categorised by risk profile then the next step is to develop strategies for ‘Preventative Action’ - to limit the quantity of accounts that fall into arrears.  And ‘Targeted Actions’ – That ensure the relationship is maintained whilst payments are swiftly collected.

 

We’ve outlined some possible risks Professional Services organisations may encounter when reviewing their client base and accounts that are in arrears. The list is by no means exhaustive and should be used as a starting point in developing a process.

Clients Comprising Large Organisations on Payment Terms of 90 Days

In the above class of client, the overall risk of non-payment is relatively small. However, given the potentially large nature of the client business and relatively large payment due in relation to a smaller suppliers overall revenue (say 5% of total revenue). When payment is withheld or delayed then the effects could be potentially catastrophic and further compounded where margins are small.

 

Clients from Small, New or Medium Sized Businesses

Given the high failure rate of new small businesses, it’s safe to say that they carry a high risk of defaulting on agreed payment terms.  It’s unfortunate, but the catch phrase ‘small businesses don’t plan to fail they just fail to plan’ falls true, too often with this category of client. 

Client Organisations from Statistically High Insolvency Rates

A good example of this type of organisation being within the ‘Building and Construction’ Industry. This sector has one of the highest rates of Insolvency, which in turn may attract a high risk profile for your organisation.

 

Rural Based Clients with Cyclical Incomes, Such as Farmers

These clients have historically had an excellent reputation for paying their debts. However your trading terms may not be able to be met owing to timing of the farmers income.

Individuals as Professional Services Clients

Working for individuals often means dealing with a large volume of clients with relatively low invoice values in relation to an organisations overall revenue as is the case of certain types of Law firms, Accounting and Health Practices. At a macro level you might assign a low level of risk to a client where the invoice exposure makes up less than 1% of Gross Income.

When assigning a risk rating to individuals and corporate clients, it’s worth noting that Banks, Building Societies and Credit Unions have very robust systems in addition they have access to data that allows them to rate and apply a risk pricing ( i.e., Credit Card Interest Rates). These tools are often unavailable to regular businesses when applying trading terms.

 

LCollect are a specialist debt collection agency, covering a wide range of industry sectors to achieve the best possible debt collection results for a diverse range of clients. We aim to deliver a sensitive and positive service experience whilst improving client cash flows.

To engage us or if you’d like a free and confidential consultation, please call: (02) 8923-1631 or click here to contact us

 

To further develop a strong robust system for credit control and debt collection, you can read about a preventative framework to maintain cash flows.


Debt Collection Default Notices and the Privacy Act 2014

Tuesday, May 06, 2014 - Posted by Philip Harvey

With the Privacy Act amendments commencing in March 2014, it is worthwhile reviewing how the Privacy Act impacts on the debt collection cycle and the compliance requirements it brings.

An important debt collection tool that many organisations have as part of their debt recovery process is the notification of default information to a Credit Reporting Bureau when a loan is in default. Section 6Q of the Privacy Act defines consumer credit defaults.

In collections, a credit listing is one of the best debt collections tools available. Where properly explained to people in arrears, it often yields a positive result. However, we would urge you to contact us or Collection Law Partners before listing a mortgage that is in arrears. This can have negative impacts on your debt cycle down the track.

A 6Q Notice must be issued if you intend to disclose information about a default to a Credit Reporting Bureau as part of your debt collection process. You must issue a new 6Q Notice where a full balance is due and payable if the previously issued notice was only for an arrears balance. This is likely the case where your organisation has incorporated the requirements of the 6Q Notice into the Section 88 Default Notice.

The next step before a default can be listed in the debt recovery process is to issue a Section 21D Notice. Unlike a 6Q Notice, a 21D Notice cannot be incorporated into another notice, and must be issued on its own. It is a notice that states you intend to disclose default information to a credit reporting body. The amounts stated in a 21D Notice must be over 60 days in arrears.

14 days after issuing a 21D Notice you can report the defaults stated in the notice to a Credit Reporting Bureau. If you have not reported the default after 3 months, you must issue another 21D Notice to report these defaults.

A possible simplified time frame for the issuing of notices for in consumer credit debt collection matter with an acceleration clause is outlined below.

  • 1 March 2014 - Day 1: A $1,000 payment is due on a loan of $20,000. Total arrears: $2,000
  • 1 April 2014 - Day 31: Another $1,000 payment is due on a loan of $20,000. Nil payments have been received. A Section 88 Default Notice is issued which stating the arrears of $2,000, and an Acceleration Clause specifies the $20,000 as due and payable if the $2,000 arrears is not paid.
  • 1 May 2014 - Day 61: Nil payments have been received. The Section 88 Default Notice has expired.
  • 1 May 2014 - A 6Q Notice is issued detailing the full $20,000 as outstanding.
  • 1 June 2014 - A 21D Notice can be issues for the arrears of $2,000 to be reported to the CRB
  • 15 June 2014 -  The $2,000 arrears can be reported to the CRB until 1 September 2014.
  • 16 June 2014 - A 21D Notice can be issued for the full $20,000.
  • 1 July 2014 - The $20,000 will be 60 days in arrears and can be reported to the CRB

 

Please note we make every effort to ensure this information is correct, however it should not be relied upon and does not constitute legal advice. As LCollect is not a lender, we do not have access to this section of the Credit Reporting Bureau's database.



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