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Judgment debt options

Judgment debt options

Last updated: October 2020

What is a judgment debt?

If you owe money to someone (called a creditor), they can apply to the Magistrates’ Court (for debts of up to $100,000) for an order that the debt must be paid. Once a judgment has been made against you by a magistrate ordering that you pay the creditor an amount of money (called a judgment debt), interest will accrue at the penalty interest rate on top of the original debt (as at October 2020, the interest rate is 10%pa, but is subject to change).

Negotiating with the creditor

You can try to negotiate with the creditor to repay the judgment debt either by instalments or as a lump sum.

If you have a lump sum of money but it is less than the actual debt, you should try to negotiate with the creditor to accept the lump sum and waive the remainder of the debt. For example, if you owe $5,000 and you offer $3,000, this might be enough to finalise the debt. It is always worth trying to negotiate with the creditor in this situation.

Alternatively, you could offer to repay the debt in instalments. The amount that you offer to pay over a set period should be reasonable, and in proportion to the amount of the debt and your financial circumstances, or the creditor is unlikely to agree. If you make an offer to repay the debt by instalments, you should try and come to an arrangement with the creditor that interest will cease to accrue during the repayment period.

It is important to record the terms of any negotiated agreement in writing (this is usually called a 'Deed of Settlement and Release') and, importantly, to obtain written acknowledgement from the creditor that they have no further claim against you once the debt, or an agreed lesser amount, has been repaid.

What are the most common methods of enforcing a judgment debt?

If a judgment has been entered against you and the debt remains unpaid, the creditor has the right to enforce payment of the debt. A judgment will only be enforced at the request of the creditor. Common forms of enforcement include:

  • summons for oral examination
  • instalment order
  • attachment of earnings order
  • attachment of debt order
  • warrant to seize property
  • bankruptcy proceedings.

What is a summons for oral examination?

A creditor may make an application for you to attend court for an oral examination. This is a hearing before a deputy registrar at the Magistrates’ Court to find out about your financial circumstances.

The Court will set the hearing date and location, which would usually be the Magistrates’ Court closest to your address.  At least seven days prior to the hearing, the creditor must serve a summons on you to attend the hearing.  If you do not attend, a warrant may be issued for your arrest to compel your attendance at a further hearing.

At the hearing, the registrar will conduct the examination and ask you a series of detailed questions about your financial circumstances, including your living arrangements and dependents, and your assets, income, debts, and expenses. The creditor’s representative may also ask you questions about your financial circumstances.

You will be required to answer the questions under oath. You will be provided with a list of the questions to be asked (called an Examination Sheet) when you are served with the summons. You should carefully review the Examination Sheet and prepare accurate answers to the questions prior to the hearing.  You should also take along to the hearing any documents that support your answers in the Examination Sheet, such as pay slips, bank statements, loan statements, and recent bills.

Only you, the registrar, the creditor, and your respective lawyers (if you have lawyers) may be present during the examination. 

The creditor will then use your answers to the questions to decide what further steps to take to enforce the debt, which might include negotiating a settlement of the debt with you or one of the other options described below.

Instalment orders

What is an instalment order?

An instalment order is an order of the Court allowing you to pay off the judgment debt by making smaller payments at regular intervals, rather than having to pay the debt in a lump sum. Either the creditor or you can apply for an instalment order.

How can I apply for an instalment order?

You can apply for an instalment order by filling out a Form 61A supplied by the Magistrates’ Court, including the details of the debt and the payment instalments you would like to make to repay it. You will need to consider how much you can afford to pay and how often.  The debt will need to be paid off within a reasonable time.  Usually you will need to include any penalty interest that has accrued on the judgment debt.

You must also fill out a Form 61B supplied by the Magistrates' Court, giving details of your financial affairs including the amount and source of your income, your weekly expenses, and the value of your property and assets and your debts and liabilities.  The information you provide is used to prove how much you can afford to pay and how often.

Once completed, you must give copies of both documents to the creditor or their lawyer (called service) and submit the original forms to the Magistrates' Court.

A registrar of the Court will consider your application and the information about your financial affairs and will advise you and the creditor of the outcome. There will not normally be any hearing before the Court. 

If the registrar rejects your application, then you will need to wait three months before making a new application. 

What happens if the creditor applies for an instalment order?

The creditor can also apply for a instalment order. In that case, the creditor will serve on you a completed copy of the Form 61A setting out the instalments that the creditor will ask the Court to order you to pay, and a blank Form 61B. You should complete the Form 61B and submit the forms together to the Magistrates’ Court.

What is the benefit of entering into an instalment order?

If the Court grants an instalment order, the creditor cannot take assets from you or enforce the judgment debt in any other way while the instalment order remains in place provided that you make all of the payments required under the instalment order in full and on time.

However, if the information you provided to the Court about your financial affairs was inaccurate, or if there is a substantial improvement in your ability to pay the judgment debt, then the creditor may apply to the Court for the instalment order to be changed or cancelled.

What if I receive Centerlink benefits?

If the creditor applies for an instalment order, you cannot be forced to comply with the instalment order if your only income is from Centrelink benefits. That is because Centrelink income is protected under legislation.

If you apply for an instalment order, then your Centrelink income will no longer be protected and you must comply with any instalment order that is made.

What if I or the creditor object to an instalment order?

If you or the creditor disagree with the registrar’s decision on an instalment application, then you can file a Form 61D notice of objection with the Magistrates’ Court within 14 days of getting notice of the registrar’s decision.  The notice will need to explain the reasons for the objection. 

Creditors may object to an instalment order if, for example, they can show that the financial information you provided was incorrect, if it is obvious that you will not be able to comply with the order, or if the time period for the instalments is unreasonably long. 

The matter will be referred to a magistrate for review in open court. You and the creditor would be required to attend the hearing before the magistrate. The Court will notify you of the hearing date and location. 

What if I breach the instalment order?

If you apply for an instalment order, make sure that you can afford to make the instalment payments. If you breach the order, the creditor can apply to the Magistrates’ Court to enforce the order.  You would be required to attend a further Court hearing where a magistrate or registrar will examine your financial position and may order that the instalment order be cancelled or varied.  You may also be required to pay the creditor’s legal costs on top of the debt and the interest accumulating.

If you are having difficulty complying with an instalment order, it is important that you stay in regular contact with the creditor to explain, for example, why you have missed an instalment or that your financial circumstances have changed. Keep a note of these conversations, recording the time and date, and who you spoke to. If the creditor refuses to negotiate reasonably and brings the matter to court arguing that you have been difficult to contact, you can show that you have been in contact with them, have explained your financial situation and have attempted to negotiate with them.

What is an attachment of earnings order?

An attachment of earnings order is a court order that requires your employer to pay part of your wages to your creditor until the debt has been paid off.

If your creditor applies for an attachment of earnings order, they will send you a blank Form 72C Statement of Financial Position, which you must complete and return to the court before the hearing date. The Form 72C includes details of where you work, how much you earn weekly and whether the employment is ongoing, together with other information about your assets and liabilities. If you do not complete the form, you may be ordered to attend court.

A hearing will then take place (conducted by a registrar), and after considering the information you have provided about your financial position the court will decide how much (if any) should be taken out of your wages and paid to your creditor. You may attend the hearing, but are not required to attend (unless specifically ordered to). If an attachment of earnings order is made, it will be served on you and your employer.

A maximum of 20 per cent of your pay (after tax) can be taken out under the order, unless the court determines otherwise. In determining the amount to be deducted, the court will consider all the information. If you are on Centrelink benefits, this is protected income and a creditor cannot seek an attachment of earnings on this income.

If you leave your job, or there are other changes in your financial circumstances, you can apply to the court to cancel or change the order.

What is an attachment of debt order?

If a creditor knows that you have money in a bank account or that someone owes you money (for example a tenant or a customer), they can apply to the court for an attachment of debt order (sometimes known as a “garnishee” order).  An attachment of debt order requires the bank or other person who owes you money to pay that money directly to the creditor. The money paid under the order will reduce your debt to the creditor.

If you receive Centerlink payments into your bank account, then all or part of those funds are protected from being paid out under the attachment order.

Warrant to seize property

A warrant to seize property is an order of the court that allows the sheriff to seize certain items of your property, sell those goods and apply the net proceeds to reduce the amount you owe to the creditor.

A creditor can apply for a warrant without prior notice to you.

Once a warrant is issued, the first step is for the sheriff to visit your home or business and produce the warrant and explain its effect.

The sheriff must first ask you for your consent to enter.  If you unreasonably withhold your consent, or if the sheriff believes that you are deliberately avoiding them, then they are allowed to use reasonable force to enter.   A sheriff can only enter a residential property between 9am and 5pm.

The sheriff will then make a list of items that can be seized.  The sheriff is permitted to seize any items owned by you outright – so, for example, items that you rent, are on a hire-purchase arrangement, or that are owned by someone else or jointly by you and someone else, are not able to be seized.

The sheriff also may not seize items in your house that you need to live in basic comfort. These goods include (but are not limited to):

  • clothing
  • a washing machine and dryer
  • a refrigerator and freezer
  • a TV, VCR, radio and set of stereo equipment
  • a telephone
  • a lounge suite
  • a dining table and chairs
  • sufficient beds, bedding, linen, clothing, cutlery, crockery, heating/cooling equipment for the household
  • educational, sporting or recreational items (such as books and computers) used by children or students in the household
  • tools of trade to the value of $3,800 (current as at October 2020 – these figures are indexed annually)
  • a motor vehicle or motorcycle, which is used primarily as a means of transport, to the value of $8,000 (note that this amount refers to the equity in the vehicle, being the value of the car less amounts owing under finance) (current as at October 2020 – these figures are indexed annually).

Despite the specific exemption for certain household goods, antique items may still be seized by the sheriff. If you have any queries about what goods can and cannot be seized, you should seek advice.

If the sheriff attempts to seize goods that are co-owned or subject to finance, you should inform the sheriff. The sheriff may still form a 'reasonable belief' that you own the property, but will give you a form for the third party to fill out. This may result in a court hearing to determine who owns the property.

Generally the sheriff will allow you time to get the money to pay the debt, to negotiate with the creditor or to enter into an instalment order before actually removing the goods. In that case, the goods are still “seized”, but rather than removing the goods the sheriff will leave them at the location and ask you to sign for the safekeeping of the goods in the list.  If you sign for safekeeping, the goods listed must not be removed from the location, interfered with, disposed of, or defaced or damaged in any way.  If you do not comply, you risk fines or a prison sentence. 

The sheriff may also decide to remove the goods immediately, including if you refuse to sign for their safekeeping. 

As previously mentioned, the sheriff will also be unable to seize your goods if you are currently on an instalment plan. This works as a stay on the enforcement of the judgment debt.

The goods removed by the sheriff will be sold at auction or private sale and the proceeds given to the creditor. The sheriff will also be entitled to their costs in taking possession and selling the goods from this sale.

A warrant of seizure and sale allows the sheriff to sell your interest in land or a house (real estate) which you own (either alone or with another person). Real estate can only be taken if the warrant was issued by the County or Supreme courts. If the warrant was issued out of the Magistrates’ Court, it must be transferred to the Supreme Court before the real estate can be seized.

Bankruptcy

If you are unable to pay your debts and cannot come to a suitable repayment arrangement with your creditor, you may voluntarily lodge a petition to become bankrupt (called a debtor’s petition) or the creditor may take action to have you declared bankrupt by order of the Federal Court or Federal Circuit Court (called a sequestration order).

Once you are made bankrupt through a debtor’s petition or sequestration order, most of your debts will be released, you will not have to repay them directly, and those creditors will not be able to pursue you for the debts. Bankruptcy does not release you from some debts, such as secured debts (e.g. a mortgage or car loan), court fines, child support and maintenance payments, HECS & HELP debt, and debts that you incur after the bankruptcy begins.

If you are declared bankrupt, the Bankruptcy Trustee has responsibility for dealing with all monies you owe and will take control of any assets you have. The trustee will determine if your money or assets can be used to pay your outstanding debts. This would likely involve the trustee selling any assets you own, except for basic household items, tools of trade, and a vehicle (as set out in the section above).

Bankruptcy normally lasts for three years and one day.

The following consequences/restrictions apply while you are bankrupt:

  • you will be required to provide details of your debts, income and assets to your trustee
  • your house and vehicle may be sold
  • if your income exceeds a certain limit, you may be required to pay a contribution from your income (as at October 2020, the threshold is between $59,031.70 and $80,283.11 depending on how many dependents you have)
  • you cannot manage a company unless you have permission from the court
  • you will not be allowed to travel overseas without the permission of the trustee
  • you will be recorded on the National Personal Insolvency Index forever
  • credit reporting agencies keep a record of your bankruptcy for five years from the date you became bankrupt or two years after the bankruptcy ends, whichever is later
  • you will find it difficult to borrow money and buy things on credit.

You should get advice from a financial counsellor, lawyer, or accountant if you are considering bankruptcy.