Are you in debt?

Under the Limitation of Actions Act 1958 (Vic) (‘LOA Act’), a creditor only gets a limited amount of time to sue a debtor for a ‘simple contract’. Most debts arise from simple contracts. If judgment has not been entered against you in a court, the time limit is six years. If a creditor does not bring court action against you within the relevant time limit, the debt becomes ‘statute barred’ and you have a complete defence to any court action brought against you.

Time under the LOA Act starts to run from:

• the date you should have made a payment;
• the date you last made a payment; or
• the date you or your representative acknowledged in writing that you owe the debt.

You should start with the most recent of these events and add six years. If the six years has expired, the debt is statute barred. While this does not mean that the creditor cannot ask you to pay the debt, it does mean that if the creditor seeks to sue you in court for payment, you will have a complete defence.

Note that in Collection House Ltd v Taylor [2004] VSC 49 a debt collector was held to have engaged in unconscionable conduct in breach of section 7 of the Fair Trading Act 1999 (Vic) (the current equivalent provision of which is section 20 of the Australian Consumer Law) when pursuing a statute-barred debt (see Chapter 7.2: Consumer protection laws, for more information about unconscionable conduct). This entitled the debtor to be repaid $5000 that she had paid to the debt collector using her credit card to settle the debt. At the time of accepting the $5000, the debt collector knew or at least suspected that the debtor was ignorant of the limitation period, impecunious and suffering from emotional difficulties. Collection House, one of Australia’s largest consumer debt collection agencies, later stated in a media release that it and its subsidiary Lion Finance would no longer pursue collection of statute-barred debts.

If your debt is statute barred, it is recommended that you write to the creditor and request that they stop contacting you for payment because the debt is statute barred. In any letter to the creditor on this basis, it is vital to include a sentence such as, ‘I deny that I am liable for the amount demanded’.

If judgment has been entered against you, the relevant time limit is 15 years, not six years, from the date of judgment. That is, after 15 years a creditor cannot bring a new action on a judgment (e.g. some bankruptcy proceedings), but can still commence proceedings enforcing that judgment (e.g. a warrant of seizure and sale), although in the latter case the court’s consent may be required before the creditor can take action (see Dennehy v Reasonable Endeavours Pty Ltd [2003] FCAFC 158).

If you have given a mortgage for payment of the debt (e.g. over a house or a car), the relevant time limit is 15 years from the date of the end of the term of the mortgage. However, the LOA Act states that this time period only relates to the recovery of the principal lent by the creditor, not the interest. It is likely that action for interest on a mortgage must be brought within six years.