Can You Go to Jail for Bad Debt in Australia?

Oct 17, 2022

If you are struggling with managing your debts, you might be worried that missed repayments or your inability to pay off your debts might land you in jail. You will be relieved to know that you won’t be incarcerated for failing to pay off your debts, irrespective of the loan type. However, this doesn’t mean that you can go scot-free without repaying your debts as it has some other serious legal consequences that you should know.

In this post, we will explain what to expect when you miss your due debt payments in Australia. We will also debunk some myths surrounding the non-repayment of loans, including whether you can go to prison if you fail to pay your debts.

Consequences of not paying a loan

Your lenders can initiate legal proceedings against you for recovery of all or some part of the loans. Here are some legal actions lenders can take:

  • The lender can appoint a debt collection agency for recovering due loans from you. They usually send you a letter of demand via mail or email. However, they can also contact you by telephone if you don’t respond to the letter of demand. If they are unable to reach you, they might also contact your relatives to initiate the loan recovery process.
  •  Debt collectors can also sue you for your unpaid debts if they are unable to recover the outstanding amount by themselves through the letter of demand. A “Statement of Claim” is filed in court for recovery of debt, interest on the unpaid amount, and the cost of the debt collection agency. If the debt collector serves the “Statement of Claim” on you, you’ll have to settle the debt or file a defence within 28 days from the date of the notice. If you fail to respond to the notice, the court can pass judgement against you.
  •  Not paying your debts can blemish your credit report as well, which can hurt your credit score. The credit reporting agencies record court judgement on your credit report as a default, which makes it difficult for you to take out further loans. The default and court judgement stay on your credit report for five years. Even if you pay the loan in full, it will stay on your credit report, but its status would be changed to “paid”.
  •  The lender or debt collection agency can also apply to the court for issuing a garnishee order against you. The garnishee can be issued against you to your bank, your tenant, or your employer, which legally binds the addressed party to pay the funds directly to your creditor instead of to you.
  • After getting a court judgement, the lender can also apply to get a writ against you. This means that a court sheriff can visit your house or business place and seize or sell the assets to recover the debt amount.
  •  A lender can also issue you a creditor’s petition by applying to court to have you made bankrupt, if you owe them $10,000 or more. If you are declared bankrupt, it will last for up to 3 years and 1 day after the acceptance of the Bankruptcy Form by the defaulter.

Common myths about non-repayment of debt

1.    All your assets and possessions will be seized and sold

Some people believe that a debt collector is authorized to seize and sell all your assets to recover the debt amount. You should understand that your household items, such as furniture and appliances are non-seizable items, which means that debt collector or a trustee can’t seize or sell them. Also, you are allowed to keep the vehicle that you use for your transport, but the value of the car should be below $8,550 (as at 1 July 2022, indexed annually).

2.    You can be imprisoned

You cannot be imprisoned for failing to repay your debt. Civil cases deal with disputes relating to money, property, and debt. This means that you don’t get a criminal record for not paying your debts. However, it can badly tarnish your credit report and reduce your chances of getting further loans.

3.    Partners are equally responsible for any unpaid debt

If you and your partner have taken out a joint loan, both of you are responsible for paying it off. For example, if you have jointly taken a loan of $50,000 and you have repaid $40,000, both of you are responsible for the balance amount of $10,000.

However, if the loan has been acquired in one partner’s name, only that person will be responsible for its repayment.  If you are bankrupt, your partner’s assets can be affected only if:

  • The asset is jointly owned by the partners
  • The asset in their possession is owned by your (the bankrupt party)
  • The purchase of the asset was financed by you but is registered in your partner’s name.

4.  You will be forced to file for bankruptcy

Some people often wrongly believe that debt collectors will force them into declaring bankruptcy. This could be counterproductive for debt collectors because if you file for bankruptcy, most of your debt is wiped off legally. You can only pay off the debt that you can afford to pay.

The job of debt collectors is to recover most of the debt, not to recover only a fraction of the outstanding debt. This means that debt collectors won’t force you into declaring bankruptcy as it would reduce their chances of recovering the full amount of debt.

Final Thoughts

If you are unable to repay your debts, you can adopt various options. For example, you can talk to your creditor, file for bankruptcy, enter into debt or personal insolvency agreements, or opt for temporary debt protection. Debt is a civil matter, so rest assured, you won’t go to jail for non-payment of your debt.

B M Peachey

B M Peachey, has over 15 years of experience investing in property and the stock market, in both New Zealand and Australia. She has a post-graduate degree, with qualifications in Finance and Mortgage Broking and in Accounting and Bookkeeping. She is passionate about ensuring people have access to credible, reliable, and easy to understand information to help them get in control of the life they REALLY want to live.<

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    Disclaimer: The information in this article is general in nature as it has been prepared without taking account of your specific objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstance before acting on it, and where appropriate, seek professional advice from a finance professional such as an adviser.