Chapter 2: Understanding and managing debt

2.1 What is debt? 

Debt refers to money owed by one party (the debtor) to another party (the creditor). Debt arises through a variety of everyday transactions, including: 

  • money owed to a business or individual for the supply of goods or services  
  • a consumer credit agreement (such as a mortgage, personal loan or credit card) 
  • a compensation claim (such as an order for damages following a car accident) 
  • fines or court judgments 
  • government requirements (such as tax, child support and Centrelink debt). 

Owing money is not unusual, but it can become a problem if you’re unable to pay your debts when they fall due. This chapter aims to help you understand different types of debt, the consequences of unpaid debt and how to avoid a debt crisis. 

2.2 Stages of debt collection 

Debts can be dealt with by full payment, negotiation as to repayment, or formal debt recovery action (generally via the Local Court of NSW). The main stages of debt collection include: 

  1. demands for payment 
  2. going to court 
  3. enforcing court orders. 

In many cases, court action can be avoided by understanding your options and resolving disputes with your creditors when they demand payment. 

It’s important to understand standard debt collection practices, so you can effectively negotiate with your creditors. Chapter 3 of this guide provides a detailed account of standard debt collection practices and how to deal with them. You should also have a look at the chapters that relate to your debt type. For example, if you’re in debt due to unpaid fines, you have unique options available to you which make it relatively easy for you to avoid court action. 

2.3 Debt tips 

The Money Smart website, run by the Australian Securities and Investments Commission (ASIC), is an excellent source of information for prudent money management. For example, they suggest the following ‘golden rules’ for managing debt: 

  1. tally up your debts 
  2. get help if required 
  3. set a budget 
  4. prioritise your debts 
  5. consider refinancing or debt consolidation. 


A budget is an itemised summary of expected income and expenses for a given period. It provides a breakdown of how much money you have coming in and how much is going out. It helps you prioritise your spending and manage your money — no matter how much or how little you have. Planning and monitoring your budget will help you identify wasteful expenditures, adapt quickly as your financial situation changes, and achieve your financial goals. 

We’ve included a sample budget in Chapter 17, which may help you put your income, spending and debts into perspective. Budgets are also useful when negotiating with debtors and seeking concessions based on financial hardship. That is, you can use them as ‘proof’ that you can’t afford to pay what you owe, given your income and other necessary expenses. 

Prioritising debts 

Despite what your debt collector might say, not all debts are equal. Some will be relatively more important than others because failure to pay them could have more severe consequences. For example, mortgage debt is more important than car loan debt if you don’t want to lose your home. Repaying debts with the highest interest rate should take priority over ones with lower interest rates (other things being equal). 

Secured debts should take priority over unsecured debt if you want to keep the ‘secured’ property. If you have debt arising from more than one source, you need to consider prioritising the debts that are most important and getting these paid, or managed, first. 

Debt consolidation 

Debt consolidation is another way to help you manage debt. For example, if you are currently repaying several credit cards and personal loans, it may be worth consolidating them into one account. This arrangement will simplify your repayments. Financial counsellors can assist you with prioritising your debt, creating a budget and debt consolidation. 

2.4 Types of debts 

Debts can arise in a variety of ways, and there are often different recovery and enforcement processes for different debt types. By understanding the laws and procedures that relate to your debt(s), you’ll be better equipped to manage debt problems. In the next part of this chapter, we’ll give you an overview of different debt types. In the chapters to follow, we’ll give you detailed practical guidance for dealing with each debt type. If you act early, you may be able to avoid, delay or stop court and enforcement action. 

Fines and government debts 

Many people have debts from unpaid fines. Revenue NSW manages the collection and recovery of these debts. If you have unpaid fines, there are various options available to you, including payment plans, contesting fines, write off applications and Work and Development Orders (WDOs). 

Other government debts might include Centrelink debt, taxation debt, student loan debt (HECS-HELP), child support debt, and victim’s services restitution debt. These debts are each processed and enforced in different ways, so your options for resolution will differ. 

For more information about fines and government-related debts, see Chapter 4 Fines, and Chapter 5 Government debt

Consumer credit 

Consumer credit arrangements involve borrowing money from a financial institution, which is repaid over time, with additional interest and charges. It includes credit cards or store cards, personal loans, car loans, home loans, overdrafts and borrowing for investment purposes. It also includes taking out a lease or buying things by instalment (for example, appliances, televisions and furniture). There are various protections in place for credit consumers and user-friendly dispute resolution processes. 

See Chapter 6 Consumer credit

Debts related to products and services 

Another common form of debt is debt arising from contracts for the provision of goods and services. As with consumer credit, there are various protections available for consumers, and dispute resolution options that are relatively quick, simple and inexpensive to use. 

See Chapter 7 Consumer goods and services

Other types of debt 

Debts can arise in a variety of other ways — for example, unpaid energy, water and telephone bills; rental arrears; causing damage to rental property; being uninsured and ‘at fault’ in a car accident; and causing damage to another person or property. We explore some of these, and resolution options, in Chapter 8 Other types of debt

2.5 Consequences of unpaid debt 

A variety of things can happen if you don’t pay your debts. These may range from debt waiver or write off on one end of the spectrum, to forced bankruptcy and financial ruin on the other. You can expect the following types of consequences when you have unpaid debt: 

  • no action, or debt waiver/write off by the creditor 
  • direct contact by the creditor or agent debt collectors 
  • commencement of in-house debt recovery procedures 
  • assignment (or sale of the debt) to a debt collection agency 
  • mediation or alternative dispute resolution 
  • letter of demand (warning of court action if the debt remains unpaid) 
  • court action (to get a formal ‘judgment’ confirming the debt, called a ‘judgment debt’) 
  • enforcement of judgment debt (forced payment) 
  • repossession of secured goods or residential property 
  • adverse credit report entries (which will impact your future credit applications) 
  • forced bankruptcy. 

You should keep these consequences in mind when negotiating with creditors. 

2.6 Credit reporting 

Credit reports contain information about your credit activities and payment default history, collected from financial institutions, courts and utility providers. Service providers send relevant information to central databases managed by ‘credit reporting bodies’ (CRBs). CRBs are then able to include that information on a person’s credit report. Credit providers can obtain a copy of your credit report from a CRB to help them decide whether to provide you with their products and services. Remember, defaults on loans or utility bill payments will be reported to the CRBs and can impair your ability to obtain loans, mortgages and other services in the future. See 6.12 Credit reporting in Chapter 6 Consumer credit

2.7 Options when you can’t pay your debts 

There are various practical things you might try when you can’t pay your debts: 

  • informal arrangements with creditors — for example, asking for an extension of time to pay 
  • formal arrangements with creditors — repayment plans, requests for debt write off etc. 
  • debt consolidation — refinancing all your small debts into one single loan, with regular repayments that you can manage 
  • prioritising your most pressing debts and paying them first — pay your mortgage, secured and essential debts first, then smaller and unsecured debts 
  • accessing superannuation — for example, if you’re at risk of losing your home, and are experiencing severe financial hardship, you may be able to access your superannuation to pay your mortgage-related debt 
  • varying your loan terms — for example, change to an ‘interest-only’ home loan, which will reduce the amount of each repayment 
  • voluntary bankruptcy, or Part IX and X debt agreements — see Chapter 16 Bankruptcy and debt agreements 
  • accessing funds from a friend or relative. 

There are pros and cons to each of these options, and you should think carefully before choosing any course of action. 

2.8 Going to court 

The Local Court of NSW deals with most ordinary debt matters in NSW. The first step in court action involves the creditor filing a statement of claim applying for a ‘judgment debt’ against the debtor, which is a legally enforceable court order confirming the debt. If you fail to pay a judgment debt, the creditor can commence ‘enforcement’ proceedings against you. Enforcement options commonly include: 

  • examination order (forcing you to provide information about your financial situation) 
  • garnishee orders (taking money directly out of your pay or bank accounts) 
  • writs for levy of property (allowing the sheriff to take personal property, to sell to pay off the debt), or 
  • forced bankruptcy. 

If court action has already commenced, then Chapters 9–15 of this guide will help you understand the fundamental processes and procedures involved. If you’ve received a bankruptcy notice, Chapter 16 explains the laws and consequences of bankruptcy. 

2.9 Limitation periods 

You should be aware of the limitation periods that apply to your matter, and what they mean in practice. A limitation period is the time frame available for starting legal action. If the limitation period expires without the creditor taking legal action, then their right to seek legal redress in court expires permanently (and the debtor has a complete defence). 

Obtaining a judgment debt 

A creditor has six years, from the date the debt becomes payable, or from when you last acknowledged or made a payment toward the debt, to commence legal action. Sometimes creditors do not take legal action immediately but will wait until they think your financial situation has improved (an example is waiting a few years until a university student gets a job). Then the creditor can sue for the original debt and interest. 

After six years, however, a debtor has a complete defence against any action by a creditor. So, if you have an old debt, which you have not acknowledged for at least six years, then you are protected from legal action. If someone is chasing you for an old debt, and you think the limitation period has expired (or is close to expiring) DO NOT acknowledge the debt or make any instalments towards the debt (this will restart the limitation period). Instead, seek legal advice immediately to clarify your options for defending the matter. 

Enforcing a judgment debt 

Where a creditor has already obtained a judgment debt against you (via a court order confirming you owe the debt), they have 12 years to enforce the debt. If more than 12 years have passed, a creditor would need to seek leave of the court to extend the time for enforcement action. That is, the creditor would need to explain to the court why they have taken so long to enforce the judgment. 

See Chapters 14 and 15, which relate to enforcement and stopping enforcement. 

2.10 Record keeping 

It’s crucial to keep copies of all contracts and correspondence with the creditor or debt collection agency. Also take notes of all telephone and verbal conversations, including date, time, who you talked to, what you spoke about and what was agreed. 

If you reach a deal about instalments, settlement of the entire debt for smaller lump sum payment, or write off, you should be sure to have these documented in writing. A common way of recording these agreements is via a ‘deed of settlement’. We have included some sample letters and templates at the end of this book (see Chapter 17 Sample templates and letters). These documents may come in handy to help fend off later court proceedings, or enforcement action.