If your creditor takes you to court because you owe money, and your defence is unsuccessful or if a court order is made against you because you didn’t file a defence, you will be issued with a court order to pay your creditor what you owe plus interest plus legal costs. Your debt is then referred to as a ‘judgment debt’ because the court has ‘judged’ that you owe it. A judgment debt may be enforced at any time, though after 15 years the leave of the court may be required.
You should seek legal advice as soon as possible if you have received court documents for debts.
- Your options when you have a judgment debt
- Options for your creditor when you have a judgment debt
- If an attachment of earnings order is made
- What a sheriff can do
- When you don’t have to pay a judgment debt
Your options when you have a judgment debt
When your creditor has a judgment debt against you, your options are:
- pay the debt. This may mean making a formal agreement with the person to whom you owe the money. Alternatively, you may make an informal agreement with the creditor to pay an agreed amount to discharge the debt. Make sure you have a copy of your agreement in writing and that you have receipts for any amounts paid.
- apply to the court for an instalment order, which allows you to repay the money by way of instalments. Interest charges, known as ‘penalty interest’ (the current amount is 9.5% per year) are added during the payment period.
If you wish to pay your judgment debt by instalments, you will need to complete the relevant court forms and show that you will be able to pay off the debt within a reasonable time.
- apply for voluntary bankruptcy. There are serious disadvantages in being bankrupt for some people and considerable benefits for others. You should seek advice from a financial counsellor before you take this decision.
Options for your creditor when you have a judgment debt
Your creditor can take action to recover their money by doing one of the following:
- request that the court makes a ruling on what you should pay in your circumstances (known as an instalment order). This usually is done after a court hearing which asks you questions about your assets and income (referred to as an oral examination);
- obtain an order for ‘attachment of earnings’ to take a regular amount from your wages;
- obtain a warrant for the seizure and sale of your possessions;
- obtain a warrant to sell real property (such as your home); or
- commence proceedings to bankrupt you if the debt is greater than $5,000 (either before or after legal costs and penalty interest are added).
If an attachment of earnings order is made
An order for attachment of earnings (sometimes referred to as a garnishee) is a court order that requires your employer to deduct a portion of your wages and pay it to your creditor. Such an order cannot be made in respect of any Centrelink payment you receive.
An attachment of earnings can mean a great deal of financial hardship for you and may affect your ability to pay other debts and bills such as your rent.
If your creditor applies for such an order, you should apply for an instalment order, which temporarily stops your creditor from taking any enforcement action against you until the court hears your application. If you are successful and meet the payments (instalments) ordered, the creditor cannot take any other action against you. With an instalment order, the repayments are often smaller and paid over a longer period and therefore more manageable than with an attachment of earnings order.
What a sheriff can do
When you don’t pay a judgment debt, your creditor may ask the court for a warrant to seize and sell your possessions to recover the debt. Ordinary household goods and one car up to the value of $7,700 (this amount is indexed) cannot be seized and sold.
Once a warrant has been issued, a sheriff can attend your house and demand payment of the debt or arrange to have your possessions taken and sold to cover the amount owed plus reasonable enforcement costs.
At this stage you may still apply to the court for an instalment order which will have the effect of temporarily stopping any action by the sheriff and if your application is successful, all action to seize your possessions will stop.
Most sheriffs will allow you a short time to negotiate an agreement with your creditor, if you state you wish to do so. You must be careful not to make an agreement you cannot keep.
The sheriff can only seize and sell possessions that belongs to you, excluding your basic household items. They cannot take something that belongs to another member of your household, anything rented or hired, or anything that is not fully paid for if it is used as security for the loan used to purchase it.
You can refuse the sheriff entry and they are not permitted to force entry into your house. They can, however, enter an open or unlocked door without your permission, and force entry into your garage or shed.
A creditor may also apply for a warrant which authorises the sheriff to seize and sell your home or another property of yours. Again, if you apply for an instalment order this will stop the enforcement action against you.
More information about what to do when the sheriff contacts you.
When you don’t have to pay a judgment debt
If you have no assets other than normal household items, do not own your home, do not have a car worth more than $7,7000 (this amount is indexed, see AFSA website) and your only income is a Centrelink payment, you are deemed ‘judgment proof’ under the law. You cannot be forced to pay a debt from your Centrelink income and you have no assets that your creditor can seize. A creditor may still obtain judgment against you for the debt, but cannot enforce it.
If you are ‘judgment proof’ but you may not always remain so, you should consider whether voluntary bankruptcy is a good option for you.
Speak to a financial counsellor if you believe you are judgment proof.