Understanding the Legal Process of Chasing Debts

Apr 17, 2025

4 min read

Updated: 5 days ago

A comprehensive guide on the steps involved in recovering outstanding payments, from sending a letter of demand to initiating litigation.

In today's business environment, maintaining healthy cash flow is critical. However, many businesses struggle with late or non-paying clients, which can severely impact operations and growth. At Invictus Legal, we understand the frustration and financial strain that unpaid debts can cause. This guide outlines the legal process for debt recovery in New South Wales, giving you a clear roadmap for action.

The Debt Recovery Timeline

1. Pre-Legal Steps

Internal Collection Efforts

Before engaging legal services, it's advisable to:

Send payment reminders when invoices become overdue
Make follow-up phone calls
Offer reasonable payment plans if appropriate
Keep detailed records of all communication attempts

Evaluating the Debt

Consider whether pursuing the debt is economically viable:

What is the amount owed?
How old is the debt?
Is the debtor financially stable or likely insolvent?
Do you have proper documentation of the debt?

2. Letter of Demand

A Letter of Demand is typically the first formal legal step in debt recovery. This document:

Formally notifies the debtor of the outstanding amount
Sets a specific timeframe for payment (usually 7-14 days)
Warns of potential legal action if payment isn't received
Demonstrates your serious intention to recover the debt

A professionally drafted Letter of Demand from a law firm often prompts payment, as debtors recognise the escalation and potential legal consequences.

3. Statement of Claim

If the Letter of Demand doesn't yield results, the next step is filing a Statement of Claim with the appropriate court:

Local Court, Small Claims Division: claims up to $20,000
Local Court, General Division: claims up to $100,000 (or up to $120,000 if the parties consent)
District Court: claims up to $1,250,000 (District Court Act 1973 (NSW) s 4(1))
Supreme Court: claims above the District Court limit (the Supreme Court has no upper monetary limit)

The Statement of Claim outlines:

The plaintiff (creditor) and defendant (debtor) details
The amount owed
How the debt arose
The grounds for the claim

Once filed, the Statement of Claim must be served on the debtor, who then has 28 days after service to file a defence (Uniform Civil Procedure Rules 2005 (NSW) r 14.3).

4. Judgment

If the debtor fails to file a defence within the prescribed timeframe, you can apply for default judgment. If they do file a defence but it has no real prospect of success, you can apply for summary judgment.

Once judgment is obtained, you have various enforcement options:

Writ for the Levy of Property

Allows the Sheriff to seize and sell the debtor's property to satisfy the debt

Garnishee Order

Directs a third party (such as the debtor's bank or employer) to pay money owed to the debtor directly to you instead

Bankruptcy or Winding Up Proceedings

For individuals: a creditor who holds a final judgment or order for at least $10,000 can apply for a bankruptcy notice, which is the usual first step towards bankruptcy proceedings (Bankruptcy Act 1966 (Cth) s 5(1) definition of 'statutory minimum'; Bankruptcy Regulations 2021 s 10A)
For companies: a creditor can serve a statutory demand for a debt of at least $4,000. If the company does not pay, secure or compound for the debt, or apply to set the demand aside, within 21 days of service, it is presumed to be insolvent and the creditor can apply to have it wound up (Corporations Act 2001 (Cth) Pt 5.4, including ss 459C and 459E–459G; Corporations Regulations 2001 reg 5.4.01AAA)

5. Examination Notice and Order

If you have obtained judgment and are unsure about the debtor's financial situation, you can apply for:

An Examination Notice requiring the debtor to provide financial information
An Examination Order compelling the debtor to attend court and answer questions about their financial circumstances

Strategic Considerations in Debt Recovery

Time Limitations

Be aware of the limitation periods that apply to debt recovery in NSW:

For debts arising under a contract (including most unpaid invoices), legal action must generally be commenced within 6 years from when the cause of action accrued, usually when payment fell due (Limitation Act 1969 (NSW) s 14)
For debts under a deed, the limitation period is 12 years (Limitation Act 1969 (NSW) s 16)
A written and signed acknowledgment of the debt, or a payment towards it, made before the limitation period expires restarts the period (Limitation Act 1969 (NSW) s 54)

Cost-Benefit Analysis

Consider the following when deciding how to proceed:

Legal costs vs. debt amount
Likelihood of successful recovery
Time investment
Impact on business relationships
Reputational considerations

Alternative Dispute Resolution

Before proceeding to court, consider:

Mediation
Settlement negotiations
Debt compromise agreements

These methods can save time and money while preserving business relationships.

How Invictus Legal Can Help

At Invictus Legal, we offer:

Expert assessment of debt recovery prospects
Strategic advice on the most effective recovery approach
Professional drafting of Letters of Demand
Representation throughout the litigation process
Negotiation of settlement agreements
Enforcement of judgments

Our experienced team understands that each debt situation is unique. We work closely with you to develop a tailored recovery strategy that balances legal costs against the potential recovery amount.

Fees for commercial matters are determined by the scope of work involved, and we issue a costs agreement before we commence any work, so you have full transparency from the start.

Preventative Measures

The best way to handle debt recovery is to prevent issues from arising:

Implement clear credit policies
Conduct due diligence on potential clients
Use well-drafted contracts with specific payment terms
Consider security for significant transactions
Monitor accounts receivable regularly
Address payment issues promptly

Conclusion

Debt recovery requires a strategic approach and understanding of legal processes. While the path from Letter of Demand to judgment enforcement is well-established, each case presents unique challenges and opportunities.

At Invictus Legal, we combine legal expertise with practical business acumen to give you the best chance of recovering what you are owed. Whether you're dealing with a straightforward unpaid invoice or a complex commercial dispute, our team is ready to help you navigate the process effectively.

Contact Invictus Legal on 02 8553 0500 today to discuss your debt recovery needs and develop a tailored strategy for your situation.

This blog is provided for general information purposes only and does not constitute legal advice. For specific advice relevant to your circumstances, please contact Invictus Legal directly.