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When debt collecting, it is best to use mild (not undue) harassment and firm (not coercive) demands to avoid breaching the Australian Consumer Law

The abolition of the debtor’s prison in the late 1800s took away the most potent threat that debt collectors had to press for payment of a debt. Ever since, debt collectors have relied upon lesser threats, such as the threat of legal process, public disclosure and additional fees.

The ACCC (Australian Competition & Consumer Commission) keeps a close eye on the threats made by debt collectors and businesses for debt recovery. The ACCC will prosecute if harassing and coercive threats are made in breach of section 50 of the Australian Consumer Law (the ACL), which states:

A person must not use physical force, undue harassment or coercion in connection with the supply or possible supply of goods or services or the payment of goods or services.

The corresponding section for financial services is section 12DJ of the ASIC Act.

This article looks at the case studies on undue harassment and coercion in the report the ACCC has recently issued – Research into the Australian Debt Collection Industry [May 2015]. They illustrate the ACCC’s current views. For my overview of the Report see:

Case Studies on Undue Harassment and Coercion;
and also on Misleading or Deceptive (or false) Representations

Harassment or Coercive Conduct is the most common type of complaint category received by the ACCC (43% of complaints), with General – no breach or issue second (40% of complaints), and Misleading or Deceptive Conduct (including false representations) third (12% of complaints).

The Report uses these case studies to illustrate how businesses, debt collectors and lawyers need to take care to tailor their demands so as to not be unduly harassing or coercive and to not make misleading or deceptive (or false) representations when pursuing debt recovery.

  1. Conduct of a telecommunications company
    Excite Mobile made three kinds of false representations to its customers when demanding payment of its mobile phone debts:
    1. that an independent organisation handled complaints (false - it did not exist);
    2. that an independent debt collector sent the letters of demand (false - the debt collection was in-house);
    3. that legal proceedings had commenced and so an additional 20% was payable (false - legal proceedings had not commenced), and a court would repossess all assets of value (false).

    The Federal Court fined Excite Mobile $455,000, fined the two directors $55,000 and $45,000 (respectively) for their involvement, and disqualified them from managing a corporation for 3 years and 2 ½ years (respectively). Australian Competition and Consumer Commission v Excite Mobile Pty Ltd [2013] FCA 350 & [2013] FCA 1267

  2. Conduct of a large debt collection business
    Advanced Credit Management (one of Australia’s largest debt collection companies) had a debt collection training manual which contained ‘scripts’ that encouraged the debt collectors:
    1. to engage in undue harassment and coercive conduct by threatening debtors that they would inform their family, friends and employer of the debt, that Sheriffs’ Officers would call by, that a warrant for their arrest had issued and that they could not travel overseas;
    2. to make false representations that it specialised in legal proceedings, had decided to commence legal proceedings and had referred the file to its lawyers, that legal proceedings including bankruptcy would be commenced immediately, and that NSW Sheriffs’ Officers would serve documents on the debtor at home.

    The Federal Court permanently restrained ACM from making these threats. Australian Securities and Investments Commission v Accounts Control Management Services Pty Ltd [2012] FCA 1164

  3. Conduct of a Lawyer
    Pippa Sampson (a lawyer) sent approximately 20,000 debt collection notices per month to collect small debts for video rental stores around Australia. The notices contained misleading and deceptive representations:
    1. that the video store was always entitled to recover legal costs (not for small debts)
    2. that the customer would always be liable to pay legal costs, even if the court does not award costs (only if the court awards legal costs)
    3. the form of notice was similar in format to a court document (it was not a court document)
    4. that judgement could be entered without a formal court order unless the debt was paid in full (a court order is needed)
    5. that a warrant or a garnishee order could be issued by the solicitor (only issued by the court)

    The Federal Court ordered the lawyer to stop making the misleading representations, to publish corrective advertising, to undertake trade practices compliance training, and to pay $30,000 for costs. Australian Competition and Consumer Commission v Sampson [2011] FCA 1165

    The lawyer was found guilty of professional misconduct and was fortunate to receive a reprimand, as opposed to a suspension of her practising certificate. See [2013] VCAT 1439

Is adding Additional Fees Coercive Conduct?

Debt collectors commonly impose additional fees and charges on outstanding debts to recover collection costs and to ‘encourage’ payment before the amount payable increases.

In the Report, the Consumer Action Law Centre (CALC) provided these case studies to persuade the ACCC to rule that consider the imposition of additional fees is coercive conduct and therefore unlawful:

  1. A debt collection agency first demanded payment of $292, then $700, then $1,350, on a debt of $140 for an air conditioner repair by imposing an administration fee of 40% each time.
  2. A debt collection agency demanded $390, consisting of $190 for the medical consultation fee, $70 commission and $130 ‘legal costs’.
  3. A debt collection agency demanded $3,780, for a debt of $2,875, without explanation for the increase in amount demanded.

The Report makes the points that: (i) the additional fees need to be supported by a trading term and condition which specifies recovery of costs; and (ii) the additional fees must be reasonable, otherwise the term may be an unfair contract term and be void.

Is Continued Contact with the debtor Undue Harassment?

The Report notes that it is an ACCC/ASIC debt collection guideline that where a debt collector is aware that a consumer is unable to pay a debt, then it is undue harassment to continue to contact the debtor.

For example, the debtor might be on Centrelink payments (which are protected income) because of unemployment, disability or age.

The creditor must wait until the debtor’s financial situation has improved before making further contact.

Tips for compliance

In short, if you are a debt collector or a business, you can harass mildly but avoid undue harassment; and you can demand firmly, but not coerce, payment.

Debt collectors and businesses should review their manuals and collection processes for compliance with the ACCC/ASIC Debt Collection Guideline for Collectors and Creditors, and in particular:

  • Remove any threats to contact the debtor’s family, friends or employer
  • Remove any representations made that legal proceedings are commencing, unless they have commenced
  • Remove any references to the Sheriffs’ Officers, garnishees and to repossessing assets in demand notices, unless a court judgement has been entered
  • Remove any additional fees unless they are supported by a term or condition and are reasonable
  • Cease to contact debtors who are unable to pay because of their financial situation

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