Conscionable Debt Collection

Further to our recent article – Am I a Debt Collector? – we now take a look at:

What is debt collection?
How should I go about debt collection?
Illegal debt collection behaviour
Unconscionable conduct

What is debt collection?

Debt collection takes place when creditors and collectors seek to secure payment from consumers or businesses who are legally bound to pay or to repay money they owe. It is important that any organisation (and its credit and accounts receivable engaged staff) involved in recovering debt is aware of its legal obligations.

How should I go about debt collection?

Principles of debt collection fairness

You should treat debtors and third parties with fairness, respect and courtesy. You should never harass or coerce them, treat them unconscionably or mislead them about the nature of their debt, their legal obligations or any possible outcomes if the debt is not paid.

You should not pursue a person for a debt unless you have reasonable grounds for believing the person is liable for the debt.

Acceptable reasons for contacting a debtor

Your communications with the debtor must always be for a reasonable purpose, and should only occur to the extent necessary, for example, in order to:

give information about the debtor’s account
convey a demand for payment
accurately explain the consequences of non-payment, including any legal remedies available to the collector/creditor, and any service restrictions that may apply
make arrangements for repayment of a debt
put a settlement proposal or alternative payment arrangement to the debtor
review existing arrangements after an agreed period
ascertain why earlier attempts to contact the debtor have not been responded to within a reasonable period if this is the case
ascertain why an agreed repayment arrangement has not been complied with if this is the case
investigate whether the debtor has changed their residential location without informing you when there are grounds for believing this has occurred
sight, inspect or recover a security interest.

You may also contact a debtor at the debtor’s request.

Illegal behaviour when contacting a debtor

Under Australian law, a debt collector must not:

use physical force or coercion (forcing or compelling the debtor or a third party, such as a family member, to do something)
harass or hassle the debtor to an unreasonable extent
mislead or deceive the debtor (or try to do so) regardless of intention
engage in unconscionable conduct – take unfair advantage of any vulnerability, disability or other similar circumstances affecting the debtor.

Understanding what unconscionable conduct means

Unconscionable conduct does not have a precise legal definition as it is a concept that has been developed on a case-by-case basis by courts over time. Conduct may be unconscionable if it is particularly harsh or oppressive. To be considered unconscionable, conduct it must be more than simply unfair—it must be against conscience as judged against the norms of society.

Business behaviour may be deemed unconscionable if it is particularly harsh or oppressive and is beyond hard commercial bargaining.

For example, Australian courts have found transactions or dealings to be ‘unconscionable’ when they are deliberate, involve serious misconduct or involve conduct which is clearly unfair and unreasonable.

How to avoid engaging in unconscionable conduct

The following practical tips may assist businesses to avoid engaging in unconscionable conduct:

do not exploit the other party when negotiating the payment terms or any other terms of an agreement or contract
take care to be reasonable when engaging in debt collection behaviours
consider the characteristics and vulnerabilities of your customers. For example, use plain English when dealing with customers from a non-English speaking background
make sure your terms of trade are thorough, easy to understand, not too lengthy and do not include harsh, unfair or oppressive terms
ensure you have clearly disclosed important or unusual terms or conditions of an agreement
ensure customers understand the terms of any agreement associated with the transaction and give them the opportunity to consider the offer properly. If the contract is long, you may decide to provide a summary of the key terms
give customers the opportunity to seek advice about contracts and credit agreements before they sign them
if things go wrong, be open to resolving complaints
do not reward your staff for unfair, pressure-based selling.

Determining unconscionable conduct – Legislation

Section 21 of the ACL (unconscionable conduct in connection with goods or services) and section 12CB of the ASIC Act (unconscionable conduct in connection with financial services) states:

“A person must not in trade or commerce, in connection with the supply or possible supply of goods or services / financial services to a person … engage in conduct that is, in all the circumstances, unconscionable.”

Section 22 of the ACL and s. 12CC of the ASIC Act set out a long list of factors that courts may consider in determining whether a person has contravened s. 21 of the ACL and s. 12CB of the ASIC Act respectively. These include:

the relative bargaining strength of the parties
whether any conditions were imposed on the weaker party that were not reasonably necessary to protect the legitimate interests of the stronger party
whether the weaker party could understand the documentation used
the use of undue influence, pressure or unfair tactics by the stronger party
the price, or other circumstances, under which the weaker party would be able to buy or sell equivalent goods or services
the requirements of applicable industry codes
failure of the stronger party to disclose any intended conduct that might affect the interests of the weaker party
the willingness of the stronger party to negotiate
whether the stronger party has the right to unilaterally change contract terms
whether the parties acted in good faith

These provisions apply widely to trade or commerce activities including debt collection activities. Collectors risk breaching this prohibition particularly when they exert undue influence or pressure on, or unfair tactics against, a debtor who is at a special disadvantage or vulnerable

Penalties and remedies

If the court determines that unconscionable conduct has occurred, a variety of remedies may be ordered including: