$10,000 or $4,000 – A Toss of the Coin

To some companies, small businesses and individuals, $10,000 may seem a relatively minor amount, while to others, it represents a small fortune – particularly in times of economic uncertainty, interest rate rises, increased costs of living and impending wage freezes. For small businesses particularly, multiple bad customer debts or even a single bad customer debt of $10,000 each can be crippling. The knock-on effect from a single non-paying customer can spread like wildfire, devastating many businesses and families alike.

However, unless you move in some accounting or legal circles, you may not know that $10,000 is also important for determining on which side of the bankruptcy ledger either you, your clients or your customers may be sitting.

On 1 January 2021, the minimum debt amount at which an individual can be made personally bankrupt, permanently changed to $10,000. The $10,000 threshold accounts for the changing value of money and debt levels since the threshold was last permanently increased to $5,000 in 2010.

This means, that even if a judgment is obtained against a person (debtor) for a debt owing to you or your client, an application to have a Bankruptcy Notice issued upon a person, cannot be made unless the judgment debt (plus any applicable costs) is equal to or greater than $10,000.

This makes pursuing recovery of amounts due and owing very cost prohibitive, when in addition to the $10,000 underlying debt, there are also legal fees and expenses generally incurred by the creditor in obtaining the judgment and applying for the individual debtor’s bankruptcy. The consequences for your credit department have now increased significantly, requiring even more diligence with ensuring adherence to strict credit policies, or run the risk of requiring the services of an insolvency professional yourself.

So where does the $4,000 fit into the mix?  Not to be outdone, the statutory minimum threshold for a creditor to issue a Statutory Demand against a corporate debtor has doubled, increasing to $4,000 from 1 July 2021. The increase of the corporate threshold from $2,000 to $4,000 brings the minimum debt amount slightly more in line with the minimum debt required to issue a Bankruptcy Notice.

Like with individual debtors discussed above, the effect of the increase to the statutory minimum is that any Statutory Demand served on a company must relate to a debt (being either a single debt or the total of two (2) or more debts owed to the creditor by the debtor company) of at least $4,000.  Statutory Demands will not be able to be issued for any lesser amount.

You can reduce your credit risks in a few ways:

  • Accurately judging the creditworthiness of a potential client on credit, is far more effective than chasing late payment after the fact;
  • Get to know your client sector profiles. You’ll want to know market leaders, sector growth prospects and future challenges anticipated for the sector;
  • Strengthen your credit control function with due diligence procedures. Consider a customer scoring process as a tool to evaluate your clients;
  • Leverage the expertise of a credit reference agency, for invaluable insight on your customers and to alert you to any potential dangers, before they become threats to your business; and
  • Setting accurate credit limits. Get up close and personal with your clients’ financial statements to assess key indicators of their financial health.

Debt recovery is a minefield and whether you are the pursuer or the one being pursued, seeking expert advice has now more than ever, become a necessity.  The successful recovery of a debt due can turn on the steps taken (or not properly taken as the case may be) right from the time the customer first walks through your door.

Want more information?

Should you or your clients need some expert advice, please don’t hesitate to reach out to the team at Vincents for a no-obligation chat.

An Important Message

While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents.  Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.

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