While many people know that a payment default is listed in a credit report for a five year period, few know that a credit provider can record these events sometimes years after the account fell into arrears.
You can imagine someone’s surprise when they find that a disagreement with a credit provider years prior, suddenly turns up on their credit file as a default.
Before we go over how the statutes of limitations affects credit reporting, let me summarise what this legislation actually is.
The statutes of limitations refers to the time a company or individual has to recover debts. For most credit contracts this is six years, the only exception is the Northern Territory where the period is reduced to three years. It should be noted that with court judgments this term is extended to twelve years. This goes a long way to explain why many credit providers will obtain a judgment towards the end of the recording period of a default, in an attempt to keep the debt recoverable.
Time starts to run from the date on which the right of action accrued. While it’s not always straightforward, a right of action usually accrues when a debt becomes due, either because the contract requires payment by that date or because the debtor defaults on regular installment payment obligations set out in the contract. Time may be re-started if the debtor a) makes a payment or b) acknowledges the debt in writing. Given this, if the debtor does not acknowledge the debt in this way the credit provider will lose their ability to recover the debt after this period.
It is important to note that even if a debt is discussed verbally, it is not in itself an acknowledgement of debt. This is particularly relevant with collection companies who understand this and will try very hard to have the debt formally acknowledged in order that they can continue there recovery activity.
Let’s say that an account fell behind in 2007 and the credit provider issued a demand letter at that time.
For whatever reason the credit provider did not list a default and did not follow up on the account; this is more common than you might think. Four years later the credit provider goes through their old accounts and finds the debt still outstanding and lists a default in 2011.
This situation is often seen with debt collection companies who regularly buy very old debts from credit providers and then list a default in an attempt to recover money. In this example the debt would only be potentially recoverable until 2013 however the default listing would be recorded until 2016. In other words the default listing would remain for three years longer than the debt is recoverable.
Should the listing be a clearout or serious credit infringement which is recorded for seven years, this situation is worse still with the listing outliving the credit provider’s ability to recover by five years.
You’re probably thinking this is an extreme example but think again; these situations happen with alarming regularity. Once these events are recorded in a credit report they can be very difficult to resolve regardless of the times frames involved.
The telecommunication ombudsman is well aware of this situation and via a position statement has said that a telecommunication default may not be listed more than twelve months from the final bill becoming due. This policy clearly relates to the statutes of limitations and in my opinion is the correct approach to take.
The problem is this attitude is not followed through the rest of the finance community. While there is strict legislation in place which outlines how long an account must be in arrears before demand notices can be issued along with the minimum time a credit provider must wait before listing a default, there is nothing firm that relates to the maximum period a credit provider has to record a negative listing.
There is a passage of legislation known as section 18J of the Privacy Act that talks about a credit provider’s obligation to make sure a credit listing is accurate and up to date at all times. It is highly questionable that a default listing made potentially years after the account fell behind is accurate and up to date however this sole point will seldom lead to the credit provider agreeing to remove the listing.
While I understand that a credit provider doesn’t control the recording period of a default and from their point of view the debt may be still outstanding, it does seem to me inappropriate to show a debt as outstanding when in fact the debt in question is not recoverable. The Telecommunication Ombudsman shares my view and I think it would be appropriate if other industry bodies also committed to the policy of only allowing credit providers twelve months to record a default from the time a final bill falls due. Until there is firm legislation that dictates the maximum time a credit provider has to list a default these situations will continue to occur and only add to the problems with our current credit reporting platform.
Credit reporting in Australia is currently under review and there are many positive changes being considered for implementation. We can only hope that these changes will help to resolve this situation.