When Can You Include Collection Costs in Debt Recovery?

 

For many businesses, recovering overdue debts is a frustrating and costly process. In addition to the outstanding amount owed, the costs associated with debt collection services can leave businesses out of pocket. However, in certain circumstances, businesses may be able to pass on collection costs to the customer, ensuring they recover not just the original debt but also the costs incurred in pursuing payment.

At Tasmanian Collection Service, we allow collection costs to be included only when it is clearly specified in the Credit Application or Terms and Conditions of the business. It is the responsibility of the creditor (our client) to ensure these costs are legally enforceable and correctly included when lodging the debt for collection.

 

The Legal Basis for Charging Collection Costs

 

Businesses can only recover collection costs if they have a contractual right to do so. This right must be stated in the credit agreement, terms of trade, or customer contract that the customer agreed to before the debt arose. Without this provision, attempting to charge collection fees may not be legally enforceable and could be challenged by the customer.

A well-drafted credit agreement should include a clause stating that the debtor is liable for any reasonable costs incurred in recovering unpaid amounts. This may include debt collection fees, legal costs, or administrative expenses.

 

What Should Businesses Do?

 

To ensure they are not left covering collection costs themselves, businesses should:

  1. Review and update their Credit Terms – Ensure terms explicitly state that collection costs are payable by the debtor.
  2. Ensure customers agree – Obtain signed acceptance of the terms before extending credit.
  3. Include costs when lodging debts – When submitting debts for collection, ensure the specified collection fees are included in the lodgement.

 

Key Considerations for Businesses

 

  • Fair and reasonable costs: The amount charged must be justifiable and reflect the actual costs incurred.
  • Consumer vs. commercial debts: Additional protections may apply to consumer debts, making it even more critical to have clear terms in place.
  • Legal compliance: Always ensure compliance with Australian Consumer Law and debt collection regulations.

 

At Tasmanian Collection Service, we work with businesses to recover outstanding debts efficiently and ethically. If your terms allow for collection costs to be added, ensure these are clearly included when lodging the debt to maximise your recovery.

 

 

For guidance on best practices in debt collection, contact our team today.