Debt collection costs are generally the responsibility of the creditor, meaning the business owed the money. However, those costs may be recovered from the debtor if your signed contract includes the right terms, or if the debtor agrees to pay them during the recovery process. Understanding which situation applies to your business is the difference between absorbing those costs yourself and recovering them in full.
This guide explains how the debt recovery process works, when you can pass collection costs onto a debtor, and how to structure your contracts to protect your business going forward.
How the Debt Recovery Process Works
Before getting into costs, it helps to understand what the debt recovery process actually looks like. Most commercial debt recovery follows a similar path, but here’s what it looks like when you work with us.
- Reviewing the debt
The process starts with a review of the outstanding amount to confirm what’s owed, checking the original agreement or invoice terms, and establishing whether there’s a contractual basis for recovering collection costs. This is an important step, since the strength of your documentation directly affects your recovery options.
- Contacting the debtor
A formal demand is issued, outlining the amount owed and the timeframe for payment. As professional debt collectors, we handle this contact in accordance with Australian law. The goal at this stage is resolution without escalation.
- Negotiating repayment
Many debts are resolved here. A repayment plan, partial settlement, or agreed payment date gives both parties a workable path forward.
During this stage, a debtor may also agree to cover collection costs as part of the negotiated outcome.
- Escalating if required
If negotiation fails, the matter can be escalated to legal proceedings. Court-ordered judgments open additional options, including court-ordered legal costs. This is typically a last resort, but it’s a necessary safety net for debts that can’t be resolved through direct negotiation.
Who Actually Pays the Debt Collection Fees?
Debt collectors cannot charge their costs and expenses to the debtor. Those costs sit with the creditor. This protection prevents excessive fees from piling up for people who already owe money.
But there are three circumstances where recovery of collection costs is possible.
Your contract includes explicit terms
If your credit agreement, terms of trade, or customer contract states that the debtor will pay reasonable collection costs in the event of default, you have a contractual right to recover those fees. This clause must be in place before the debt arises, so you can’t add it in after the fact. Many businesses we’ve worked with in the past include provisions allowing up to 20% plus GST of the debt amount to cover collection costs.
The debtor agrees during the recovery process
Even where your original contract doesn’t include a cost recovery clause, a debtor may agree to cover collection costs as part of a negotiated repayment arrangement. This should be documented in writing before any agreement is finalised.
The court orders cost recovery
When a debt proceeds to legal action and judgement is obtained, the court may order that legal costs be paid by the debtor. Interest and other court-determined costs may also be recoverable through this pathway. This is at the court’s discretion to allow the costs.
How to Set Your Business Up to Recover Collection Costs
The easiest way to reliably recover debt collection fees is to set up your contracts correctly before any debt arises. Once a default has occurred, your options narrow significantly.
A well-drafted credit agreement should include a clause stating that the debtor will pay reasonable costs incurred in recovering unpaid amounts. To make this enforceable:
- Get it in writing before extending credit: Your terms of trade, credit application, or customer contract should include the clause explicitly
- Get signed acceptance: Verbal agreement isn’t enough. You need documented acceptance of your terms
- Keep costs reasonable and justifiable: Charges must reflect actual expenses, not penalties. Late payment fees, for example, must represent a genuine pre-estimate of your loss to remain enforceable under Australian Consumer Law
- Specify the fee structure where possible: Vague clauses are harder to enforce than specific ones
Our team can review your clauses to ensure they comply with current laws and will hold up in a challenge.
Need Help Recovering Costs?
Debt collection costs are the creditor’s responsibility by default, but with the right contracts in place, or the right negotiation during the recovery process, they don’t have to be. The businesses that consistently recover their full costs are the ones that plan for it before a debt ever arises.
At Dynamic Commercial Collections, we work with businesses in Brisbane, Bundaberg, Perth and Australia-wide to structure their agreements and navigate the recovery process from start to finish.
If you’re unsure whether your current terms protect you, get in touch with our team for a straightforward conversation about your options.
This article is intended as general information only and does not constitute legal advice.
Frequently Asked Questions
Can I recover debt collection fees from a debtor in Australia?
Generally, no, unless your original contract includes a clause allowing it, the debtor agrees to pay those costs during negotiations, or a court orders cost recovery as part of legal proceedings. Evidence of acceptance of the terms is required to be provided to the court for a decision to be made by the court to allow the costs at its discretion.
Do I need to include a debt collection clause in my contracts?
Yes, if you want the option to recover those costs. The clause must be in place before any debt arises and must be accepted by the other party in writing and on an indemnity basis.
Can a debtor agree to pay collection costs even if my contract doesn’t mention it?
Yes. If a debtor agrees to cover collection costs as part of a negotiated settlement, and that agreement is documented in writing, those costs may be recovered.
What happens if I try to recover fees without the right contractual terms?
You risk breaching Australian Consumer Law and engaging in misleading conduct, both of which carry significant financial penalties.