Debt collection rules for consumer debts tougher from October
Debt collection rules due to come into force in October are set to make collecting debt from individuals harder for businesses with higher compliance costs although initial plans to include a copy of the credit agreement with loan chasing letters have been dropped
17 May 2017
Under the new pre-Action Protocol for Debt Claims set to be introduced by the Ministry of Justice from 1 October 2017 an individual will have 31 days to respond to a letter of claim pursuing the debt, up by a third from the current 21 days.
If the individual fails to pay, then another letter must be issued giving a further 14 days of grace. In total, individuals will now have double the amount of time to pay a debt before creditors are able to take them to court.
The creditors will also have to provide more detailed information to debtors, although initial plans to include a copy of the original credit agreement have been dropped following a wave of criticism from credit companies and brokers, who claimed that this information would be difficult to provide due to the administrative burden since the debts were being handled by collection agencies who would not have access to the documentation.
The government is keen to enable parties to resolve the matter without starting court proceedings, including agreeing a reasonable repayment plan or considering using an Alternative Dispute Resolution (ADR) procedure.
The new rules will not apply to business-to-business debt collection, only to individual consumer debtors.
The Ministry of Justice protocol sets out clear parameters for the communications between the creditor and the debtor. It states: ‘Where a debtor indicates in the Reply Form that they require time to pay, the creditor and debtor should try to reach agreement for the debt to be paid by instalments, based on the debtor’s income and expenditure.
‘In trying to agree affordable sums for repayment, the creditor should have regard where appropriate to the provisions of the Standard Financial Statement or equivalent guidance.’
There are concerns that the rule change will increase administrative and compliance costs for business, an issue which has concerned businesses since the proposal was first suggested in 2010 in the Jackson review of litigation costs. After a number of consultations following criticism of the sheer scale of paperwork required, the government has agreed to reduce the level of administrative process required.
Damon Watt, principal in the business support, restructuring & insolvency team at EMW, said: 'The debtor has the right to request documents from the debt collection agency and they have to be supplied within 30 days of the request; a canny debtor can string this out for 90 days and this will slow up the debt collection process.
'Businesses will now have to include much greater detail on the contract of the debt the claim relates to, instalments that have been offered for repayment and any interest incurred on the debt. The new rules are likely to reduce cashflow and squeeze the margins of many businesses.
‘The result may be that businesses reconsider the credit terms offered to individuals. Businesses will likely start chasing debt earlier in order to get the clock ticking on the response time.’
There will be a sanctions scheme for companies that fail to comply with the new debt collection protocol. These will include cost sanctions or a reduction in the interest that can be claimed on the debt.
Watt said: 'If the creditor fails to comply with the protocol there is potential for sanctions. The Court has at its discretion to disallow the creditor's legal costs or even make a cost order against the creditor. This would only come into play in extreme circumstances. Again, if the procedure over the warning letters was not followed, the Court could also stay the proceedings.'
What is required
The Pre-Action Protocol, which will come into force in October 2017, applies where any business is claiming payment of a debt from an individual. It provides for an enhanced letter of claim for the debt which must include more detailed information about the debt, as well as:
- whether the claim for debt arises from a written or oral contract;
- whether instalments have been offered and details of how the debt can be paid;
- whether interest is being charged and the amount incurred so far; and
- in addition, the letter must be sent by post.
The Ministry of Justice Pre-Action Protocol for Debt Claims is available here