Changes To Debt Claims From The 1st October 2017

Civil litigation is governed by the Civil Procedure Rules ('CPR') which provides guidelines that must be complied with in civil claims. Annexed to the CPR are Pre-Action Protocols which set out the particular steps parties should follow in more detail (pre-action conduct) before commencing proceedings.

The new Pre-Action Protocol for Debt Claims comes into force on the 1st October 2017 and outlines conduct the court expects of parties to a debt claim before proceedings are issued.

It is important these steps are followed as a failure to adhere to the Pre-Action Protocol can result in the court taking into account non-compliance when giving directions for the management of proceedings and when making orders for costs. For example, proceedings could be stayed whilst steps are taken to comply with the Pre-Action Protocols or sanctions could be imposed upon a party. An example is the party at fault could be ordered to pay all or part of the costs of the proceedings or any award obtained could be at a lower rate of interest than what would have been awarded.

The aim of the new Pre-Action Protocol is to encourage communication between the parties and to enable them to resolve the matter outside of court proceedings. Alternate Dispute Resolution ('ADR') and negotiation with the debtor (to enter into a reasonable payment plan) is encouraged as an alternative to proceedings as a court claim is always the last resort to resolving a dispute.

Who does the Protocol apply to?

The Protocol applies to any business (including sole traders and public bodies) claiming against an individual. This Protocol does not apply to business to business debts unless the debtor is a sole-trader. This Protocol also does not apply where the debt is covered by another Pre-Action Protocol (e.g. Construction and Engineering / Mortgage Arrears).

What are the Aims of the Protocol?

  • To encourage early engagement, early communication, early exchange of information to assist in clarifying any issues in dispute;
  • To enable the matter to be resolved without the need for litigation (i.e. a payment plan is negotiated or ADR is utilised); and
  • To encourage parties to act in a reasonable and proportionate manner.

The Letter of Claim

In the first instance, the creditor should send a dated Letter of Claim, by post, to the debtor. If an email address is also to hand then the letter can be sent by both email and post. If the debtor has specifically stated no correspondence is to be sent by post then the creditor must send the letter to the alternate details provided. The Letter of Claim must contain the following:

  • The amount of the debt;
  • Whether interest or other charges are accruing;
  • How the debt arose (including details of the oral / written agreement (a copy should be made available of any written agreement);
  • If the debt has been assigned, details of the original debt and creditor and when this was assigned and to whom;
  • Details of how the debt can be paid;
  • How to proceed if the debtor wishes to discuss payment options (if instalments are offered, or are currently being paid, an explanation must be provided by the creditor in relation to why the offer is not acceptable and why a claim is still being considered);
  • The address to which the completed reply form should be sent;
  • An up-to-date statement of account for the debt should be attached (including details of interest / all other charges). If a statement of account cannot be provided then the letter must explain the amount of interest incurred / any other administrative charges imposed; and
  • An Information Sheet, Reply Form and a Financial Statement Form to be completed by the debtor should also be attached.

The Debtor's Response

If the debtor does not respond within 30 days of the letter of claim (allowing time for postage of a response) the creditor may start court proceedings. The debtor should respond using the Reply Form sent to them and request any copy documents they wish to see. They should also enclose any copies of documents they consider relevant (i.e. details of payments made to the creditor that have not been taken into account in the letter of claim).

If the debtor indicates they are seeking debt advice the creditor must allow the debtor a reasonable period for the advice to be obtained or in any event should not start court proceedings any less than 30 days from receipt of the completed Reply Form / 30 days from when copy documents were sent by request to the debtor (whichever is later). If the debtor cannot obtain advice within 30 days of their reply the creditor should allow reasonable time for the debtor to obtain that advice where reasonable in the circumstances.

If a debtor wishes to pay by instalments parties should try to reach an agreement based on the debtor's income and expenditure. If a creditor does not agree with the debtor's proposal for repayment they should give their reasons in writing.

Where an agreement has been reached concerning repayment of the debt the creditor should not start court proceedings whilst the debtor complies with the agreement. If court proceedings become necessary at a later date a further, an updated Letter of Claim must be sent out to the debtor.

Where the debtor responds to the letter of claim, but an agreement has not been reached, the creditor should again give notice to the debtor of their intention to start court proceedings (at least 14 days' notice) unless there are exceptional circumstances (i.e. the limitation period is about to expire) and urgent action may be required.

Disclosure of Documents

The early disclosure of documents and any other relevant information can help to resolve any issues in dispute and provide clarity. If any aspect of the debt is in dispute parties should exchange information and disclose documents to enable each other to understand their respective positions. Any documents requested by the debtor must be provided to them by the creditor within 30 days of their request. If documentation / information are unavailable to the debtor the creditor must explain why.

Alternative Dispute Resolution ('ADR')

If the parties cannot come to an agreement in relation to the debt ADR should then be considered to try and resolve the matter. Forms of ADR may include negotiation or mediation. If the debt is regulated under the Consumer Credit Act 1974 a more formal process such as a complaint to the Financial Ombudsman Service may be an option.

The Information Sheet, Reply Form and a Financial Statement Form

Examples of these documents which are required to send with the Letter of Claim are annexed to the new Pre-Action Protocol.

Article written by Rachel Frammingham in relation to the new Pre-Action Protocol for Debt Claims.