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On 1 October 2017 a new pre-action protocol for debt claims (“the Debt Protocol”) came into force.

The Debt Protocol applies to businesses (including sole traders and public bodies) claiming payment of a debt from an individual (including a sole trader).

It does not apply where the debt is covered by another pre-action protocol, such as mortgage arrears and construction and engineering disputes.

The Debt Protocol broadly shares the same aims as all other pre-action protocols:

  • To encourage early communication between the parties,
  • To enable the parties to resolve the matter without the need to issue court proceedings,
  • To encourage parties to act in a reasonable and proportionate matter.

The Debt Protocol introduces a number of new requirements for creditors to comply with in respect of pre-action correspondence and disclosure.

The Letter of Claim

The first step in the Debt Protocol is for the creditor to send the debtor a Letter of Claim. This letter must include certain prescribed information and contain much more detail than was previously necessary. The letter must include or attach a statement of account which explains the outstanding balance and details of all interest and administrative charges which have been added.

The creditor must also attach a number of documents to the Letter of Claim: an Information Sheet (which contains debt advice), a Reply Form and a Financial Statement Form.

The Letter of Claim must be sent by post and give the debtor 30 days to reply.

If the debtor does not respond, the creditor can issue proceedings (although there is a further onus on the creditor to ‘take stock’ before doing so).

The Reply

The first part of the Reply form asks the debtor to confirm whether they 1) accept the debt in full or in part 2) whether they dispute the debt or 3) whether they do not know.

If the debtor requests documentation or information, the creditor must provide it or explain why it is not available within 30 days.

If the debtor indicates that he or she is seeking advice, the creditor must allow a reasonable period for that advice to be obtained and should not start court proceedings less than 30 days from receipt of the completed Reply Form (or from the creditor providing the debtor with any documents requested, whichever is the later).

If the debtor wishes to seek advice but cannot do so within 30 days, then he or she must provide details as to why advice can’t be obtained within 30 days, and when advice is expected.  The creditor should then allow reasonable extra time, where that is reasonable in the circumstances.

If the debtor says in the Reply form that he or she needs time to pay, then the creditor and debtor should try to reach an agreed payment plan based on the debtor’s income and expenditure, as set out on the Financial Statement.  If the creditor does not agree to any proposal made by the debtor for repayment, it should give written reasons.

Attempts to Settle

If the parties cannot agree about the existence, enforceability, amount or any other aspect of the debt, they should take steps to resolve the dispute without court action. In particular, they should consider using an appropriate form of alternative dispute resolution (ADR) for example, ‘without prejudice’ discussions or mediation.

If, following discussions, no agreement is reached, the creditor may give the debtor at least 14 days’ notice of their intention to start proceedings, unless there are exceptional circumstances which means the creditor cannot wait.

The Protocol emphasises the need for parties to make every effort to resolve cases without issuing proceedings. The effect of its provisions on creditors is that the timescales before issuing a claim will be increased, perhaps considerably where the debtor seeks additional time to obtain advice. The additional work that is involved in complying with the debt protocol also front-loads a significant proportion of costs on to creditors pre-issue.

 

This is not legal advice; it is intended to provide information of general interest about current legal issues.