Debt Protocol: Death of the ‘7 Day’ Letter

A New Regime

From 1 October 2017 a new pre-action protocol has come in to force which applies to claims brought by a business claiming a debt from an individual.  The protocol sets out the conduct expected by the Court prior to legal proceedings being commenced against the debtor.  It does not apply to business-to-business debts unless the debtor is a sole trader.

The process of recovery of debts is set to become more arduous for creditors.  Where previously a letter of claim could be sent to the debtor demanding payment within 7 days, the business creditor must now allow 30 days for an individual debtor to respond before legal proceedings can be commenced.

 Requirements

In addition to the extension of time for a response, the protocol also provides mandatory content for the letter of claim including:

• Details of the amount of debt as well as any interest and charges due
• Full details of the written or oral agreement under which the debt arose
• If instalments are being paid, an explanation as to why instalments are no longer acceptable
• Details of how the debt can be paid/or how to proceed if the debtor wishes to discuss payment
• The inclusion of an information sheet and a reply form for the debtor to complete indicating whether or not the debt is disputed and how any payment(s) will be made. The reply form can also be used by the debtor to request any further information or documentation.
• A Financial Statement for the debtor to provide details of their incomings and outgoings in support of any offer of repayment proposals.

Points to note

If the debtor responds to the letter of claim with confirmation that debt advice is being sought, the creditor must allow “reasonable extra time” for the advice to be obtained.  It is not clear how much extra time will be considered reasonable, particularly given the lack of availability of such debt advice services in many areas of England and Wales.

The protocol also makes clear that Alternative Dispute Resolution (“ADR”) should be utilised to resolve any dispute that remains in respect of the debt.  Again, it is not clear when ADR will not be considered appropriate and the costs of an ADR process such as mediation will need to be considered against the size of the debt being pursued.

Non-Compliance

Failure to comply with the protocol could mean further delays in recovering the debt as any legal proceedings may be stayed whilst the failures are remedied.  There could also be sanctions in terms of payment of the debtor’s legal costs or a failure to recover costs and an inability to recover interest on the debt.

Outcome

The aim of the protocol is to encourage early communication between the creditor and debtor and for the exchange of information and relevant documentation to avoid the commencement of legal proceedings.  Whilst these aims are admirable, it is clear that the new Protocol will mean increased delays in pursuing legitimate debt claims.  Letters of claim will no longer carry the prospect of imminent Court proceedings and businesses will need to consider changes to their debt recovery processes to ensure that where credit is offered, prompt action is taken if debts arise.