New pre-action protocol for debt claims

It does not apply to claims issued by HMRC, or in cases where the claim is covered by another pre-action protocol, such as construction disputes or mortgage arrears.

The new debt recovery claims protocol will require the parties to a debt claim to engage in early communication and exchange of information to seek to resolve matters without the need for court proceedings. 

This is to prevent the parties from incurring disproportionate legal costs - and to help promote the use of alternative dispute resolution (ADR).

It is important to note that the court has significant powers to make costs orders and sanctions against a party that has not complied with the debt recovery claims protocol.

If parties have complied with the protocol, but it was not possible to resolve the dispute, the creditor can then proceed to issue a claim in court without being at risk of sanctions or an adverse costs order.

What is expected of the creditor?

A creditor should ensure that a letter of claim is sent to their debtor by post. It is also permissible to send a copy by email, where the creditor has been given such details.

The letter of claim should: –

• Outline the amount of debt owed by the debtor
• Be dated accordingly
• State whether interest or other charges still apply
• Where a debt has been assigned, give details of the original debt and creditor.
• Include a copy of a current account statement for the debt, including details of interest or other additional charges, an information sheet and a reply form.
• Confirm how the debtor can repay the debt, i.e. bank details or address to send payment
• If the debt arises from an oral agreement, a detailed account needs to be provided. For example, when and where the agreement was made, what it entailed, and which parties were involved.
• If the debt arises from a written contract, the creditor may be expected to procure a copy of the agreement along with a description of the parties involved and the date it was established.
• If instalments are being/have been offered by the debtor, an explanation of why these may be unsuitable needs to be provided by the creditor, along with an outline of how he/she wishes to proceed.
• If the debtor requests relevant documents or information, the creditor is expected to disclose such to the debtor within 30 days of receiving the request. In the case where such information cannot be provided, the creditor needs to inform the debtor as to why doing so is not feasible.

What is expected of the debtor?

• The debtor needs to reply to the Letter of Claim sent out by the creditor within a 30-day period, using the Reply Form. This should also enclose any pertinent documents.
• The debtor is expected to complete the Reply Form, though if partially completed, this will nonetheless be considered by the creditor as an attempt to engage with the matter and will not be disregarded. In such a situation, both parties will need to communicate with clarity.
• If the debtor fails to comply with the deadline, for example, in the instance where the debtor seeks debt advice which cannot be obtained within the period of 30 days, they will need to state this explicitly in the reply form so that the creditor may allow reasonable time for the debtor to obtain advice.
• If the debtor states that they require more time to pay the debt in the Reply Form, both parties will need to reach an agreement as to when the debt may be paid.
• If no agreement is reached, the creditor must provide a reason for why it is disagreeable to the debtor.

If the parties have followed the protocol and it has not been possible to reach an agreement, the creditor must give 14 days notice of its intention to commence court proceedings. Exceptions to this arise where the claim is very urgent, for example, if the statutory limitation period is about to expire.

Useful tips

• Keep written records relating to financial transactions where at all possible. It is far simpler, and therefore usually more cost-effective, to seek recovery of a debt under a written agreement or contract.
• Avoid oral agreements regarding financial arrangements where at all possible as the terms can easily be disputed.
• If you are owed a debt, act promptly to recover it. Time limits for the recovery of debt are limited by statute, usually to 6 years.
• Use a mediator or solicitor to assist you in negotiating terms with the other party, especially where the relationship between you is difficult or has completely broken down.

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SO Legal has litigation solicitors in London, Brighton, Eastbourne, Hastings, and Uckfield, providing support in all areas of litigation and dispute resolution.