On 1 October 2017, the Pre-Action Protocol for Debt Claims (Protocol) will come into force. It will apply to all debt claims where:
- the creditor is a business (including sole traders and public bodies)
- the debtor is an individual (including sole traders), and
- no other specialised Protocol applies.
Why is this new Protocol being introduced?
The express purpose of the new Protocol is to:
- encourage early engagement, communication and exchange of information between the parties
- enable parties to resolve debt claims without court proceedings via agreement to pay or alternative debt resolution (ADR)
- encourage parties to act reasonably and proportionately with one another; and
- streamline the management of proceedings that cannot be avoided through the frontloading of disclosure and the narrowing of issues in dispute.
What does this mean for creditors?
To achieve its aims, the Protocol sets out information which is to be provided by creditors to debtors in the initial letter before claim (LBC), as well as the timescales, actions and follow up correspondence it expects the parties to comply with before a claim is issued.
Will LBC's have to change?
Yes. Although not an exhaustive list, these changes include:
- An increased deadline of 30 days for the debtor to respond
- Reference to the Reply Form
- Detail around what, when, where and with whom any contract was agreed with
- A statement that written contracts can be requested
- Enclosing of either:
- an up to date statement of account detailing the interest and charges applied; or
- the most recent available statement of account with detail in the LBC of any interest and charges applied since the statement; or
- detail in the LBC of any interest and charges applied to the debt since it was incurred where no statement of account is available
- Enclosing the Reply Form and Information Sheet as annexed to the Protocol
- Enclosing an income and expenditure form.
What if a debtor does not respond within 30 days?
If no response is received within 30 days from the issue of the LBC, the creditor is free to issue a claim.
What if a debtor does respond within 30 days?
What happens next will depend on how the debtor has responded. The Reply Form gives the debtor the option to respond as follows:
- Admitting all or part of the debt and paying or proposing payment terms for the admitted debt
- Confirming they are seeking legal advice in respect of the debt
- Disputing all or part of the debt
- Requesting documentation from the Creditor to understand the debt.
A debtor has requested documentation from the creditor. What happens now?
The creditor has 30 days in which to either:
- provide the requested documentation to the debtor; and/or
- provide a written explanation to the debtor as to why the requested documentation is not being provided.
The creditor cannot issue a claim less than 30 days after the above documentation and/or explanation has been provided. The creditor must also give 14 days' notice before a claim is issued.
A debtor is seeking advice. How long must the creditor wait for this advice to be obtained?
The debtor has to indicate on the Reply Form whether obtaining advice will take longer than 30 days and, if so, provide details. In such a case, the creditor must allow a reasonable amount of time for this advice to be obtained.
In any event, the creditor cannot issue a claim less than 30 days after a Reply Form has been received and must give 14 days' notice before doing so.
A debtor has not fully completed the Reply Form. How should the creditor proceed?
A partially completed Reply Form should be taken as an attempt by the debtor to engage with the matter. The creditor should attempt to contact the debtor to discuss the Reply Form, and obtain any additional information required to understand the debtor's position.
Again, the creditor cannot issue a claim less than 30 days after a Reply Form has been received and must give 14 days' notice before doing so.
A debtor is disputing all or part of the debt. Can the creditor issue the claim?
Not immediately, there is a risk. Parties must take appropriate steps to resolve the dispute without issuing proceedings, and consider the use of ADR, which can take the form of:
- discussion and negotiation between the parties; and/or
- referral of the matter to a formal complaints process, such as an ombudsman; and/or
- mediation using a third party mediator.
A debtor has proposed payment terms. How does a creditor respond?
Parties are expected to try to reach an agreement for payment of the debt based on the debtor's income and expenditure. If the debtor's proposal is accepted, then the creditor should not start proceedings while the agreement is active.
If the debtor were to breach a term of the agreement, such as defaulting on a payment, the creditor should send an updated LBC (complying with the Protocol again). However, documents need not be re-sent if they have been sent within the preceding 6 months.
If, on the other hand, the debtor's proposals are not accepted, then the creditor must inform the debtor of this in writing and give reasons for refusing the debtor's payment proposal.
Further information required?
If you have any concerns around the impact of the Protocol on your debt portfolio, or would like more information, we would be more than happy to talk to you.