Incoming: changes to recovering debts from individuals

The principle aim of the Pre-Action Protocol for Debt Claims (the Protocol), like many recent reforms, is to reduce the number of debt recovery cases taking up court time and the parties incurring court costs by making court proceedings the last resort.

What does this mean for you?

Where you have exhausted your credit control processes and your debtor is an individual, you must provide the debtor with a detailed Letter of Claim containing prescribed information and enclosing prescribed documentation including an information sheet, a reply form and a financial statement form before court proceedings can be issued.

You must provide the debtor with 30 days (plus two clear business days to allow for postage) from the date of the Letter of Claim to respond. This is an increase of over two weeks.

Debtor response

The debtor should respond using the reply form. If a reply is received and states that legal advice is being sought, you need to allow the debtor a reasonable period to take this. What is a reasonable period is undefined but I would suggest this will be at least 14 days, if not 28.

If an offer of settlement is made and you refuse it, you will need to outline your reasons for refusal and consider next steps.

Further steps

If the debtor does not respond to the Letter of Claim, then court proceedings can be issued.

If the debtor does respond and the parties cannot agree about the existence, enforceability, amount or any other aspect of the debt, you should both take appropriate steps to resolve the dispute without starting court proceedings. In particular, alternative dispute resolution (ADR) should be considered, for example, negotiations, using an independent mediator or authorised ADR body, or even a more formal process such as arbitration.

If ADR has not been attempted before proceedings are commenced, the court may impose sanctions such as an order that the party at fault pays costs of the proceedings or the court may award a higher rate of interest (up to 10% above base rate) on any judgement.

Terms of business

When contracting with individuals, in accordance with the Consumer Rights Act 2015 your terms of business should now include a provision with regard to ADR among other terms. If you have an expressed term with regard to disputes, you should invite your debtor to refer the matter to your chosen body.

If they refuse and/or fail to engage in proposals to use ADR, cost sanctions can also be imposed by the court.

Court proceedings

Provided all other attempts to settle the debt have been taken, the claimant must then provide the debtor with a further 14 days notice before issuing a claim.

Consider a review

As can be seen, the process has been significantly elongated. If disputed and attempts to refer the matter to ADR fail, the chances are that around four months will pass by before court proceedings can be issued without cost risks.

If your credit control processes are fairly lengthy already, this Protocol is likely to be an unwelcome additional burden on cash flow. Therefore, it may be appropriate now to review your credit control processes and terms of business to streamline these as far as possible so that, in the event of non-payment, the requirements of complying with this Protocol do not stretch the cash flow band too far.