Creditors need to be aware and prepare themselves for the new Pre-Action Protocol for debt claims, effective from 1 October 2017. The aim of the new protocol is to encourage early engagement and communication between both parties of the credit agreement in order to try and resolve outstanding debts and where possible agree a repayment plan, rather than initiating court action.
The protocol is relevant to any business requesting payment of an unpaid debt from an individual, (which includes sole traders) and comprises of a series of steps which the court expects to have been taken to recover the debt owed, before court proceedings are issued. The new rulings will not apply to business to business debt recovery, with the only exception being where the debtor is a sole trader.
The protocol requires a detailed letter of claim to be issued by the creditor to the debtor which should include:
- The total amount of the debt, with a breakdown of any interest and charges claimed.
- Full details of the written or oral contract, including the date this was entered into, the parties to the contract and confirmation that sight of the written contract is available upon request.
- Whether the debt has been assigned, providing details of when and who to.
- Details of how the debt can be paid or who to contact if the debtor wants to discuss the debt further.
The letter of claim needs to include the following:
- copy invoices or an up to date statement of account detailing the outstanding invoices
- information sheet setting out what the debtor now needs to do
- reply form
- financial statement detailing the debtor’s income and expenditure
Once produced the letter of claim must be sent by post to the debtor and the protocol then allows 30 days for the debtor to respond. If the debtor does not respond, or no agreement is reached, the creditor must send a further letter to the debtor advising that unless a response is received within 14 days, court proceedings will be issued against them.
The debtor should respond using the reply form, sanctioning whether they agree with the debt outstanding or not, requesting copy documents if required, and confirming if they are seeking debt advice. If this is the case then the creditor must allow the debtor reasonable time to obtain the advice and copy documents should be provided within 30 days of the request.
As the timeframe for debtors to respond has been increased to 30 days (previously 14 days), businesses may wish to reduce their payment terms to reflect this. However in all cases it is important that businesses have a written contract and terms of business in place detailing the agreement between both parties.
If a creditor does not comply with the protocol and court action is subsequently instigated, the court can impose sanctions on the creditor, which could limit the interest and costs recoverable.
It is more important than ever for businesses to know their customers and their entity i.e. whether they are a sole trader, partnership or limited company. Knowing this will determine whether to follow the new protocol, but in instances where this is unknown then the protocol approach should always be adopted.
As Cumbria’s leading debt recovery firm we recognise that there is no one size fits all solution to debt recovery. Contact Joanna Seminara on 01228 713070 for more information.
Posted: August 18th, 2017