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New Debt Letter Rules - What Does Your Business Need to Do?

View profile for Catherine Rickett
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The way your business must deal with individual debtors is changing. On 7 October 2020, the Treasury announced new rules for debt letters that are less intimidating and provide more support for people in debt. The law is expected to be officially changed in December 2020 and lenders will have 6 months to implement new procedures.

What’s changing?

Legally prescribed default notices are designed to warn debtors that they have fallen behind on payments and give them time to rectify the situation before the lender takes further action. However, these letters have long been criticised for having the opposite effect. The ‘threatening’ use of block capitals and legal terms may instead distress and confuse debtors, causing them to bury their heads in the sand and ignore the situation. As a result, they may find their debts continuing to mount beyond manageable levels.

Martin Lewis, the Founder and Chair of the Money and Mental Health Policy Institute charity and campaigner for this change in the law sums up the problem as follows:

  • “Over 100,000 in England attempt to take their lives each year due to debts, and four times that consider it the last thing people struggling with debt need is a bunch of thuggish letters dropping through the letterbox, in a language they can’t understand, written in shouty capitals alongside threats of court action.”

As well as addressing a long-term issue with debt recovery procedures, the new rules are designed to help people struggling with debt as a result of the Covid-19/coronavirus pandemic. The Government has also given the Financial Conduct Authority powers to take action on certain types of lending, including capping the costs of payday loans and rent-to-own agreements.

So, what’s changing? Once the new law has been fully implemented, debt letters will have to:

  • Use simple language that is easy to understand and is less threatening – complicated legal jargon must be replaced with plain English. For example, lenders must explain what terms such as ‘surety’ mean
  • Avoid intimidating capital letters – lenders should use underlined text instead of capital letters which can be threatening and ‘shouty’
  • Point debtors towards free debt advice services

The new rules will mainly apply to individuals. However, the definition of an individual includes sole traders, so lenders must also be wary about how they enforce some business debts.

Debt recovery law

The new law on debt letters is the second major change to the debt recovery procedure in the last few years. In October 2017, a new Pre-Action Protocol for Debt Recovery was introduced, setting out clear rules about how businesses (including sole traders and public bodies) should recover debts from individuals (including sole traders).

You can read our article about the rules under the Pre-Action Protocol here – Changes to debt recovery procedures due October 2017.

One of the key points is that debtors must be given longer (at least 30 days) to engage in repayment negotiations with you. If you start legal proceedings prematurely, the court is likely to halt your claim until you comply with the Pre-Action Protocol and may even deny you recovery of interest.

The new law on debt letters is less far-reaching – they simply change the rules set out under the Consumer Credit Act 1974 on what lenders must include in default demand letters to their debtors. However, given how harmful these debt letters can be to mental health, lenders must be very careful to comply with the new rules.

Minimise the impact on your business – get expert advice about debt recovery

In these economically uncertain times, issues of cash flow can push a business into financial difficulty with just one or two unpaid invoices. While the changes to debt recovery procedures over the past few years are arguably essential to protect debtors, how will this impact businesses? The key to minimising the impact on your business is to put in place strong credit control policies – for example, developing template letters and forms, ensuring debts are picked up early and diligently applying deadlines for repayment.

If you need advice about recovering money from your customers or clients, get in touch with our specialist debt recovery solicitors. We can help you put in place effective credit control procedures to efficiently recover payments owed to you while supporting your customers through debt. Our team is highly recommended by the leading client guide, the Legal 500, for our debt recovery expertise and high-quality customer service.