Legal loophole partially closed

At the end of last year, I wrote a blog on claims management companies, and mentioned a legal loophole that allows people to write off their debts.

At the time, the issue was the subject of a court case hearing in Manchester High Court. This centred on whether consumers should have to pay their debts if the lender fails to produce an original agreement within a certain time limit.

How is it possible that people could write off debts in this way? In short, the Consumer Credit Act requires certain credit arrangements to be set out in a particular way, and to contain certain information, in order to be enforceable. If lenders do not comply with the Consumer Credit Act, then they cannot enforce repayment of the loan through the courts.

The Court has now reached a decision, ruling that lenders only need to provide a ‘reconstituted’ copy of the original loan agreement. The decision means that the absence of a copy of a signed executed agreement is not evidence that such an agreement was not made.

However, the Court alsp ruled that if a lender is not able to supply a copy of the loan agreement, then they cannot use the courts to chase a debt. 

The case has set a precedent for an estimated 150,000 cases currently sitting in other courts around the country. In the majority of theses cases, consumers were trying to avoid payment of their credit card and loans on the grounds that the bank had either lost or destroyed the original signed agreements.

Upon request from the consumer, lenders are obliged to supply a copy of the credit card or loan agreement within 12 days. Claims management companies representing consumers have previously argued that if no agreement is produced then the debt is unenforceable – this has understandably led to disputes between lenders and customers about what constitutes a ‘true copy’.

Following this test case it has been ruled that:

* A copy of the loan agreement must contain the name and address of the borrower as it was at the time it was signed

* If an agreement has been subsequently changed by the lender, then the lender is obliged to supply a copy of both the original agreement as well as the current one

Other rules

The Office of Fair Trading (OFT) also offers guidance on the issue on unenforceable debts.

It states that it is legal and acceptable for a bank that has lost the original loan agreement, or whose copy is illegible, to supply an accurate reconstituted version instead in order to demonstrate that the agreement did in fact contain the information specified by the Consumer Credit Act.

The OFT points out to lenders that they are acting unfairly - and potentially in breach of their consumer credit licenses - if they misled borrowers by:

• Hiding or disguising the fact that there was never a properly signed agreement in the first place

• Providing the current terms and conditions, rather than the original ones

• Failing to preserve data so the borrower cannot be given an up-to-date statement of account

Previous High Court ruling

A previous High Court ruling in London ruled that borrowers could still be held liable for their debts even if bank cannot produce a copy of the original agreement.

The judge decreed that claimants should not stop paying back their loans or credit cards while the claim was ongoing, as the loan may become fully enforceable in future.

Any non-payment could be recorded on the claimant’s credit files - which would not breach data protection law.

The previous High Court ruling also clarified ‘enforcement’ by the lender. It ruled that starting legal proceedings it is not actually enforcement but a step towards enforcement.

This basically means that any steps the lender takes before commencing legal proceedings - such as demands for payment, issue of default notices and or threatening legal action – do not construe enforcement.

Consumers exploited?

Some people feel that those with debt problems have been exploited through their desperation and vulnerability as many consumers have been cold called by claims management companies claiming they can write off credit card and personal loan debts by using this legal loophole.

For this service consumers usually pay upfront fees of between £195 and £495 per agreement, in the hope they will become debt free. In some cases, these fees have been added to the credit card debt they are trying to wipe out.

The way forward

There will still be some lenders that cannot produce a ‘true copy’ of the agreement, which may lead to the debts not being enforced. But this is expected to be restricted to just a small proportion of the banking industry. 

To produce a ‘true copy’, all the lender needs to do is insert the correct credit amount, the credit rate and the original terms and conditions onto the original loan agreement, or if they know the original terms and conditions.

Your Comments

Letters from lawyers on behalf of Debt Collection Agencies

Hi there,

A few years ago my relationship ended after 12 years. I was left with credit cards in my name, bills. council tax and a joint mortgage.
My ex-partner suported our son and I when he was working but as a contractor there were many months I didn't receive money from him.
I tried to soldier on on my own, selling things and borrowing from family and friends.
Along the way, I stopped making repayments to the cards and have ignored [not opened tons of mail].
I have got the mortgage back on track[interest only], gas and electic payments made and partial payment to council tax arreas and us fed but I am now receiving letters for unpaid cards.
It's not I don't want to pay these, it's taking all my efforts to get the eessecials covered.
I have just applied for Child Tax credits, my mother [88] lives with me and needs someone here with her so she has just been awarded attendance allowance I am now filling out the form to claim Carer's allowance.
Can you sugguest what I can do regarding these letter?
Can I ask for a copy of the original signed Card application form?
I'm at my wits end....

PS I live in Scotland