Although some debt collection trends were visible before, the year 2020 has left a significant stride in the debt recovery statistics in the UK. According to the data collected by The Money Charity, by May 2021 the overall household debt rose to £46.7 billion from £1,674.6 billion in May 2020. The currently average household debt is now at £61,933, with almost 50% of new debtors in a vulnerable situation (StepChange Statistics Yearbook 2020).
All of this means that debt collection requires an even more individual approach and precise tools to cater for people with different abilities and needs. Following ethical conduct best practices will help you ensure that your company will not be disproved of its debt recovery authority.
In this article, we’re listing these best practices and take you through the debt collection procedure that’s you’re legally obliged to follow.
Debt moratorium during the Covid-19 pandemic
Before we start analysing the ins and outs of the debt collection laws in the UK, it’s worth mentioning the recent changes to them as these can influence how your company approaches debt collection.
As of May 4th, 2021, there’s a new debt moratorium regime introduced in England and Wales eligible for individuals struggling to pay off their debt. The Debt Respite Scheme (Breathing Space) introduces some important rules affecting not only debtors who can now take a 60-day break from any loan payments but also creditors and debt advice providers. They are now required to stop any debt recovery actions once the breathing space is applied to a certain debt and apply protections as stated in the Debt Respite Scheme (Breathing Space) guidance for creditors. Additionally, financial advisers are responsible for serving a touch point between debtor, creditor and the Insolvency Service and managing breathing spaces of their customers. You can check the document I’ve shared above for more information on the exact responsibilities.
Supervision of debt collection in the UK
To manage and collect any debt in the UK, your company needs to be registered as a Debt Collection Agency (DCA) that can act and recover debt on behalf of the creditor. Once the registration process is completed, you’ll be listed as required by law to follow ethical and legal debt recovery scheme supervised by the Financial Conduct Authority, the Financial Ombudsman Service and the Competition and Markets Authority (previously known as the Fair Trading office). This ensures that all liabilities are collected in an ethical manner, within the legal requirements.
According to these requirements, here’s the set of activities that are not deemed harassment and are considered non-abusive:
- sending reminders and letters of demand before taking any debt recovery actions, including letters, emails, text messages and phone calls;
- arranging meetings to set up a payment plan or seizure the debtor’s belongings by a bailiff or an in-house agent;
- following the above-mentioned with court proceedings if the debt cannot be settled using pre-legal actions.
The legal requirements also detail the actions that a DCA nor a creditor cannot take, and these are as follows:
- provide any information that’s not transparent and clear to the debtor or assign any deadlines that will be difficult for them to be met;
- add any charges to the debt that have not been mentioned in the contract and are above the 8% fee allowed by the debt recovery guidance acts plus the current Bank of England interest rate;
- contact the debtor via their social profiles or outside of the hours specified in the guidance (8am – 9pm on working days);
- contact the debtor’s employer, family members or acquittances without specific permission.
Any breach of these practices can be punished by the regulators and result in your company being losing the DCA registration.
Debt recovery procedure for individual debtors in the UK
Step 1: pre-legal actions
Before taking an issue to court, there are certain actions you can carry out as a DCA if your debtors have not made any payments for at least 30 – 60 days (depending on your contract). They’re centred around a ‘letter before action’ policy that ensures that the debtor has enough time to make their payments. Here’s how the full process looks like:
- performing a credit check on the debtor;
- performing judgements and insolvency search about the debtor;
- calculating late payment fees based on your company’s terms and conditions. Keep in mind that they can’t exceed 8% plus the Bank of England interest rate and need to be considered reasonable I.e. for you can claim £40 for debts of less than £1000, £70 for debts of less than £10,000 and £100 for £10,000 or more; if charges are low, you can also consider dropping them altogether;
- sending a letter of demand with the exact amount owed, the detailed instruction on how it can be paid off and the deadline by it needs to happen.
Step 2: county court proceedings
Here the process starts with a recurrent credit and insolvency check on the debtor. Next, your company can proceed as follows:
- you can any applicable fees and court costs that will be collected after the recovery is completed;
- once the court claim is made, the claim form will be issued and sent to the debtor;
- they then have 14 days to respond with what their next steps will be (and they can be as listed: paying the claim in full, admitting the claim and offering to pay it in full or in instalments by a certain date; defend the claim in full or partially);
- if the debtor responds to the claim, you can move back to step 1 and try to settle it without further legal actions taken;
- if they don’t respond, you can apply for a judgement to be set against the debtor;
- once the judgement is made and your debtor has not responded to it/made any payments, you can proceed to stage 3.
Step 3: enforced debt recovery
In the final step of the debt recovery, you need to ensure the best practices and the rules of ethical conduct are applied at all stages. Unless the debtor agrees to sign a repayment contract following the court proceeding, there are at least a few ways you can use to recover debt, mostly depending on whether the debtor has any assets that may be seized.
Under Insolvency Act, Statutory Demand can be used as an alternative to the ‘letter before action’ approach mentioned above, but it’s more intrusive and formal than the former and has far-reaching consequences. It precedes a Bankruptcy Petition against an individual and it’s for debts over £5000 where there are no known disputes in relation to the claim.
Please note that the debtor can apply to the court to drop the Statutory Demand procedure at any time.
Third-party Debt Order
If you know about any of your debtor’s loans that are about to be repaid, you can apply to the court for the money to be paid directly to you. While this may not be the quickest way to recover the debt as the timing largely depends on the third-party debtor’s capability, but your application can be made against the debtor’s bank account to ensure that the recovery will be effective.
Attachment of Earnings
Attachment of Earning can be executed only if the debtor is employed (but not self-employed). Payments are then deducted from their salary and transferred into the creditor’s bank account to satisfy the debt.
A charging order can be placed against the debtor’s property, so once they sell it, the appropriate payment will be made to the judgement creditor. Once the order is granted by the court, you can apply for it to be executed through the Land Registry.
This is by far the most invasive debt collection method, and it can be applied for debts up to £5000 where an assigned county court bailiff can enter the debtor’s property and seize any belongings that would satisfy the debt. For debts over £600, this procedure will be completed by a high court enforcement officer. It’s important to remember that contrary to business properties, the entry cannot be done by force on residential properties, and you need to gain a peaceful admittance in order to seize any items.
Are you looking for ways to speed up your debt recovery process and make it easier for the debtors to pay off their liabilities? At Spyrosoft, we’ve built DebtPro, a debt recovery and management tool created for and by financial experts that has been successfully implemented at both debt management companies and a large commercial bank.