There are a lot of misunderstandings by both creditors and debtors as to what can and cannot be done in respect of outstanding debts. Karen Chapman, associate and Stuart Hoysted, senior associate at Clarke Willmott LLP, both specialists in debt recovery, examine the “top ten” debt myths and dispels some of those misconceptions.
The myth – A creditor must accept any offer of repayment made.
Most creditors will have heard a debtor say “I will offer to pay £2 per month. If you take me to Court I will tell the Court my financial circumstances and the Court will only order me to pay £1 per month.”
In response to issued Court proceedings it is possible for a debtor to file paperwork advising of their financial circumstances and to make derisory offers of repayment. It is open to the creditor to file a response, and if you have information suggesting that the debt can be repaid quicker – for example because the debtor has already told you it can – then the Court will make an appropriate final judgment.
The myth – You can refuse entry to a bailiff.
There is a lot of misleading information concerning what right of entry a bailiff has, though this is understandable as what a bailiff can and cannot do may vary according to the debt they are enforcing. Generally, when enforcing a normal civil warrant, a bailiff cannot force entry into a home. However, if a bailiff can gain peaceful entry, either through an unlocked door or a side garage, then this is allowed.
If a bailiff has previously visited the premises and obtained a signed Controlled Goods Agreement, they can then force entry. If there are outbuildings, sheds or garages which are separate from the residential building, entry can also be forced.
Finally, there are circumstances when the bailiff may be able to obtain an order of the Court granting leave to force entry, for example if there is good evidence of a debtor hiding valuable assets in a property.
The myth – A person is only liable to pay his “share” of a jointly and severally liable debt.
It is perhaps natural that someone who owes £10,000 jointly and severally with their business partner might think that they should only pay £5,000, as this is their share. However joint and several means that all parties are liable for the whole debt until it is paid. What arrangements the debtors have for settling their affairs between themselves is not a concern for the creditor.
The myth – A claim form has to be personally served.
No they don’t. An individual can be served by post at their usual or last known residence and a company can be served by post at its registered office or principle place of trading. It follows that an application to set aside judgment made solely on the ground that the debtor was not served with the claim form, will normally fail.
The myth – The HCEO/Bailiff cannot remove a vehicle if it is needed for work.
There is some truth to this, but the situations where it actually applies are extremely limited. The High Court Enforcement Officer or Bailiff is not allowed to take control of or remove “tools of trade” – items that are needed by the debtor to do their job or run their business.
A vehicle could be a tool of trade, but only if it is exclusively used for business purposes. If the vehicle is also used for the school run, the weekly shop or any non-business related activity then it can be removed.
It might also be the case that the vehicle is excessive for the business needs. The local painter and decorator will have difficulty in making a business case that he needs a top end Porsche to conduct his trade. In such cases the bailiff can take the expensive vehicle for sale at auction and replace it with a cheaper, more business suitable alternative.
The myth – Chasing a debt constitutes harassment.
Again, there can be some truth to this. The two key words to remember are “reasonable” and “proportionate.”
It is reasonable and proportionate to chase a debtor for payment if they default, or to send letters in compliance with Pre-Action protocols advising a debtor that you are intending to take Court action.
It is unreasonable and disproportionate to attempt to contact the debtor several times a day by telephone or social media to remind them that they owe you money.
It is not acceptable (and criminal) to physically assault or verbally threaten harm to a debtor.
The myth – A debtor can avoid the debt by making himself bankrupt.
From the creditor’s perspective once a debtor enters bankruptcy the debt appears to then be “written off” as there is nothing more the creditor can do. For the debtor, bankruptcy is not an easy option. The debtor’s means and circumstances will be reviewed and assets liquidated.
The debtor can be subject to an Income Payment Order, which requires them to pay their disposable income to the trustee in bankruptcy for the next three years. Whilst the formal bankruptcy normally lasts 12 months, the damage to the debtor’s credit record will make obtaining credit or a mortgage extremely difficult for years to come.
The myth – All contracts or agreements have to be in writing.
Whilst it can make life easier if there is a written document stating what the parties have agreed, there are only limited circumstances where there is a formal legal requirement for there to be a written contract. If you were so inclined, you could verbally agree with a builder that he will build you a bespoke mansion, in the same way you instruct the window cleaner to wash your windows!
The myth – A personal guarantee is no longer valid if the guarantor is no longer associated with the party he offered the guarantee for.
The relationship that the guarantor has with the party he is providing the guarantee for is distinct and separate from the relationship between the guarantor and lender. Thus, a person who gives a personal guarantee to the bank for the overdraft of his employer, but is subsequently dismissed by that employer, will remain liable to the bank for the overdraft.
The myth – A debt is wiped out after six years.
This is a misconception about the provisions of the Limitation Act. A creditor who is owed money under simple contract and has failed to take formal legal action within six years from the cause of action, will be statutorily barred from issuing an action on that debt. A debt which is statute barred still exists, and can be paid by the debtor.
A creditor with such a debt should consider when the “cause of action” arose i.e. the date that the debt became formally due. If a debtor has “acknowledged” the debt at any time since the initial default date, the six year period may have restarted allowing a Court action to be taken.
If there has been no acknowledgement of the debt, a creditor can still apply to the Court to extend the limitation, though the Court would require very good reasons to do this.
It should also be noted that a Creditor is usually only allowed to claim up to 6 years interest.