Cancel your debts? The law is clarified
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Last week this blog discussed a consumer who managed to get her credit card debt cancelled because of a legal technicality regarding the bundled selling of Payment Protection Insurance (PPI). However, a High Court ruling this week has dashed the hopes of many other consumers trying to follow this example.
The ruling will also suffocate the multimillion-pound debt avoidance industry that has expanded rapidly over the past year or two as consumers struggling to keep up repayments are seduced by attractive claims.
Many of the UK’s 3,000 Claims Management Companies (CMCs) attract clients with promises that they can exploit legal loopholes to write off certain unsecured debts, most commonly personal loans and credit cards.
The industry depends on the CMCs establishing that the customer’s original loan agreement is “unenforceable” because it is in contravention of one or more requirements of the Consumer Credit Act 1974.
The simplest tactic that CMCs use is to demand to see a copy of the client’s original loan agreement. Under the Consumer Credit Act, if the lender cannot provide a copy within 12 days, which many banks struggle to do with older loans arranged by predecessors, the debt becomes “unenforceable”.
Where the bank can provide the documents, lawyers will advance other arguments, such as that the terms and conditions page was not signed or that certain information required by law was missing. Some CMCs have built their businesses on the promise that unenforceability means that the borrower is no longer obliged to repay the loan and lawyers say that many thousands of people have already stopped payments. Others have continued with repayments, hoping that their loans would be be cancelled.
The High Court decision will mean defeat for tens of thousands of similar county court cases, which have been put on hold until the test case involving Royal Bank of Scotland (RBS) was resolved.
The tens of thousands of county court claims on hold are from borrowers asking the court to cancel the debt on the basis that it is unenforceable. Ultimate Law, a Manchester-based law firm, estimates that 100,000 claims are in progress.
Given the amounts at stake, the county court referred the matter to the High Court, which considered the case of Phillip McGuffick, who was seeking to have his £17,034 personal loan from RBS declared unenforceable. The case was heard on the basis that both sides agreed that the loan was unenforceable and the judge was asked to decide what this meant.
Mr Justice Flaux ruled: “Although the [Consumer Credit Act] may render the agreement unenforceable, the agreement remains a valid and subsisting contract and rights and obligations under it continue to exist”.
The Ministry of Justice, which regulates the UK’s 3,000 CMCs, has recently stepped up its campaign against unscrupulous practices in the industry. Last year it banned 116 CMCs for offences including exorbitant fees and misleading advertising. The ministry had no comment on the RBS case.
