Debt Remedies: England & Wales

Establishing a credit control system enables a credit union to monitor the extent of bad debt experienced by the credit union. However, simply monitoring the bad debt is not enough. The credit union needs to take action to encourage more regular payment of delinquent loans and to recover outstanding bad debts.

Only by taking action can a credit union control bad debt and thereby limit the negative impact of bad debt on the profitability of the credit union.

Recovery options

A credit union has a range of recovery options available. The approach adopted will depend on the circumstances and responsiveness of the member, as well as the size of the debt. Actions that a credit union can take include:

• Meet and interview member
• Credit union phone calls and letters
• Solicitors letters
• Lien on shares
• Debt collection agency
• Court action

Remember that the options for recovery will change from time to time so it is essential for the credit control officer to keep up to date with any changes affecting the way in which a credit union can recover debt.

The best outcome of the credit control cycle is getting the member to pay before recovery action is needed. If a member doesn’t pay then there are various further opportunities to recover monies due, all of which have varying degrees of success. Court action may not be cost effective where there is a low balance and/or low probability of recovering money. But court action can help to send a message to a community that you won’t tolerate non-payers, and to other lenders that someone is a bad credit risk.

If you want to be able to charge debtors for the cost of enforcement action, you must include a clause in your loan agreement that sets out what charges may be applied.  The FSA expects loan agreements to set out clearly, fairly, unambiguously and completely the scope of any loan arrears charges and in what circumstances they would be levied.  The FSA also expects credit unions to set out a reasonable, fixed monetary cap on the amount of fees, or a limit based on a ‘reasonable amount’ which may be increased in order to cover reasonable administrative costs associated with loan arrears recovery costs.

Court Order

Credit union debt recovery would go through the County Court.

Steps

• Apply for judgement (Form N1)
• Debtor can defend themselves or admit the debt
• Arrangement can be made to pay – need to be wary, can just be spinning process out
• If no response or a missed payment – default judgment. A judgment is in default if no response is made to the credit union’s application for judgment and the debtor fails to pay the full balance within 28 days. It would also be in default if an instalment arrangement was not kept to.
• Apply for enforcement action

Enforcement Action

• Need a default judgment
• Attachment of earnings
• Third party debt order
• Charging order
• Bailiffs
• Record of examination

Documentation will be required that proves the money owed is still outstanding. That must include a loan agreement that has been properly executed e.g. signed by borrower.

Orders to obtain information

Previously known as “oral examinations” these are orders for debtors to attend the courts to answer questions by a court official or drawn up by the creditor. These Orders are a useful option to use to find out whether the debtor is working (and for whom) if the credit union is seeking an attachment of earnings order or to find out about other assets if the credit union is seeking a third party debt order.

There has been a steady decline in the number of applications with 27,000 made in 2007.

The creditor applies on form N316 at a cost of £45 for the order and £30 for a bailiff[1] to issue it. The penalty for non attendance is prison therefore the court must be certain that it has been received by the debtor. The hearing will usually be heard at the debtor’s local court.

The debtor can get travel expenses from the creditor although these can be added to the final value of the debt. Failure to attend does not lead to imprisonment where the creditor has failed to provide travel expenses to attend the first hearing.

Standard questions are asked on form EX140 – a 12 page questionnaire designed to find out what resources the debtor has – such as property and cash. The debtor must supply certain documents such as bank statements, pay slips, rent book, outstanding bills etc. The creditor can ask the court to add other documents to this list.

Attachment of Earnings Order

Governed by the Attachment of Earnings Act 1971, 82,000 of these orders were made in 2007. They are used to deduct directly from a debtors wage repayments which are transferred to the creditor – a good option for those members that your credit union knows continue to work for a particular employer.

The Credit Union can apply for an order on form N56 at a cost of £65. The application can be made for any unpaid judgement in excess of £50[2].

A debtor has only eight days to return the N56. Failure to do so can lead a court to order that a statement of means is completed and an employer can be requested to give details of earnings. This must be filled in and returned, otherwise an order for appearance can be given and failure to attend can lead to imprisonment.

The court will then make an assessment of the payments, using internal guidance to assess protected income (form EX119) and what offer of repayment should be made. Protected earnings are usually the rate of income support for that household, plus housing and work related cost and the repayment of other debts. Disability Living Allowance and Attendance Allowance are ignored for the purposes of this calculation.

Once the court makes its decision the creditor and debtor have 14 days to respond to the order with any objections.

The court can consider a suspended order, but guidance suggests that this should only be made on application by the debtor. Usually this is on condition that payments are made and retained.

It is important to note that such an action could lead to the debtor’s loss of job. Employers will be aware of the order and tribunals have considered it to be fair dismissal in cases where an employee has responsibility for handling money, e.g. banks and security firms.

There is a £1 fee for each deduction. The debtor must inform the court if they cease work, change job or become self-employed. Failure to do so is punishable by a fine.

Other enforcement options cannot be considered when the order is in force and being complied with.

Other enforcement options to consider include:

• Third party debt order
• The charging order
• Eligible Loans Deduction Scheme

Debt collectors

Debt collectors can also be worth considering, but make sure they’re paid on results (e.g. % of the amount collected). It is also wise to make sure that they work within the law at all times, and you need to make sure they have the correct licence from OFT, otherwise the credit union could be open to complaints and adverse PR.

If a debt collector has good local knowledge and local agents then this can help get good results.

Legal considerations

It is very important to make sure that all steps in the collection and recovery process are carried out fairly and properly. If they’re not then the debtor can have a stronger case to argue that the debt should be set aside if you take court action.

Debtors could also complain to the OFT or Trading Standards, even though credit union loans aren’t regulated by the OFT this could cause reputational problems.

The other primary consideration as well as the legal and regulatory issues listed is harassment – basically you shouldn’t harass a debtor. This doesn’t mean not chasing them hard, but you should avoid repeatedly calling at unsociable hours, calling places of work, or calling on neighbours and disclosing the reason you’re are making enquiries.

The Credit Union Act 1979 governs credit union loans; credit unions are currently exempt from Consumer Credit Act. However, Some OFT guidance is relevant, e.g. inclusion of OFT Arrears and Default information sheets with arrears/default letters.

Loan agreement forms must have proper terms and conditions, especially setting out what happens if the loan is not paid back.

Regulatory considerations

The PRA sets prudential restrictions on lending, e.g. maximum loan size, maximum loan term. If loans are not made in accordance with law and regulations then there is a risk that they could be set aside. Documentation must be correct, e.g. APR calculated and shown correctly.