Debt Remedies: Scotland

Recovering debt

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.  Make sure you have a clause in the loan agreement stating that you will add any recovery/enforcement fees to the loan balance, and add the court fees to the borrower’s debt.

Earnings Arrestment

An Earnings Arrestment is a court order to the debtor’s employer to deduct a percentage of his or her wage every pay day and pay the money deducted directly to you, the creditor.

How much you receive is determined by law and will depend on how much the debtor is paid and how often.

Bank Arrestment

A Bank Arrestment is a court order that prevents a debtor accessing money in his or her bank, building society and credit union accounts. As a creditor you can apply to the courts for money to be transferred directly to you to pay the outstanding debt.

Attachment

An Attachment prevents the debtor from selling possessions and can lead to a Messenger-at-Arms or Sheriff Officer taking the items to sell at auction to recover the money owed to you.

Only in exceptional circumstances will an Attachment be granted on items kept in a debtor’s home or items required for a profession or trade. An Attachment normally only applies to items kept outside of the debtor’s home, e.g. on a driveway or premises used for business.

Inhibition

Inhibition allows you to stop your debtor selling, transferring or re-mortgaging their house or land unless they pay the outstanding debt.

Bankruptcy/Sequestration

You can petition a court to have the person who owes you money sequestrated or made bankrupt. If a sequestration order is granted, a trustee will be appointed to sell the debtor’s assets and use the money to pay off as much as possible of outstanding debts.

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 the 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 for 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 the law and regulations then there is a risk that they could be set aside. Documentation must be correct for example, the APR calculated and shown correctly.