Debt write-off hopes damaged by High Court Case impacts unenforceable credit hopes

15 October 2009

Scales of justice

A landmark court court case has dented the hopes of hundreds of thousands of people looking to wipe off their loan and credit card debts

An estimated 100,000 have been pursuing getting their credit card and loan debts written off through a legal loophole. The test case involving the Royal Bank of Scotland (RBS) will impact their hopes of having their debts cancelled.

The test case taken to the High Court involved Phillip McGuffick who was seeking to have his £17,000 loan from RBS deemed unenforceable. The judge ruled that despite RBS falling foul of the Consumer Credit Act by failing to produce a copy of the original loan agreement, Mr McGuffick should not stop paying back his loan while the claim in ongoing as the loan may become fully enforceable in future. 

The judge also noted that should this happen Mr McGuffick's credit rating could be damaged, and the cost of the loan may have increased as a result of charges and interest applied to the loan.

The court case is also likely to impact the multi-million pound debt write-off industry provided by claims management companies who offer to write off credit card and loan debt in exchange for upfront fees. 

Claims management companies 

A significant portion of the roughly 3,000 Claims Management Companies (CMCs) operating in the UK offer to write off the outstanding debt on loans and credit cards taken out prior to April 2007 by using a series of legal loopholes in the Consumer Credit Act, 1974.


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The sets out how credit providers must behave towards consumers. Under the Act, lenders must adhere to a list of prescribed terms, such as providing a clear description of the cooling-off period for example. If any of these terms are not fulfilled CMCs claim the credit agreement is unenforceable – meaning the lender can’t pursue the loan.

The easiest method employed by CMCs is simply to request a copy of the original loan agreement. Under the the lender must provide this within 12 days – which many may struggle to do. Failure to do so makes the loan unenforceable.

The court case

The judge ruled that consumers should not stop paying their loans just while a claim in ongoing as the loan may become fully enforceable in future.  

Under Section 77 of Consumer Credit Act, if a lender cannot provide a copy of a loan agreement upon request, the lender may not enforce payment that loan while that default persists. However, if the lender subsequently provides a copy of the loan agreement, he has the right to enforce the loan again. 

Therefore the loan is not automatically written off in full, nor are the loan payments during the period of default by the lender (where the original agreement cannot be produced). Instead all the rights and obligations under the loan agreement continue, although they cannot be enforced until a copy is provided.

Not a sensible way to deal with debt

The industry regulator, the Ministry of Justice, has previously clamped down on CMCs operating in this sector for misleading the public. Which? reported a CMC – Claim4Gain – to the Ministry of Justice (MOJ), in August for claiming a 100% success rate in writing off a potential customers debt. Commenting on that story, Kevin Rousell, head of claims regulation at the MOJ told us: 'We urge anyone considering challenging their agreements to seek non-commercial independent advice.” Which? has also maintained that claiming credit agreements are unenforceable is not a sensible way of dealing with debt. 

Chris Warner, a lawyer at Which?, said that the decision is a sensible one. 'This case confirms that when something seems too good to be true, it often is. Which? believes consumers should not stop payments on their loan just because the lender cannot provide them with a copy, as stopping payments could cause more problems in the long-run than it solves.'

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