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Chasing a debt

Reminders

Where an invoice or a series of invoices remains unpaid after the due date, the first step is to write a friendly reminder letter to the debtor (i.e. the person or business who owes the money). In this letter you would not threaten court action but instead remind the debtor that an amount is overdue and request payment. You could invite the debtor to make contact with you to discuss any issues they may have.

Ideally, you should send at least one reminder letter before moving on to a letter of claim.

Note that if the debtor is granted a period of breathing space under the debt respite scheme, you can't send them any reminder letters during this period. See below for more on this.

Letter of claim

A letter of claim is a more formal letter to the debtor. It's important because the courts will expect you to have sent one before starting a claim. In other words, you won't be able to go to court to recover your money unless you have sent one.

Note that if the debtor is granted a period of breathing space under the debt respite scheme, you can't send them a letter of claim during this period. See below for more on this.

If you're claiming against a consumer or a sole trader

The letter should contain the following information:

  • The amount of the debt
  • Whether interest or other charges are continuing (if they are, you should also include an up-to-date statement of account for the debt)
  • If the debt arises from an oral agreement: who made the agreement, what was agreed (including, as far as possible, what words were used) and when and where it was agreed
  • If the debt arises from a written agreement: the date of the agreement, the parties to it and the fact that a copy of the written agreement can be requested from you
  • If the debt has been assigned: the details of the original debt and creditor, when it was assigned and to whom
  • If regular instalments are currently being offered by or on behalf of the debtor, or are being paid: an explanation of why the offer is not acceptable and why a court claim is still being considered
  • Details of how the debt can be paid (e.g. the method of and address for payment) and details of how to proceed if the debtor wishes to discuss payment options.

You also need to include the following, all in the format specified in the court service guidance:

  • an Information sheet
  • a Reply form
  • a Financial statement form.

The letter must be dated and posted either on that date or the day after. It has to be posted unless the debtor has specifically requested it be emailed and not posted. If they haven't, you can still email it alongside posting it.

If the debtor doesn't respond

If the debtor does not respond within 30 days, you can begin court proceedings. However, if you have a written contract in place with the debtor, check that it doesn't require you to do something else first (e.g. go through some form of Alternative Dispute Resolution procedure).

If the debtor does respond

The debtor must return the completed Reply Form and Financial Statement. In the reply form they'll say whether or not they agree that they owe the debt. They may also say other things:

  • If they say they're seeking debt advice, you must allow a reasonable amount of time for them to get it, which should be at least 30 days. If they also ask you to supply documents, the 30 days will only start running once you've given the document to them or explained why you can't. You have to respond to a request for documents within 30 days.
  • If they say they can't get debt advice within 30 days, you'll have to give a reasonable number of extra days to allow for this.
  • If they say they need time to pay off the debt and they have completed the financial statement or tried to complete it, you must try to reach agreement about how much can be paid off based on their income and expenses. You'll need the information in the financial statement to work out what the debtor can afford to pay off. If the amount that they offer as instalments is not acceptable to you, you must give your reasons why.

If the matter remains unresolved

You should take steps to settle the issues without going to court by considering an appropriate form of Alternative Dispute Resolution (ADR). Some of the options for resolving a matter through ADR are:

  • Discussion and negotiation: This is an informal and flexible ADR process. You negotiate directly with each other without the help of another person and attempt to reach agreement on those aspects of the claim that are in dispute.
  • Mediation: This is a form of negotiation with the help of an independent person or body. To find a mediator in your area see the Civil mediation council.
  • Early neutral evaluation: This is where an independent person or body, for example a lawyer or an expert in the subject, gives an opinion on the merits of a dispute.
  • Arbitration: This is where an independent person or body makes a binding decision. Many types of businesses are members of arbitration schemes for resolving disputes with consumers.

If the dispute is still unresolved, you should reconsider your position again in an attempt to avoid court proceedings.

If the debtor responds to the letter of claim but no agreement was possible, you must give them at least 14 days' notice of your intention to start court proceedings.

If you're claiming against a business (other than a sole trader)

In this situation, the requirements aren't as extensive. Your letter should include:

  • A summary of the facts giving rise to the claim and the basis of the claim
  • Details of how you've calculated the amount due
  • What you expect the debtor to do to resolve your claim.

The debtor should respond within a reasonable time, which is generally accepted to be about 14 to 30 days unless the matter is very complex.

In a complex case, the debtor should respond within 3 months.

Their reply should either confirm that they accept your claim, or explain why they don't. If they don't accept it, they need to say which facts they dispute. The debtor should also at the same time say if they have a counterclaim against you.

Both you and the debtor should also disclose any documents that are relevant to the dispute.

If the matter remains unresolved

You'll both be expected to consider the use of an appropriate form of Alternative Dispute Resolution (ADR). Any ADR process must be managed efficiently with a view to reducing the costs of resolving the dispute.

If you later go to court, they may require evidence that you considered some form of ADR. If either of you are silent in response or refuse to participate in the suggested ADR procedure, the court could take this into account when determining any costs orders against the uncooperative party.

The debt respite scheme

If a person is struggling with their debt, they may be able to get 'breathing space' under the debt respite scheme. During this breathing space period, you must pause your attempts to chase the debt. The idea is that the debtor can use the time to get advice and form a plan to pay off their debts.

There are 2 types of breathing space:

Standard breathing space

This lasts for 60 days, although can be cancelled before then. To get it, the debtor must speak to a professional debt advisor. The advisor can grant the breathing space period if they think it's appropriate in the circumstances (there are also other criteria – see below).

Mental health crisis breathing space

To be eligible for this, the debtor must be receiving mental health crisis treatment as defined in the debt respite scheme. It lasts for however long the debtor's mental health crisis treatment lasts, plus 30 days after that treatment ends. It can be cancelled before then.

The debtor doesn't have to get debt advice from a debt advice provider – an approved mental health professional can certify that the debtor is receiving mental health crisis treatment and provide the following information:

  • information to identify the debtor
  • their own name and contact details
  • the name and contact details of the debtor's nominated point of contact
  • as much information about the debtor's creditors and any enforcement agents or other agents instructed by those creditors to collect the debt from the debtor.

The debtor does, however, still need to meet the eligibility criteria (See below).

We discuss the eligibility criteria below.

Eligibility criteria

To be eligible for either type of breathing space, the debtor must be an individual who is living in England or Wales. Individuals include those with personal debts, as well as sole traders with business debts.

The debt must be a qualifying debt. Most debts are qualifying debts, including those that arose before the debt respite scheme came into force.

Debts that arise after a breathing space period starts are not qualifying debts. Other non-qualifying debts include any new arrears on secured debts, such as a mortgage.

A debtor can only get a standard breathing space once in any 12-month period. However, they may be able to get a mental health crisis breathing space if they've already had a breathing space (of either kind).

A debt advisor should only grant a standard breathing space if the person can't, or is unlikely to be able to, repay all or some of their debt.

What you can't do during a breathing space period

If the person owing you money is granted breathing space, you'll be told by the Insolvency Service. If this happens, you must stop any attempts to recover the debt until the breathing space period is over. This includes:

  • Collecting the debt from the debtor
  • Contacting the debtor for the purposes of enforcing the debt, including to demand payment or as a precursor to starting legal proceedings
  • Charging any interest or other fees that become due during the breathing space (see below for more on this)
  • Enforcing a judgment or order issued by a court or tribunal either before or during the moratorium
  • Enforcing security held in respect of the debt
  • Getting a warrant
  • Selling or taking control of a debtor's property or goods
  • Starting any action or legal proceedings against the debtor for non-payment of the debt
  • Applying for default judgment in respect of a claim for money against the debtor
  • Installing a pre-paid meter to take payment in respect of the debt, unless the debtor consented to it before the start of the moratorium
  • Disconnecting the debtor's home/premises from a supply of gas or electricity, unless the supply was taken illegally
  • Serving notice to take possession (or taking possession after serving notice) of the debtor's home
  • Apply for the debtor to be committed to prison over the debt

You also can't instruct someone else (e.g. a solicitor or a debt collection agency) to do any of these things on your behalf. If you've already done so and you're then told that the debtor has been granted breathing space, it's your responsibility to then tell whoever you've instructed to act on your behalf. If you don't, you'll be responsible for any losses the debtor or agent incurs as a result of your failure.

If you've already started legal proceedings when a breathing space period is granted, you'll need to tell the court. In the case of a bankruptcy petition, the court will then stay (pause) the petition. However, other pending actions may continue to progress – but if they do, the court is unlikely to allow any resulting order or judgment to be enforced during the breathing space period.

In summary, it's best to avoid all contact with the debtor during the breathing space period unless they approach you with a query or complaint, or wants to talk with you about a debt solution.

Getting the breathing space period cancelled

If you feel that the breathing space unfairly prejudices your interests or that there has been some reason why it shouldn't have been granted, you can request that the debt advisor reviews it. If they don't then cancel it and you feel this decision is wrong, you can apply to the county court.

More information

See the guidance on the debt respite scheme on GOV.UK.

Interest and recovery costs

If the debtor owes you money, you may be able to charge interest or other costs.

Interest if both you and the debtor are acting in the course of business

If your contract with the debtor specifies that you can charge interest at a certain rate, you must normally claim interest in line with those terms (unless you decide not to claim it at all).

If the contract doesn't specify a rate of interest, you have a choice of Acts under which you can claim interest:

  • County Courts Act 1984
  • Late Payment of Commercial Debts (Interest) Act 1998

The interest rate under the 1984 Act is 8%, which is usually lower than the rate under the 1998 Act (see below). The other disadvantage of the 1984 Act is that you can't ask for the interest immediately - you are only entitled to it if you end up going to court to get your money back.

For those reasons, choosing to claim interest under the Late Payments of Commercial Debts (Interest) Act 1998 is likely to be the best choice. The interest rate you can charge is the reference rate applicable to the 6-month period in which the interest start date falls, plus 8%. The two 6-month periods are:

  • 1 January to 30 June (the Bank of England base rate on 31 December will become the 'reference rate' for this period)
  • 1 July to 31 December (the Bank of England base rate on 30 June will become the 'reference rate' for this period)

If either you or the debtor is an individual (not acting in the course of business)

If your contract with the debtor specifies that you can charge interest at a certain rate, you must normally claim interest in line with those terms (unless you decide not to claim it at all).

If there is no contractual right of interest, you can claim interest under the County Courts Act 1984 at a rate of 8%, but only if you go to court over the debt. Until then, you are not entitled to any interest.

Calculating interest

If charging interest under the Commercial Debts Act, the interest starts running as follows:

1. If there is an agreed payment date, the interest will run from the day after.

2. If there is no agreed payment date, the interest will start running 30 days after whichever of the following events is the latest:

  • the date of delivery of the goods or performance of the services;
  • the date the debtor had notice of the amount of the debt; or
  • the date any acceptance procedure is completed.

What is an acceptance procedure? An acceptance procedure is any procedure where you check that the goods delivered or the services performed are in line with the contract of sale. If this is more than 30 days after delivery/performance, then the Act protects you if the timeframe is grossly unfair to you. If it is, the acceptance procedure is capped at 30 days.

Reasonable recovery costs

If interest is payable under the Late Payment of Commercial Debts (Interest) Act, you are entitled to a fixed sum, as follows:

  • Debts up to £999.99: £40
  • Debts from £1,000.00 up to £9,999.99: £70
  • Debts of £10,000.00 or more: £100

If these amounts don't fully cover your reasonable costs in recovering the debt, you can also ask that the debtor pays the shortfall. Reasonable recovery costs could include:

  • a debt collection agency fees;
  • your internal administrative costs in recovering outstanding debts, including the cost to instruct a lawyer; and
  • any solicitor's fees incurred in relation to the debt recovery.

Charging interest or other costs if the debtor receives 'breathing space'

The debtor may have successfully applied for formal 'breathing space' under the debt respite scheme (see above). You'll be told by the Insolvency Service if a breathing space period applies. In effect, interest stops accruing during a breathing space period. Similarly, you can't apply any fees, penalties or charges that would have otherwise accrued on the debt during the breathing space period.

Once the breathing space period is over, you can continue to demand any interest that accrued before the breathing space period started, as well as any interest that accrues after it's finished.

Next steps

If a debtor fails to pay the debt within the time limit stated in the letter of claims, you could still consider making arrangements with the debtor before taking the matter to court.

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