NEWS...
Reformed Limitation Act in the Pipeline
Many lawyers may be celebrating increased clarity and consistency with the laws surrounding limitation periods set to reform. However they are not welcomed by everyone – particularly those in the debt collection and purchase industry.
The main proposal impacting upon debt collectors and purchasers is the introduction of a 3 year limitation period for simple contracts. In short this means, for most unsecured credit agreements, proceedings will need to be issued within three years of the debtor's non-payment. However, there will be exceptions – such as when the identity of the debtor is unknown. The ability to restart the limitation period for part payment or acknowledgement will remain, but there will be a 10 year 'long stop' period, which will run from the date the cause of action (non-payment) arose, after which time proceedings cannot be issued.
Regulations and Guidance stress the importance of treating customers fairly, dealing sympathetically with financial hardship and not placing pressure on debtors to pay more than they can afford. Indeed, all of these are the foundation of the CSA Code. This approach has led to an increased number of formal and informal payment plans, where debts are repaid over long periods, often with only nominal payments. Creditors are aware that, if a debtor defaults, they can take legal action – as a last resort. A 10 year long stop will impact on a creditor's willingness to agree a long repayment arrangements and even individuals making regular payments may find legal action taken against them, with legal fees and costs increasing the amount they actually owe.
For those unable or unwilling to agree to a repayment – or acknowledge the debt (and few would actively acknowledge debts they're not paying), creditors will need to issue proceedings at a much earlier stage in the collection process and issue more. It is unlikely that a court system, already buckling under current pressure, will be unable to cope.
The debt sale and purchase sector would be worst hit by the proposals. The age at which debts are sold varies across the industry, but the vast majority between 2 and 4 years post default. Cutting the limitation period in half will substantially devalue debts greater than 2 years post default – so much so that they will be practically worthless. A statute barred debt remains valid and, legally, it is recoverable and proceedings can still be issued as expiry of the limitation period does not prohibit legal action but enables this to be raised as a defence.
However, the provisions of the OFT Guidance and with the likelihood of a defence being raised, many creditors will be actively avoiding dealing with statute barred debt. The increased costs of litigation, either before or after debt sale, will affect the price and liquidity.
Increased creditor costs and lower recoveries are making credit more expensive and creditors even less risk averse, further reducing the amount and availability of mainstream credit. This will be a backward step, away from the financial inclusion the Government wants to encourage.
Elsewhere, absconded debtors will find it even easier to avoid liability. Despite millions of traces being carried out each year some debtors are never found and many more are only found after numerous attempts over a number of years.
Under Civil Procedure Rules, if the debtor cannot be found and the creditor has made reasonable attempts to locate them, court papers can be sent to the debtor's last known address – but most creditors don't take this action. It would cause wide concern to innocent individuals, lead to complaints and increase the risks of potential recovery. However, under these new proposals, more creditors and purchasers will do this, resulting in a rise in complaints – and subsequently people seeking assistance from the free advice sector.
I agree that consumers need protection but if they genuinely can't pay or need to pay by instalment, there are a number of statutory and regulatory provisions to protect them and provide debt relief – IVAs, debt relief orders and the availability of debt management plans. A shortened limitation period which will lead to increased litigation, decreased recoveries and more expensive less accessible credit is not the answer.
Original article by Sara de Tute, courtesy of CSA.
