Can You Claim to Have Your Debts Cleared?

From early 2008 onwards, there has been a large increase in the number of Claims Management Companies advertising that they may be able to help you clear your credit card and loan debts.

On What Grounds?

Any credit that is taken out in the UK for an amount up to £25,000 comes under a law known as the Consumer Credit Act (CCA). It used to be called the '1974 Consumer Credit Act', but was updated late in 2006 to the '2006 Consumer Credit Act'.

The CCA was created to protect consumers and provides comprehensive detail on what information a lender must include in their contract with a borrower. The 1974 Consumer Credit Act includes what are called 'prescribed terms' which a lender must include when creating a contract with a borrower. If any of these terms are breached, it could render a contract (agreement) unenforceable.

Although the CCA was created to protect consumers from unscrupulous lenders, it has become apparent that many mainstream lenders have fallen foul of the requirements and so some of their credit agreements are unenforceable.

What are the Criteria for Making a Claim?

It is difficult to ascertain whether a claim can be made on a particular contract until the original agreement has been checked (audited). There is however one key date which will have a big impact on whether you are likely to have a potential claim or not: 6th April 2007.

For agreements made on or after 6 April 2007 the court now has discretion under the Consumer Credit Act 2006 to enforce an agreement which does not comply with the 1974 Act’s requirements. In exercising its discretion, the court must balance the prejudice that would be suffered by a borrower if the court decided to enforce the agreement, against the prejudice that would be suffered by a lender if the court decided not to enforce the agreement.

Is it Worth Making a Claim?

Firstly, making a claim under the CCA is not a quick-fix solution for someone who is struggling to pay their debts. This is because the process can take 6 - 12 months (sometimes even longer) and there is no guarantee that a claim taken on by a Claims Management Company will be successful.

If you are struggling to pay credit card and/or loan payments, then you should consider seeking debt advice. The solution could be a Debt Management Programme (DMP) or even an Individual Voluntary Arrangement (IVA). A DMP is an informal agreement that is arranged by a debt solutions company between you and your creditors.

With a DMP, although your creditors may record late payments on your credit rating, the benefits are that any interest will usually be frozen and your debt is spread over a longer period of time, thus reducing your monthly payments into something that is more affordable. A debt solutions company usually charge a management fee of around 15% of your monthly payments, which is still a good deal if you can get the interest frozen and because a DMP is not a formal legal agreement, it is flexible.

An IVA is a formal legal agreement under the 1986 Insolvency Act between you and your creditors and will be arranged by a legal practitioner on your behalf. The creditors will accept an amount from the debtor that is less than the total amount owing and has the potential to reduce payments by up to 70% (payment is calculated on disposable income before unsecured debt payments).

With an IVA, interest is always frozen and the debtor must make the arranged payments for a term which is usually 60 months. As long as the arranged payments are made each month, the creditors cannot take action. However, if the debtor stops paying the payments, they could be faced with an order for bankruptcy.

If you would still like to make a claim and you're not already in an IVA, then if you have any finance arrangements under £25,000 that were taken out before 6th April 2007 you may want to contact a Claims Management Company.

Who Should I Use to Help Me Make a Claim?

If you have decided you want to go ahead and make a claim to clear any of your debts, then it's important that you select a reputable Claims Management Company who have proven results and who don't charge excessive fees. Things to look out for are:

• Only use a company that is regulated by the Ministry of Justice (MOJ). They should have a registration number which you should be able to check on the Ministry of Justice Website
• Don't pay excessive upfront fees - some companies charge £500 or more on the front-end, even before they take on your claim
• No case is guaranteed to be successful, therefore make sure that any upfront fees you do pay are refundable should your case not progress, or if it is unsuccessful
• Make sure that the Claims Management Company doesn't charge any back end fees. Some companies charge clients 25% or more on the back end, which means that you will have to pay them a potentially large amount once the case has been resolved
• Ask the company for proof of success. Do they have genuine, qualified solicitors working on behalf of clients, or inexperienced legal executives? Do they have appropriate insurance in place such as After the Event (ATE) Insurance?

As with any new industry, there have been teething problems for the Consumer Claims Management Industry and many unscrupulous companies have emerged trying to make quick money.

If you are interested in making a claim, please contact us and we can refer you to a reputable company who fulfill all the above criteria.