Should lenders use legal redress as part of their collections practise?

Whenever a loan remains unpaid, the lender has few choices on how to get their money back. Once the debtor refuses to engage with you, most lenders will pass the debt to a Debt Collection Agency that specialise in the collection of these debts. They will tend to have a fairly low rate of collections – even the best agencies.

One other way to collect is to use the Courts. I have heard many reasons why lenders do not use the courts, for example:

  • Just costs more money and is likely to fail
  • The OFT/FCA look at lenders that take customers to court as treating debtors unfairly
  • Even with a Judgment we won’t get our money

However, these are not based on fact. When I ran the cheque cashing shops, we had concerns about trying to get a CCJ for a third party cheque as there was some doubt about the legal situation on the encashment facility. However, with a loan the legal situation is clear. There is a legally binding contract and an amount of money to be paid on a set day.  The fact that this has not been paid means that the contract is in default and there are rules in the contract that cover this.

So the required information to take legal action in the case of a defaulted loan is:

  1. Is there a legally binding contract?
  2. Has the loan been repaid?
  3. Has the customer contacted the lender to discuss any change in circumstances that should be taken into account?
  4. Does the contract allow for additional fees to be added to the debt in case of default?
  5. Do we know where the debtor lives?
  6. Are we sure the debtor is employed?

Once we have the answers to these questions, we can decide whether that debtor is a good case for a legal attempt to collect the debt.

When this information is available, my experience is that you will win a Judgment in every case. Some think that is a bold statement, but I can confirm that I have never seen a properly entered application for a CCJ that has failed!

So given that information, why do lenders not take their debtors to court more? Well some think it is an expensive way to try and collect a debt. The costs vary on the debt amount, but generally are around £60 for the application. On top of this you may need a solicitor who will charge extra fees, and if the case is defended you may need to employ a solicitor to undertake the court hearing. However, more or less all of the costs can normally be added to the debt and eventually collected once the judgment is made.

I have also heard lenders say that the OFT do not like it when a lender uses the court to try and collect on an outstanding debt. I suspect that if a lender used the threat of court to intimidate a debtor but never actually carried out the threat, then this would be seen as bad practice for sure. However, if the debtor has ignored every attempt the lender has made to contact them about the debt then how is the lender supposed to collect? That is how the OFT see it. A County Court Judgment is a very valid tool in the collections armoury for a lender.

So I would say that right now the question is “Why wouldn’t you use the County Courts to enforce legal debts?”

If you would like any further information on how we can help you with your debt collection practises and especially legal collections then please contact me.

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