Debt claim product pack

Guidance notes for letter before claim (debt) pack

Our template letter before claim has been drafted in accordance with the provisions of the Pre-action Protocol for Debt Claims (“Debt Protocol”). The additional documents (contained in separate attachments) are what creditors (i.e. the party to whom a debt is owed) should send to a debtor (i.e. the party that owes a debt) under the Debt Protocol when sending a letter before claim requesting payment of a debt.

The Debt Protocol applies to any business (including sole traders and public bodies) claiming payment of a debt from an individual (including a sole trader). The Debt Protocol does not apply to business-to-business debts unless the debtor is a sole trader. Therefore, where the debt is owed by one business to another, our template letter can be amended to reflect this. In such a case, you should remove references to the Debt Protocol from the letter and would not need to provide the Information Sheet, Reply Form or the Financial Statement (attached as separate documents) when sending the letter to the debtor.

The Debt Protocol should be read in conjunction with the Practice Direction on Pre-action Conduct and Protocols (“Pre-action PD”). The Pre-action PD sets out the conduct that the court will normally expect of prospective parties and contains requirements that apply to all cases, including those that are subject to a specific pre-action protocol.

Our letter assumes that none of the other specific pre-action protocols apply.

Although the Debt Protocol is not mandatory, there are potential sanctions for failing to comply. If the matter proceeds to litigation, the court will expect the parties to have complied with the Debt Protocol, and will take into account non-compliance when giving case management directions.

As per paragraph 2 of the Debt Protocol, its aim is to:

• Promote early communication between the parties, including early exchange of information about the debt to assist with identifying the issues in dispute.
• Enable the parties to resolve the dispute without court proceedings, including by agreeing a repayment plan or considering using a form of alternative dispute resolution (“ADR”).
• Encourage the parties to act reasonably and in a proportionate manner and to support the efficient management of proceedings that cannot be avoided.

Our letter is intended to apply to debt claims regardless of whether the debt is disputed by the parties. However, in circumstances where there is no dispute that the money is owed, it might be more appropriate to consider serving a statutory demand.

Note also that while the Debt Protocol does not set out specific requirements where the creditor does not know if the debtor is legally represented, if the debtor indicates that they are seeking debt advice, the creditor must allow the debtor a reasonable period for the advice to be obtained. In any event, the creditor should not start court proceedings less than 30 days from receipt of the completed Reply Form or 30 days from the creditor providing any documents requested by the debtor, whichever is the later.

This letter is intended as a template only and must be adapted to the particular circumstances of your case. In particular, if the letter before claim is being sent to the debtor’s solicitors, it should be amended accordingly (for example, by changing the references from “you” to “your client”).

Letter breakdown

Your input is required at the parts of the letter highlighted in yellow and the wording inside the square brackets which we have included explains clearly the information that should be inserted. You are advised to fill in the wording in square brackets in lower case unless directed otherwise. Any figures should be inserted in numerical form. The brackets should be removed after the amendments are made (and before sending a final, signed and dated version to the debtor).

Ideally, the letter should be on the creditor’s letterhead and you should insert the debtor’s name and his/her residential address in the top left-hand corner (unless the debtor is a sole trader, in which case insert the businesses’ name and its trading address).

The letter should be clearly dated towards the top of the first page, and should be posted either on the day it is dated or, if that is not reasonably possible, the following day.

The letter should be sent by post. If the creditor has additional contact details for the debtor, such as an email address, the creditor may also send the letter using those details. If the debtor has made an explicit request that correspondence should not be sent by post, and has provided alternative contact details, the creditor should use those details when sending the letter.

When it comes to debt recovery, it is important that you attempt to recover the monies by other means before sending a letter before claim such as this. Therefore, the first paragraph of the letter has been drafted on the assumption that the creditor has already chased the debtor for payment, and still not received the monies owed. It is advisable therefore that in the first instance the creditor sends the debtor an email reminder chasing them for payment.

The second paragraph of the letter states that the letter is being sent in accordance with the Debt Protocol.

Overview and basis of claim

In this section you should specify whether the agreement between the parties was based on a written or oral agreement. You should also clearly highlight the total amount of the debt that is owed as well as the date that payment of the debt was due.

Circumstances resulting in the debt becoming payable

The Debt Protocol outlines the preliminary information that the creditor is required to provide in the letter before claim. The letter should give concise details of the claim, including:

• The amount of the debt and an explanation of how it has been calculated, including whether interest or other charges are continuing.
•  The basis on which the claim is made which should include a precise summary of the facts, including the specific information set out in paragraphs 3.1(iii), (iv) and (v) of the Debt Protocol.

1. 1. Paragraph 3.1(iii) provides that the letter should contain the following information – “where 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”;
   2. Paragraph 3.1(iv) provides that the letter should contain the following information – “where 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 the creditor”; and
   3. Paragraph 3.1(v) provides that the letter should contain the following information – “where the debt has been assigned, the details of the original debt and creditor, when it was assigned and to whom”. Note that our template letter has not been drafted with this situation in mind.

• If current instalments are currently being offered by or on behalf of the debtor, or are being paid, an explanation of why the offer is unacceptable, and why the claim is still being considered.

The letter is also obliged to enclose one of the following:

• An up-to-date statement of account for the debt, which should include details of any interest and administrative or other charges added.
• The most recent statement of account for the debt and a statement in the letter of the amount of interest incurred and any administrative or other charges imposed since that statement of account was issued, sufficient to bring it up to date.
• Where no statements have been provided for the debt, a statement in the letter of the amount of interest incurred and any other administrative or other charges imposed since the debt was incurred.

You will need to adapt this section of the letter to fit the circumstances of your case, so for example if interest is not being charged in relation to the debt, then such references in this section (and the letter generally) can be removed.

If a written agreement was entered into between the parties, this ideally should be appended to the letter. If no written agreement was in place and the parties were continuing business together on the basis of an oral agreement, the detail relating to the oral agreement should be as detailed and specific as possible.

Relevant documents

The parties should exchange sufficient information to help them clarify and resolve any issues in dispute, as well as enabling them to understand each other’s position.

The Debt Protocol states that if the debtor requests a document or information, the creditor must, within 30 days of receipt of the request, provide that document or information, or explain why the document or information is unavailable. The letter should normally include all the key documents that you consider to be relevant to the dispute (for example, email correspondence requesting payment of the debt), even if you believe the debtor already has any of them in his, her or its possession.

Documents requested from the debtor

While the Debt Protocol does not explicitly state that the letter should identify and ask the debtor for copies of relevant documents not in the creditor’s possession, if there are relevant documents in the debtor’s possession that the creditor wishes to see, the creditor should request these. This is in accordance with the expectation that the parties should exchange sufficient information to help them clarify and resolve any issues in dispute, as well as to enable them to understand each other’s position.

Payment of the debt

The Debt Protocol specifies that the letter should include details of how the debt can be paid, and details of how to proceed if the debtor wishes to discuss payment options (hence the inclusion of the creditor’s contact details within this section).

Alternative dispute resolution

The parties should consider whether negotiation or some other form of alternative dispute resolution (“ADR”) might enable them to settle their dispute without commencing proceedings.

If mediation is being considered, the potential associated costs should be considered in relation to the amount of the debt.

An unreasonable refusal to consider ADR, or a failure to respond to such an invitation, may be held to constitute unreasonable conduct, and may result in sanctions being imposed by the court should the matter proceed to litigation. Therefore, a creditor may gain a strategic advantage by suggesting an appropriate form of ADR in the letter before claim.

The next steps

If the debtor does not reply to the letter within 30 days of the date of the letter, the creditor may start court proceedings, subject to any remaining obligations that the creditor may have to the debtor. Account should be taken of the possibility that a reply was posted towards the end of the 30-day period.

Note that there are alternatives to commencing court proceedings at this stage, for example you could serve the debtor with a statutory demand or make a claim via the government’s online money claim service.

A statutory demand is a written demand for payment of a debt served on either:

• An individual, in accordance with section 268(1) (a) of the Insolvency Act 1986 (“IA 1986”).
• A company, in accordance with section 123(1) (a) or 222(1) (a) of the IA 1986.

Note that you will only be able to serve a statutory demand if the outstanding debt is for more than £750 (for companies) and £5,000 (for individuals) and the debt has been outstanding for three weeks.

In general terms, a debtor who, for three weeks, fails to comply with a statutory demand for a debt of more than £750 (for companies), or a debt of £5,000 or more (for individuals), is at risk of having bankruptcy or winding-up proceedings issued against it. For this reason, serving a statutory demand may be a means of exerting pressure on an individual or company to pay a debt. It is often the first step taken by a creditor who intends to present a bankruptcy or winding-up petition against the debtor. However, there is no obligation on a creditor who has served a statutory demand to commence insolvency proceedings against the debtor.

A statutory demand does not commence court proceedings, is not a court document and does not need to be issued at court. The process has the following potential advantages:

•  It does not involve the courts from the outset.
• Preparing and serving a statutory demand is quick and inexpensive.
• It can either result in prompt payment of a debt, or flush out details of any dispute or cross-claim.

On the other hand, serving a statutory demand may have a negative impact on an ongoing trading relationship, which is worth bearing in mind. It may be perceived as an aggressive step and can lead to court proceedings.

The government’s online money claim service can also be used and involves paying a fee (the amount of which will depend on the amount of the claim/debt). Note importantly that this service is only for claims of £10,000 or less, and so if the claim is for more then a statutory demand could be a more viable alternative. You must also know how much is owed in order to use this service and be able to provide a specific figure.

Some further points to note in relation to the government’s online money claim service:

• You cannot use the service if the claim is against more than one person or organisation. Likewise, you cannot use this service if more than one person or organisation is making the claim.
• You can only use this service to claim against a person or organisation with an address in England and Wales.
• The service is only available for claimants representing themselves (and so cannot be made by a solicitor on behalf of a claimant).
• To use the service you must have an address in the UK.
• You cannot make a claim for a tenancy deposit using this service.
• You can’t use this service to claim against government departments.
• You can only use this service to claim against a defendant who’s 18 or over and you need to be 18 or over to use this service.

If the debtor indicates that they are seeking debt advice, the creditor must allow the debtor a reasonable period for advice to be obtained. In any event, the creditor should not start court proceedings less than 30 days from receipt of the completed Reply Form or 30 days from the creditor providing any documents requested by the debtor, whichever is the later.

If the debtor indicates in the Reply Form that they are seeking debt advice that cannot be obtained within 30 days of their reply, the debtor must provide details to the creditor as specified in the Reply Form. The creditor should allow reasonable extra time for the debtor to obtain that advice where it would be reasonable to do so in the circumstances.

Note that the Debt Protocol places an obligation on the parties to reach an agreement for the debt to be paid by instalments, based on the debtor’s income and expenditure (which will be detailed in the Financial Statement), if the debtor indicates in the Reply Form that they require time to pay. If the debtor makes a proposal for repayment that the creditor does not agree with, they should give the debtor written reasons for refusing to accept the offer.

Where the debtor responds to the letter but agreement is not reached, the creditor should give the debtor at least 14 days’ notice of their intention to start court proceedings, unless there are exceptional circumstances in which urgent action is required.

You will note that in the penultimate paragraph of the letter it states that the creditor reserves its right to commence proceedings. If a creditor starts a claim after the expiry of the applicable limitation period, the debtor may legitimately raise a limitation defence. If proceedings are started before the parties have complied with the pre-action procedure outlined in the Debt Protocol, they should apply to the court for a stay of the proceedings while they take steps to comply.

Unless the debtor is known to be legally represented, it may be advisable to inform the debtor that ignoring the letter may lead to proceedings being issued and increase the debtor’s liability for costs. When making costs orders, the court will take into account any non-compliance of the parties with the Debt Protocol.

Reply Form breakdown

As explained above, when you send a letter of claim you should also send a reply form with it to the debtor. The debtor then needs to send the creditor a completed reply form within 30 days of the date at the top of the letter.

Section 1
This section of the reply form allows the debtor to say whether he, she or it owes all of the money, some of it, none of it, or alternatively make a declaration to the effect that the debtor does not know if they owe anything.

Section 2
If the debtor agrees that he, she or it owes all or some of the money being claimed then the debtor will need to complete section 2 of the reply form. This section allows the debtor to say whether they can afford to pay the whole amount immediately, or if they will need to pay by instalments. If the debtor needs to pay by instalments, the debtor can include a completed budget (i.e. the Financial Statement attached as a separate document to these guidance notes, which is also known as a statement of means) to show how much the debtor can afford.

It is a good idea for the debtor to complete a budget before making a payment offer to make sure it is realistic and affordable.

Section 3
If the debtor is receiving, or planning to seek debt advice on whether he, she or it owes the debt then this can be explained in section 3.

The debtor may also need debt advice on whether he, she or it can afford to pay the debt back.

If it will take the debtor longer than 30 days to get advice then he, she or it should give the reasons why and say when he, she or it expects to get advice.

Section 4
The debtor may not be sure whether the amount the creditor is asking them to pay is correct, or the debtor may want more evidence to be sure.

Section 4 can be completed by the debtor to ask the creditor to send them more documents.

The debtor can also send the creditor any documents he, she or it thinks are important, such as details of payments already made by the debtor which have not been taken off the amount the creditor says is owed.

The debtor needs to tell the creditor what documents/information has been provided and explain why he, she or it thinks it is relevant.