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New rules set to make collecting debt even harder for businesses

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New rules set to make collecting debt even harder for businesses

New rules set to make collecting debt even harder for businesses

  • New rules, which come into force in October, may impact on profitability of businesses
  • Businesses face possible sanctions as administrative and compliance costs increase

New rules introduced by the Ministry of Justice are set to make collecting debt from individuals even harder for businesses, says EMW, the commercial law firm.

EMW says the new rules mean an individual now has 31 days to respond to a letter of claim pursuing the debt, up by a third from the current 21 days. If the individual fails to pay, then another letter must be issued giving a further 14 days of grace. In total, individuals will now have double the amount of time to pay a debt before creditors are able to take them to court.

EMW says the increase in response time could be damaging for businesses as it restricts cash flow, which could impact on profitability.

Additionally, the new rules will increase administrative and compliance costs. Businesses will now have to include much greater detail on the contract of the debt the claim relates to, instalments that have been offered for repayment and any interest incurred on the debt.

This will lead to increased costs as businesses may be forced to outsource standard debt collection to solicitors and debt collection agencies more than before. All details have to be put into writing and posted to the debtor.

EMW says businesses may face sanctions for failing to comply with the new rules; for example, cost sanctions or a reduction in the interest that can be claimed on the debt.

Damon Watt, Principal in the Business Support, Restructuring & Insolvency team at EMW, says: “The new rules are likely to reduce cash flow and squeeze the margins of many businesses.”

“The result may be that businesses reconsider the credit terms offered to individuals. Businesses will likely start chasing debt earlier in order to get the clock ticking on the response time.”

“Many businesses will be facing new challenges in the post-Brexit environment and the extra red tape and costs associated with these measures will not be welcomed.”

The Pre-Action Protocol, which will come into force in October 2017, applies where any business is claiming payment of a debt from an individual. It provides for an enhanced letter of claim for the debt which must include more detailed information about the debt, as well as:

  • Whether the claim for debt arises from a written or oral contract;
  • Whether instalments have been offered and details of how the debt can be paid;
  • Whether interest is being charged and the amount incurred so far;
  • In addition, the letter must be sent by post.