Consumers have been warned not to be duped by firms that claim they can write off a loan or credit card debt.
The Office of Fair Trading (OFT) says many companies mislead hard-up borrowers with false promises that they could be debt free by using loopholes in the Consumer Credit Act. Some charge £500 per credit agreement 'reviewed'.
The alert could mark the final nail in the coffin of the so-called 'debt write-off' industry that grew rapidly in 2008 and 2009 (see the Write off your debts? guide).
A series of court judgments over the past year stated debt write-off is largely impossible and industry regulator the Ministry of Justice has banned over 200 firms over the past few years – including the high profile Cartel Client Review in June – to virtually kill off the sector.
One of the main false statements made by some claims companies has been that a debt can be written off when, even in the best case scenario, as far as claimants are concerned, it can only be deemed 'unenforceable' which means any balance is far from wiped out.
The OFT has reaffirmed those court decisions in consumer guidance issued today. It states even where a lender makes an error which renders a debt unenforceable, a bank or building society can still add charges, send threatening letters and register non-payment with a credit reference agency.
All it cannot do, while unenforceable, is get a court judgment forcing you to pay or take back anything you have bought using the loan (such as a car or house).
Once the error is corrected, the debt becomes enforceable again. Crucially, it is easy for lenders to correct mistakes, following the court judgments.
Errors are usually made where a lender cannot locate the original credit agreement or where there is a mistake on it. One of the key promises claims companies have made is that a debt can be wiped out where the original agreement is not produced.
A High Court decision last December stated a lender only has to provide a copy of an agreement with the correct information to make the debt enforceable, which could be printed on a new sheet of paper.
Rulings have stated that where there is a minor mistake on the agreement, such as a typo or mis-spelling, this is usually not enough to make a debt unenforceable. Even were it to be unenforceable, if it's corrected, such as by resending an accurate copy, the debt becomes enforceable.
Judgments have also said that lenders can register non-payment with credit reference agencies while a debt is unenforceable, which can damage the person's ability to borrow cheaply, or borrow at all.
The OFT stresses that even where a lender has made a major error, such as charging too much interest, this will not mean a debt can be wiped out.
It says consumers just need to be put in the position they would have been without the error.
In this example, they should contact their lender to get back any charges that exceeded what was owed, and if that fails, take their complaint to the independent complaints arbitrator, the Financial Ombudsman Service.
The OFT consumer guidance also contains information on the rights consumers have to request information on their credit agreement under the Consumer Credit Act.
This explains that for a £1 fee, they can request a copy of their credit or hire agreement, and information on their account to find out what was originally agreed, what the agreement is now (if it has changed) and how much is owed.
Ray Watson, OFT director of consumer credit, says: "Consumers have a right to information on debts they owe, but it is important they realise the Consumer Credit Act cannot be used to write off legitimately owed debts in this way.
"Although the debt can be classified as unenforceable until the right paperwork is provided, people are encouraged to seek advice and help on how they can continue to repay the money they owe. Consumers can get free advice on debt by contacting Citizens Advice or the Consumer Credit Counselling Service."
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