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Unenforceable credit card and loan agreements

Wednesday, 10th June 2009

054-credit-applicationLatest updates can be found towards the end of the article, just above the Debtwizard comment.

Many firms have sprung up claiming on their websites or in their advertisements to be able to get you out of your credit card or personal loan debt.  How can this be done you may ask? And it may be difficult to discover the true position.

Much of the hype and information surrounding this issue is incorrect or misleading but it is true that in some cases lenders are unable to issue legal proceedings to recover monies they claim are owed to them. This is because some of their credit agreements lack 'prescribed terms' and are 'irredeemably unenforceable'. Mike has spoken with solicitors and been to the Law Society and can now report the facts as follows:


The Consumer Credit Act 1974 (The Act) was brought in to safeguard the public from unscrupulous lenders. It requires most businesses that offer goods or services on credit or lend money to consumers to be licensed by the Office of Fair Trading. Trading without a licensing arrangement is a criminal offence and can result in a fine and/or imprisonment.

The Act also requires certain credit and hire arrangements to be set out in a particular way and to contain certain information in order to be enforceable.

Until 6 April 2008, credit agreements were excluded from control if the amount of credit or hire exceeded £25,000. However, this financial limit was removed for all new credit and hire agreements by the Consumer Credit Act 2006.

Pre-existing agreements above £25,000 remain outside CCA regulation.

The Act was so worded that if lenders did not comply with the provisions of the Act, they would be unable to enforce repayment of the loan in a court, it was not however, the intention to trip up major banks or credit card companies which may have unintentionally failed to observe all the rules by not containing the prescribed terms, and thereby render their credit agreements unenforceable.

The current Position

In such cases where the agreement was signed before 6 April 2007 the lender can apply to a court for an enforcement order. However there are certain circumstances in which the court does not have power or jurisdiction to enforce the agreement. It therefore remains unenforceable and the lender is unable to recover any money, in legal proceedings, from the borrower.

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 Act's requirements.  The court must consider the prejudice that would be suffered by the borrower if it were decided to enforce the agreement, against the prejudice that would be suffered by the lender if the court decided against enforcing it.

Claims made by Claims Management Companies

There are companies claiming that 80% of agreements are unenforceable and they will want to charge you a fee to get rid of your debt, sometimes charging you a percentage of the amount you have 'saved'.  Some may also claim to get you compensation. These companies should not be giving guarantees or making promises to get you out of your debt and consumers have been asked by the Ministry of Justice, which monitors claims management companies, to report to them any which are operating in an unacceptable way.

Whilst in certain circumstances some agreements may be unenforceable, many are. If you mistakenly believe your agreement is unenforceable and are not making repayments you may be incurring additional default charges and legal costs.

Ministry of Justice - Claims Management Companies

Firms that provide regulated claims management services must be authorised by the Regulator. You can easily search on line to see if the 'claim management firm' is regulated.

The search can be by business name, trading name or authorisation number, and the search result will give the business name, any trading names, principal place of business and authorisation number.

Click here to do a search.

Mis-leading adverts or statements

Below is a list of the types of statement that are causing concern, along with an example for each. If a firm makes such statements and are unable to provide evidence to justify them, then they could be considered misleading.

Potential outcomes
"We can write off all your outstanding debt, all previous payments could be returned, and you could keep any goods purchased."

Scale of unenforceability market
“80% of credit agreements are unenforceable”; “50 million credit agreements are created every year, at least 25 million are unenforceable”.

"We'll get your credit cards written off within 6 weeks!"; "Fast results guaranteed!"

More examples can be found here

I wish to contact a firm to see if my agreements are unenforceable, what questions should I be asking them?

When you contact a firm you may wish to ascertain the following;

  • what their fees are and what is payable up front per agreement
  • whether they take a percentage of any compensation you may receive
  • if they are able to represent you in any harassment issues
  • will look to see if you have been mis-sold Payment Protection Insurance, often referred to as PPI
  • will they protect your credit file whilst the claim is in dispute. (If they say yes, then they are wrong, see below 'Your credit rating'

Your credit rating

Mr Justice Flaux sitting in the High court recently found in favour of Royal Bank of Scotland despite the bank failing to produce a copy of the original loan agreement in its case against the claimant, Phillip McGuffick. The claimant was seeking to have £17,000 loan from the bank to be made irredeemably unenforceable under sections 61 and 127 of the Consumer Credit Act 1974.

As part of his ruling the judge decreed that claimants should not stop paying back their loans or credit cards while the claim was ongoing as the loan may become fully enforceable in future. Any non payment could be recorded on the claimant’s credit files which would not breach data protection law.

The court also clarified ‘enforcement’ by the lender. It ruled that by deciding to bring legal proceedings it is not actually enforcement but a step towards enforcement.

This basically means that any steps the lender takes before commencing legal proceedings, such as demands for payment, issue of default notices and or threatening legal action does not construe enforcement.

It is estimated that 100,000 -150,000 consumers are currently employing either a solicitor or Claim Management Company (CMC) to see if they can get any credit cards and personal loans written off through various so called legal loopholes. Many consumers pay up front fees between £195 and £495 per agreement, in the hope they will become debt free.

Latest News - Unenforceable Consumer Credit Agreement cases - Update

Update 10th December 2009 OFT warns lenders over misleading consumers if their debts are unenforceable

Update 4th January 2010 Bad News for those trying to avoid their debts

Claims regulator and OFT warn consumers about the risks of being misled over the enforceablilty of consumer credit agreements. Ministry of Justice Consumer Alert

DebtWizard comment

All CMCs should make it very clear to consumers that are thinking of challenging their credit agreement that they must continue to pay the amounts as agreed with the lender, if they stop paying then this will be recorded on their credit file which will impact on any future borrowing.

The judge has made it quite clear that the loan or credit card debt may prove to be enforceable at a later date and that a lender can mark your credit file that you have not repaid the debt.

In my view this is not the end of these claims, I spoke with a legal firm earlier today and they believe that there will be several more hearings, not necessarily on this particular case as the one above is different to other cases in the system. Be prepared for more action over the coming months.

If you are struggling to repay your debts then think about getting some professional advice on how you can manage the payments. There is no guarantee you will be successful with getting the debts written off and there is also a moral issue about repaying back the lender that initially advanced you the money in good faith.

SEEK ADVICE with a view to how to restructure your finances, this may include entering into a repayment programme that you can afford such as a debt management planIndividual Voluntary Arrangement (IVA) or even bankruptcy.

We have some useful links for you below;

Debt comparison table

Six option guide to getting out of debt

DIY debt guide

Free Budget Wizard





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