Consumers hoping to write off their debts through a legal loophole have been dealt a blow aftera recent ruling on six test cases.

Judge Waksman, sitting at the High Court in Manchester, has upheld that credit card companies need only provide a "reconstituted" copy of the original loan agreement. He ruled that if the lender no longer had the original executed agreement it is not therefore, itself a bar to compliance with the Consumer Credit Act. The absence of a copy of a signed executed agreement is no evidence that such an agreement was not made. 

But he confirmed that if a lender could not supply a copy of the loan agreement, then this automatically prevented them from using the courts to chase a debt until such time as they could come up with a copy.

As this case was heard in the High Court it will set a precedent for an estimated 150,000 cases currently sitting in other courts around the country that were waiting the outcome.  In the majority of theses cases consumers were trying to avoid payment of their credit card and loans on the grounds that the bank had either lost or destroyed the original signed agreements.

Dispute over loan agreement 

Upon request from the consumer lenders are obliged to supply a copy of the credit card or loan agreement within 12 days. In previous cases those representing consumers have cited that if no agreement is produced then the debt is unenforceable, which has led to disputes between lenders and customers about what constitutes a true copy. 

Following this test case it has been ruled that 

• a copy of the loan agreement must contain the name and address of the borrower as it was at the time it was signed 

• if an agreement has been subsequently varied by the lender, then the lender is obliged to supply a copy of both the original agreement as well as the current one.

Office of Fair Trading (OFT)

Some of the claims promoted by the Claims Management Companies (CMCs) clearly conflict with the OFT's guidance which says that it is legal and acceptable for a bank that has lost the original loan agreement, or whose copy is illegible, to supply an accurate reconstituted version instead in order to demonstrate that the agreement did in fact contain the information specified by the Consumer Credit Act.

The regulator points out to lenders that they are acting unfairly and potentially in breach of their consumer credit licenses if they misled borrowers by:

• hiding or disguising the fact that there was never a proper signed agreement in the first place

• providing only a copy of the current terms and conditions, not the original ones

• confusing the borrower as to who they should send an information request after selling the debt to a debt collection company

• failing to preserve data so the borrower cannot be given an up to date statement of account.

Borrowers still liable under previous High Court ruling.

Even if banks cannot produce a copy of the original agreement, borrowers could still be held liable for their debts due to a previous ruling at the High Court in London. Here Mr Justice Flaux 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.

Enforcement

In the previous High Court ruling it 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.

Consumers exploited?

Some people feel that those with debt problems have been exploited through their desperation and vulnerability as many consumers have been cold called by CMCs claiming they can write off credit card and personal loan debts by using this legal loophole. For this service consumers usually pay up front fees between £195 and £495 per agreement, in the hope they will become debt free. Some of these fees have been added to the credit card debt they are trying to wipe out.

The way forward

There will still be some lenders that cannot produce a ‘true copy’ of the agreement, which may lead to the debts not being enforced but this, is expected to be restricted to just a small proportion of the banking industry.  For a ‘true copy’ all the lender needs to do is insert the correct credit amount, the credit rate and the original terms and conditions. They will only be able to do this though if they have the original loan agreement or know the original terms and conditions.

Borrowers will still be able to employ the services of a CMC and pay fees for this but there is no reason why they cannot do this them self and obtain a copy of their agreement for a nominal fee. After this they can then consider approaching a CMC for further advice.

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 in getting the debts written off and there is also a moral issue about repaying 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 plan, Individual 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