Challenging debts and reducing liability
Contract law and statutes such as the Consumer Credit Act can be used to challenge some debts and reduce liability or avoid it altogether. In some cases, an amount may not be due if:
Joint and several liability
When more than one person enters into an agreement, each individual is liable for the full amount borrowed. Typical examples include mortgages in joint names, joint current account overdrafts, secured or unsecured loans in joint names as well as debts arising from any other joint agreement, for example rent arrears, water charges or council tax for a dwelling occupied by a couple.
Joint liability often occurs when business loans and overdrafts are personally guaranteed by partners in a business.
A guarantor is somoeone who agrees to repay the debt if the borrower fails to do so. Guarantees must be in writing and signed by the guarantor.
Another type of guarantee is personal guarantees by business owners/partners for credit extended to businesses such as limited companies. They effective get around the ‘limited’ element in limited companies by making their owners personally liable.
If the guarantor was not made aware of their liability by the creditor, they were misled or made to agree to the guarantee under duress, it may be possible to challenge liability.
A payment demand can be sent to the wrong person by mistake or for any other reason. If you don’t recognise the debt, you should get the creditor to supply you with full information about the alleged debt, this is usually done sending what’s known as a “prove it letter”.
You may also receive demands for payment of debts incurred by other family members such as your partner, parents or children. In most cases you wouldn’t be liable for debts incurred by immediate family members, unless you entered into a credit agreement jointly with them (such as a joint current account that went overdrawn) or you signed as a guarantor for them.
Under contract law, agreements involving young people who were under 18 at the time the agreement was entered into may be unenforceable unless they are for necessaries or for the minor’s benefit.
The law does not give an exact definition of ‘necessaries’ but they are considered goods required by the minor to sustain their condition in life and their requirements. Necessaries may include food, clothing, fuel and possibly other items, however, there is also a limit as to the quantity of items that can be considered necessaries. Age and immediate needs can be taken into account. In some cases the minor can be ordered to return the goods purchased.
Contracts for a minor’s benefit include goods or services related to education or apprenticeships.
If your signature has been forged, you are not liable for any debt arising from that agreement. However, if your signature was forged with your knowledge and consent, for example by a relative looking to obtain credit, then you would be fully liable.
A contract made under these circumstances my be unenforceable. The most common example is domestic abuse which can also include financial abuse.
This situation often arises with guarantees. where a partner applies for a loan for their own purposes but the creditor requires the loan to be in joint names, for example, to take into account both partner’s income or to secure it on jointly owned property.
A contract entered into by someone who lacked capacity may be unenforceable. However, a person is assumed to have capacity unless it can be established that they do not have it. Lack of capacity can occur when an individual is unable to understand the information provided and weigh up the consequences of entering into the agreement.
Lack of capacity can be temporary or permanent. Temporary lack of capacity occurs when someone is under the influence of alcohol or drugs (including prescription drugs). Permanent lack of capacity occurs due to learning difficulties or mental health issues.
CONC 2.10 sets out grounds that may lead a firm to suspect that a customer may have mental capacity limitations.
If the creditor misled the debtor about the terms of the agreement or the consequences of entering into it (for example, failing to explain that a secured loan could result in repossession of the property), the agreement may be unenforceable.
Credit agreements usually include clauses allowing the lender to charge specified amounts for:
The above are cases where the debtor has breached their contract and the charges are meant to make up for the damages incurred by the creditor as a result of the breach.
It may be possible to challenge charges in cases such as:
When they constitute a penalty as opposed to liquidated damages. A charge could be a penalty if:
They are a result of an unfair term. An term can be unfair if it causes a significant imbalance in the parties’ rights and obligations. Requiring debtors who breach their agreement to pay a disproportionately high sum could be regarded as an unfair term as per Schedule 2(1)(e) of The Unfair Terms in Consumer Contracts Regulations 1999.
In the old Dunlop Pneumatic Tyre Company v New Garage & Motor co case, the House of Lords gave guidance to establish when a charge can be considered a penalty and thus be unenforceable.
See unfair relationships for further information.
Using the Consumer Credit Act
If the agreement is regulated by the Act, it may be challenged using is provisions. Examples of regulated agreements include:
See Using the Consumer Credit Act for more details about challenging regulated agreements.