The courts have long-encouraged early engagement and clear communication between businesses, creditors and their debtors as a way of settling debts without the need for taking it to court.

Now, a new Pre-Action Protocol for debt claims, which comes into force on 1 October 2017, will give debtors more opportunities to pay their debt before being forced into costly litigation.

The Protocol applies to businesses (including sole traders and public bodies) claiming debts from individuals, not business to business claims.

The most notable rules under the Protocol relate to the Letters of Claim sent to debtors by creditors which detail what is owed and why. As of October these will have to be sent with 30 days’ notice of commencing court proceedings to give individuals enough opportunity to make the necessary arrangements. Early disclosure will therefore be essential. They also must include a reply form to allow debtors to dispute the claim.

A financial form should also be sent with the Letter of Claim so the creditor can understand how the debt could be re-paid. If a debtor indicates a need for time to pay, the creditor and debtor should try and reach an agreement to permit the debt to be paid by instalments, based on the debtor’s income and expenditure. If the creditor does not agree to a proposal for repayment, they will need to give reasons for this refusal in writing.

The new Protocol places the onus firmly on a claimant to make sure that the debtor is provided with a lot more information at the time of legal demand than is customary at present. The provision of this information at an early stage is likely to promote settlement of claims, identify and narrow issues and areas of dispute and ultimately reduce the need to reference matters to the Court for determination.

Failure to observe the new Protocol will expose the claimant to an adverse costs order being made by a Court or interest penalties.