Debt collection made harder for businesses by new MoJ rules

New Pre-Action Protocol rules will make collecting debt from individuals more difficult for businesses, according to EMW, commercial law firm.

The new rules, introduced by the Ministry of Justice, are set to be implemented in October 2017 and will extend the window of time individuals are given to respond to a debt claim letter an increase of ten days from the current 21 days.

If an individual fails to pay within that time, another letter will be issued and they will be given 14 days of grace. This means that individuals will now have almost double the time than the current period before they can be taken to court by creditors.

These new rules will create administrative and compliance burdens for businesses, warns EMW.

The requirements for claim letters will also increase, such as needing more detail on the type of contract (written or oral), whether installments have been offered and whether interest is being charged. To add to this, the letter must also be sent by post.

This increased window of response time may also damage businesses by restricting cash flow, and businesses may incur increased costs by being forced to outsource debt collection to solicitors and debt collection agencies.

Failure to comply with the new rules may lead to sanctions,  including cost sanctions or a reduction in the amount of interest able to be claimed on the debt, according to EMW.

Damon Watt, principal in the business support, restructuring and insolvency team at EMW, commented: “The new rules are likely to reduce cash flow and squeeze the margins of many businesses. The result may be that businesses reconsider the credit terms offered to individuals.

“Businesses will likely start chasing debt earlier in order to get the clock ticking on the response time.

“Many businesses will be facing new challenges in the post-Brexit environment and the extra red tape and costs associated with these measures will not be welcomed.”