Many of the UK’s 3,000 Claims Management Companies (CMCs) attract clients with promises that they can exploit legal loopholes to write off certain unsecured debts, most commonly personal loans and credit cards.

A landmark court court case has dented the hopes of hundreds of thousands of people looking to wipe off their loan and credit card debts

An estimated 100,000 have been pursuing getting their debt written off through a legal loophole. The test case involving the Royal Bank of Scotland (RBS) will impact their hopes of having their debts cancelled.

The test case taken to the High Court involved Phillip McGuffick who was seeking to have his £17,000 loan from RBS deemed unenforceable. The judge ruled that despite RBS falling foul of the Consumer Credit Act by failing to produce a copy of the original loan agreement, Mr McGuffick should not stop paying back his loan while the claim in ongoing as the loan may become fully enforceable in future.

The judge also noted that should this happen Mr McGuffick’s credit rating could be damaged, and the cost of the loan may have increased as a result of charges and interest applied to the loan.

The court case is also likely to impact the multi-million pound debt write-off industry provided by claims management companies who offer to write off credit card and loan debt in exchange for upfront fees.
The court case

The judge ruled that consumers should not stop paying their loans just while a claim in ongoing as the loan may become fully enforceable in future.

Under Section 77 of Consumer Credit Act, if a lender cannot provide a copy of a loan agreement upon request, the lender may not enforce payment that loan while that default persists. However, if the lender subsequently provides a copy of the loan agreement, he has the right to enforce the loan again.

Therefore the loan is not automatically written off in full, nor are the loan payments during the period of default by the lender (where the original agreement cannot be produced). Instead all the rights and obligations under the loan agreement continue, although they cannot be enforced until a copy is provided.