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Unsecured Debt in an Economic Downturn

By: Louise Smith, barrister - Updated: 15 Oct 2012 | comments*Discuss
 
Unsecured Debt Secured Debt Debt

Unsecured debt generally ranks below secured debt when it comes to prioritising.

However, this is not reflected in the way unsecured creditors pursue their debts. Some secured creditors can seem surprisingly relaxed about default, whereas unsecured creditors may start sending out threatening letters as soon as a single payment has been missed - even hiring bailiffs to chase the borrower for payment.

Secured Debts and Unsecured Debts

Secured lenders know that, if the worst comes to the worst, they can apply for a possession order and recover the debt by selling the debtor’s property. Unsecured lenders do not have this comfort and will, therefore, react more quickly and aggressively when payments are missed. There is a danger that the way in which unsecured creditors sometimes pursue their debts can lead borrowers to have a distorted view about which debts are priority debts.

Defaulting on Unsecured Debt

Many lenders are now pursuing even the smallest debts much more quickly, using methods which many people may consider to be disproportionate to the level of default. These may include bombarding debtors with letters, phoning people at all hours, telephoning on people’s work number, sending letters that may appear to have the authority of the courts and refusing to accept debtor’s offers of payment.

Debt Collection Agencies

Sometimes debt collection companies are instructed to locate a borrower who has moved on from the address held on record for them. The debt collectors do not always trace the right person and are often unwilling to accept the protestations of the innocent target of their attentions.

There have been cases of individuals being pursued for a debt that had nothing to do with them and the truth only being accepted after the issue of court proceedings, a trial taking place and a judge throwing out the case because the claimant has got the wrong person.

Office of Fair Trading Guidelines

The Office of Fair Trading (OFT) has issued a set of guidelines which all debt collection agencies should follow. Debt collectors should avoid:
  • Communicating with debtors in a way which is misleading or unclear. The guidelines highlight as “unfair practice”, charging for debt collection, providing a premium rate telephone number, contacting debtors at unreasonable times or using complex or technical language in correspondence
  • Misrepresenting the true legal position regarding the debt or misrepresent the debt collector’s authority. For example, threatening bankruptcy when the debt is beneath the bankruptcy minimum or implying that the debt collectors are authorised by the courts or another official body
  • Harassment. For example, instructing several debt collection companies to pursue the same debt so that the debtor is bombarded with letters and calls. The debtor is left with no idea who they are meant to talk to about the debt
  • Deceptive or unfair methods. This could include refusing to deal with a debtor’s appointed representative or failing to investigate claims that the debt is incorrect
A full list of the OFT guidelines is available on the OFT website. It is surprising that many common debt collection techniques are officially considered to be unfair practice. Any debt collection company who appears to have breached a guideline should immediately be reported to the local trading standards office.

Selling on Unsecured Debt

Sometimes the original lender will sell, or assign, a debt to another company - often for a fraction of the debt’s value. The company who purchased the debt has the right to pursue the debtor for the original amount. Such companies are rarely high street brands and therefore do not have a good name to protect.

When a debt is assigned, the debtor should receive a letter notifying them that the debt has been sold and providing contact details of the company that now controls it. The company which has bought the debt is restricted to the original terms and conditions that the borrower agreed to. For example, the new company cannot charge a higher rate of interest than the original lender would have been able to.

Unsecured Debt and the Threat of Possession

The aggressive methods used by some unsecured creditors can lead to debtors paying these debts first resulting in a greater risk that neglected, secured lenders will apply for a possession order. However, if unsecured debt is put to the bottom of the to-pay list, unsecured creditors may seek a county court judgment which could ultimately lead to a charge being placed over the debtor’s home.

Whatever the type of debt, it should not be ignored. If debts have got out of control help should be sought from an organisation like the Citizens Advice Bureau or the Consumer Credit Counselling Service – both of whom provide free and expert advice on debt and money issues.

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