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Diamonds are forever, but debts can become unenforceable

29/02/2008

Everyone knows: when someone borrows money, they have a responsibility to make sure it is repaid. But not everyone knows that the creditor shares that responsibility.

The Limitation Act 1980 states that most debts can become ‘statute barred’ after 6 years (12 years for mortgages and secured loans). This means they become unenforceable – you still owe the money, but the creditor can no longer take action to recover it.

This can only happen if:

• the creditor hasn’t contacted you (at your last known address) or taken action (e.g. court action) in that time
  and
• you haven’t made payments or acknowledged the debt in that time.

The Debt Collection guidance from the Office of Fair Trading (OFT) states that it is unfair for creditors to tell you the debt is still legally recoverable if it isn’t – or to push for payment if you’ve already disputed the debt and cited the Limitation Act. If a creditor does either of these, you should complain to the local Trading Standards Department or to the OFT.

However, please note that the Limitation Act 1980 contains various exceptions and a great deal of complicated legal terminology. If you think it might apply to one of your debts, it’s essential you seek advice from a debt specialist, so you can be sure you’re saying the right things and staying within the law.

6 years for most debts
Most debts can be declared statute barred if they’re left ‘untouched’ for 6 years. You may be surprised to hear that this includes Community Charge or Council Tax debts.

An example:
Imagine you took out a personal loan 10 years ago, but stopped making repayments after 3 years. Since then, you’ve not contacted them and they’ve not contacted you, even though you’ve not moved house. Then, yesterday, a letter arrived on your doormat requesting payment.

Since they’ve left it for 7 years, the debt is probably unenforceable – but you can’t simply ignore it. It’s up to you to seek debt advice and dispute the debt on the grounds that the Limitation Act 1980 means you no longer owe the money.

Note that the 6-year period can ‘reset’. In this example, if you’d contacted your creditor in 2006 and admitted the debt, the Limitation Act 1980 would not apply until 2012.

Exceptions to the rule
If a creditor has been granted a County Court Judgment (CCJ), the debt will still be enforceable, with the court’s permission, even if it’s more than 6 years old. But if the creditor got the CCJ after the debt itself had become statute barred, you can ask the court to set it aside.

The Department of Work & Pensions (DWP) has just 6 years to recover benefit overpayments and social fund loans through the court. But they don’t have to go to court to deduct money from benefit payments they make to you, so they can do this even if the debt is over 6 years old.

Student Loans are an unusual case, as they changed in September 1998. Any Student Loan taken out before this date was a consumer credit agreement, which means the Limitation Act 1980 applies. But any Student Loan taken since then is an ‘income contingent’ loan – so repayments can be deducted from your wages without any court involvement, regardless of how old the debt is.

Income Tax and VAT (Value Added Tax) debts never become unenforceable, however old they are.

A real-life mortgage story
Mortgages and secured loans cannot become statute barred until 12 years have passed – but this can happen, as illustrated by the following real-life story.

A Stockport man hadn’t paid anything to his mortgage since 1993 and was later declared bankrupt. His bank had not taken any action since 1992, and in March 2007 a judge accepted that his mortgage was ‘extinguished’.

The Limitation Act 1980 meant that the bank’s right to enforce the mortgage was ‘barred’. The bank had allowed more than 12 years to pass without taking legal action, so the property became legally his.

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