Challenging debts and reducing liability

It is often possible to use legal avenues to reduce the amount you owe, for example by making sure that there is a valid contract between yourself and the creditor and that the creditor has complied with all the legal requirements to enable them to enforce the debt.

signatureContract law and statutes such as the Consumer Credit Act can be used to challenge some debts and reduce liability or avoid it altogether. In some cases, an amount may not be due if:

  • There isn’t a valid contract between the creditor and the debtor.
  • Someone else is liable for the debt.
  • The other party has breached their side of the agreement, for example by not providing a satisfactory service or supplying faulty goods.
  • For regulated agreements, if the creditor hasn’t complied with the provisions of the Consumer Credit Act.
  • When there are unfair contract terms or an unfair relationship in the case of a credit agreement or there’s been irresponsible lending.
  • The creditor is outside the time limit to recover the debt through the courts, i.e. the debt is statute barred.

Joint and several liability

When more than one person enters into an agreement, each individual is liable for the full amount borrowed. Typical examples include mortgages in joint names, joint current account overdrafts, secured or unsecured loans in joint names as well as debts arising from any other joint agreement, for example rent arrears, water charges or council tax for a dwelling occupied by a couple.

Joint liability often occurs when business loans and overdrafts are personally guaranteed by partners in a business.

When a joint debtor goes bankrupt, the other debtor(s) is (are) liable for the full amount owed under the joint account.

guarantorA guarantor is somoeone who agrees to repay the debt if the borrower fails to do so. Guarantees must be in writing and signed by the guarantor.

Another type of guarantee is personal guarantees by business owners/partners for credit extended to businesses such as limited companies. They effective get around the ‘limited’ element in limited companies by making their owners personally liable.

If the guarantor was not made aware of their liability by the creditor, they were misled or made to agree to the guarantee under duress, it may be possible to challenge liability.

Who owes the money?

ContractA payment demand can be sent to the wrong person by mistake or for any other reason. If you don’t recognise the debt, you should get the creditor to supply you with full information about the alleged debt, this is usually done sending what’s known as a “prove it letter”.

You may also receive demands for payment of debts incurred by other family members such as your partner, parents or children. In most cases you wouldn’t be liable for debts incurred by immediate family members, unless you entered into a credit agreement jointly with them (such as a joint current account that went overdrawn) or you signed as a guarantor for them.

Parents are not normally liable for their children’s debts even if they are minors. If a debt is in the name of a minor, it would be unenforceable unless it was for necessaries.
If you allow a family member such as your partner or children to use your account to purchase goods of services, you are liable for the debt.
Credit cards are not issued in joint names but there can be one or more additional cardholders. The main cardholder is fully responsible for all transactions made by additional cardholders as they were his or her own.
Minors (under 18s)

Apply OnlineUnder contract law, agreements involving young people who were under 18 at the time the agreement was entered into may be unenforceable unless they are for necessaries or for the minor’s benefit.

The law does not give an exact definition of ‘necessaries’ but they are considered goods required by the minor to sustain their condition in life and their requirements. Necessaries may include food, clothing, fuel and possibly other items, however, there is also a limit as to the quantity of items that can be considered necessaries. Age and immediate needs can be taken into account. In some cases the minor can be ordered to return the goods purchased.

Contracts for a minor’s benefit include goods or services related to education or apprenticeships.

Fraud and forgery

If your signature has been forged, you are not liable for any debt arising from that agreement. However, if your signature was forged with your knowledge and consent, for example by a relative looking to obtain credit, then you would be fully liable.

Cases of identity theft and other fraudulent use of your name, address and credit worthiness should be reported to the police in the first instance as these are serious criminal offences.
Duress and undue influence

A contract made under these circumstances my be unenforceable. The most common example is domestic abuse which can also include financial abuse.

This situation often arises with guarantees. where a partner applies for a loan for their own purposes but the creditor requires the loan to be in joint names, for example, to take into account both partner’s income or to secure it on jointly owned property.


A contract entered into by someone who lacked capacity may be unenforceable. However, a person is assumed to have capacity unless it can be established that they do not have it. Lack of capacity can occur when an individual is unable to understand the information provided and weigh up the consequences of entering into the agreement.

Lack of capacity can be temporary or permanent. Temporary lack of capacity occurs when someone is under the influence of alcohol or drugs (including prescription drugs). Permanent lack of capacity occurs due to learning difficulties or mental health issues.

For an agreement to be unenforceable on the basis of lack of capacity, it has to be established that the creditor knew or should have known, about the lack of capacity.
It should not be assumed that just because someone has mental health or learning difficulties, agreements entered into by them will be unenforceable, medical evidence is usually required.

CONC 2.10 sets out grounds that may lead a firm to suspect that a customer may have mental capacity limitations.

Indications that a person may have some form of mental capacity limitation

A firm is likely to have reasonable grounds to suspect a customer may have some form of mental capacity limitation if the firm observes a specific indication (behavioural or otherwise) that could be indicative of some form of limitation of the customer’s mental capacity. Examples (amongst others) of indications might include:

(1) where a firm has an existing relationship with a customer, the customer making a decision that appears to the firm to be unexpected or out of character;

(2) a person who is likely to have an informed view of the matter, such as a relative, close friend, carer or clinician raising a concern with the firm as to the capacity of the customer to make a decision about borrowing;

(3) the firm understands or has reason to believe the customer has been diagnosed as having an impairment which led to the customer not having had mental capacity for similar decisions in the past;

(4) the firm understands or has reason to believe the customer does not understand what the customer is applying for;

(5) the firm understands or has reason to believe the customer is unable to understand the information and explanations provided by the firm, in particular concerning the key risks of entering into the agreement;

(6) the firm understands or has reason to believe the customer is unable to retain information and explanations provided by the firm to enable the customer to make the decision to borrow;

(7) the firm understands or has reason to believe the customer is unable to weigh up the information and explanations provided by the firm to enable the customer to make the decision to borrow;

(8) the customer is unable to communicate a decision to borrow by any reasonable means;

(9) the customer being confused about the personal information that the firm requires, such as date of birth or address.


If the creditor misled the debtor about the terms of the agreement or the consequences of entering into it (for example, failing to explain that a secured loan could result in repossession of the property), the agreement may be unenforceable.



Credit agreements usually include clauses allowing the lender to charge specified amounts for:

  • Moneylate or missed payments
  • overlimit charges on credit facilities such as credit cards
  • unauthorised overdraft charges for exceeding the authorised overdraft amount or when there is no overdraft facility
  • direct debits not paid due to insufficient funds

The above are cases where the debtor has breached their contract and the charges are meant to make up for the damages incurred by the creditor as a result of the breach.

It may be possible to challenge charges in cases such as:

  • When they constitute a penalty as opposed to liquidated damages. A charge could be a penalty if:

    • The amount charged is disproportionately high when compared to the potential loss sustained by the creditor.
    • If the charge is larger than the amount unpaid
    • If the charge is the same regardless of the seriousness of the breach
  • They are a result of an unfair term. An term can be unfair if it causes a significant imbalance in the parties’ rights and obligations. Requiring debtors who breach their agreement to pay a disproportionately high sum could be regarded as an unfair term as per Schedule 2(1)(e) of The Unfair Terms in Consumer Contracts Regulations 1999.

In the old Dunlop Pneumatic Tyre Company v New Garage & Motor co case, the House of Lords gave guidance to establish when a charge can be considered a penalty and thus be unenforceable.

The claimant, Dunlop, manufactured tyres and distributed them to retailers for resale. The contract between Dunlop and New Garage contained a clause preventing New garage from selling the tyres below list price. In the event that they were in breach the contract specified that 5/. would be payable for each tyre sold below the list price. The defendants sold some tyres below the list price and the claimant brought an action for damages based on the amount specified in the contract. The defendant argued that the relevant clause was a penalty clause and thus unenforceable. The trial judge held it was a liquidated damages clause and awarded the claimant 5/. per tyre. The Court of Appeal reversed this holding that the clause was a penalty clause and awarded the claimant 2/. per tyre representing the actual loss suffered. The claimant appealed to the House of Lords.


The clause was a liquidated damages clause not a penalty clause.

Lord Dunedin set out the differences between a liquidated damages clause and a penalty clause:

1. Though the parties to a contract who use the words “penalty” or “liquidated damages” may prima facie be supposed to mean what they say, yet the expression used is not conclusive. The Court must find out whether the payment stipulated is in truth a penalty or liquidated damages. This doctrine may be said to be found passim in nearly every case.

2. The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage (Clydebank Engineering and Shipbuilding Co. v. Don Jose Ramos Yzquierdo y Castaneda)

3. The question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of the breach (Public Works Commissioner v. Hills and Webster v. Bosanquet)

4. To assist this task of construction various tests have been suggested, which if applicable to the case under consideration may prove helpful, or even conclusive. Such are:

( a ) It will be held to be penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach. (Illustration given by Lord Halsbury in Clydebank Case)

( b ) It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid (Kemble v. Farren)This though one of the most ancient instances is truly a corollary to the last test. Whether it had its historical origin in the doctrine of the common law that when A. promised to pay B. a sum of money on a certain day and did not do so, B. could only recover the sum with, in certain cases, interest, but could never recover further damages for non-timeous payment, or whether it was a survival of the time when equity reformed unconscionable bargains merely because they were unconscionable, – a subject which much exercised Jessel M.R. in Wallis v. Smith

( c ) There is a presumption (but no more) that it is penalty when “a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage” (Lord Watson in Lord Elphinstone v. Monkland Iron and Coal Co)

On the other hand:

( d ) It is no obstacle to the sum stipulated being a genuine pre-estimate of damage, that the consequences of the breach are such as to make precise pre-estimation almost an impossibility. On the contrary, that is just the situation when it is probable that pre-estimated damage was the true bargain between the parties ( Clydebank Case, Lord Halsbury; Webster v. Bosanquet, Lord Mersey).

Charges: what to do

  • Check the terms of the agreement to establish whether a charge could be a penalty or an unfair term;
  • Point out to the creditor in writing, that the charges do not reflect the creditor’s actual or potential loss and are, therefore, a penalty;
  • State that the charges are also an unfair term contrary to Schedule 2(1) of the Unfair Terms in Consumer Contracts Regulations 1999 because they require payment of a disproportionately large sum;
  • Ask the creditor to refund the charges.

See unfair relationships for further information.

Regulated agreements

Using the Consumer Credit Act

If the agreement is regulated by the Act, it may be challenged using is provisions. Examples of regulated agreements include:

  • Consumer Credit ActCredit cards
  • Most personal bank loans
  • Credit to buy specific goods such as a computer or furniture
  • Hire purchase agreements
  • Home shopping/catalogue/mail order accounts
  • Short-term loans such as payday loans

See  Using the Consumer Credit Act for more details about challenging regulated agreements.

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