Challenging debts on the basis of mental capacity

The terms “debt” and “loan” can often be used interchangeably, however, there are subtle differences. A debt is a financial obligation that must be repaid, sometimes with interest, and can involve property or money. A loan is an agreement between a lender and a borrower for a sum of money, where the borrower is obligated to repay the full amount under the terms of the loan, usually with interest.

This blog will investigate whether a debt can be challenged on the basis that the individual in debt lacked mental capacity when entering into the financial obligation. For more details on loans and challenging them based on one of the parties to the loan lacking mental capacity, please see our blog linked here.

An individual being in debt is not always a negative. A mortgage for example can allow someone to purchase a property that may increase in value or generate income. If, however, the debt is unmanaged and the repayments are unaffordable, enforcement action by the creditor can be taken, depending on the type of debt.

Debt can take various forms, including being secured, when the debt is taken out against an asset, such as a bank securing a mortgage against the property. This means that if the mortgage payments are not met, the bank may repossess the property. The same would apply to a car loan.

Unsecured debts, such as credit card debt or outstanding care fees, are not taken out against an asset. If an individual fails to repay the debt, it can lead to the creditor instructing a debt collection agency and if this is unsuccessful, the creditor can go to court to seek repayment.

If there is doubt as to whether an individual had the required mental capacity, and whether they are able to understand to concept of debt when the financial obligation was entered into, there is scope for the debt to be challenged.

A person is assumed to have capacity to make decisions themselves, unless it’s proved otherwise. A bank or car loan company, for example, should therefore, assume that an individual is capable of making the relevant financial decision when entering into a financial obligation with them.

To determine whether an individual lacks mental capacity to make a decision surrounding debt, it must be shown that they have an impairment of, or a disturbance in the functioning of, the mind or brain. It must also be shown that they are unable to do one or more of the following:

• Understand the information relevant to the decision, for example enter into a financial obligation, such as applying for a credit card;
• Retain that information for long enough to make the decision;
• Use or weigh up that information as part of the process of making the decision; and
• Communicate their decision in any way.

It is also important to note that mental capacity is issue specific, and therefore, they may have capacity to manage their finances on a daily basis, such as pay for food shopping, however, may not have capacity to enter into a mortgage, apply for a credit card or agree to a care fee contract.

In order to challenge the debt, the burden of proof that the person lacked mental capacity when entering into the financial obligation lies with the person alleging incapacity. This can be the individual but is usually their Litigation Friend if they do not have litigation capacity.  For a discussion of around the appointment of Litigation Friends, please see an earlier blog on that topic here.

If it can be shown that the creditor should have identified that the individual lacked the requisite mental capacity and, therefore, should not have allowed for the financial obligation to be entered into, the debt can be cancelled or made void.

At Anthony Gold Solicitors, we are experienced in dealing with vulnerable clients who may find themselves in debt that they cannot manage. If a person you know or act for may be subject to debt enforcement proceedings and you believe they lack mental capacity, please do not hesitate to contact us on 020 7940 4000 or mail@anthonygold.co.uk to discuss your concerns and obtain specialist advice from our experts.