Hi Chilufya and welcome to TPUC
Is the council just trying to grab what cash they can in these times of austerity, or have you missed a payment or fallen out with them?
Whatever the circumstances, they are completely out of order talking to your lender. You should inform both your lender and the council that you do not consent to disclosure of personal information and interference in your private affairs. May help to research complaint procedures for both and ways to complain to ombudsmen, Information Commissioner etc, Also any legal information on breach of trust.
Even though the agreement was verbal, making payments to them would be considered as performance on a contract. In order to amend any contract agreement, the council would have to give you a revised offer (in this case payment in full). Check any letters they have sent recently that may be interpreted this way. If you didn't reply, they can assume your silence as agreement to the new offer. If they appear to have made an offer, you can reply with a counter-offer. The simplest form, of counter offer would be something like "Thank you for your recent letter... ...however, I am happy to continue making repayments as originally agreed"
To reinforce the original verbal agreement, you may also be able to make an "official offer". Check out:http://tnsradio.ning.com/forum/topics/official-offer
for details about how to do this. That site and this forum have a lot more information available that may be useful.
If you continue to repay at the agreed rate, the council will have a very difficult time proving there is anything for the court to make a decision on. Very important that you continue paying.
Also, If you can get the amount owed below £5000.00, the courts should downgrade any action to a "small claims" status - this could greatly improve your chances of having a fair hearing compared to a standard court. If you can afford to, make a lump sum payment as "an offer of goodwill"
Freedom is nothing if it is not to live as you wish! Exactly as you wish! - Isaac Asimov