The Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020, comes into force on 4 May 2021 (“the Scheme”).
The Scheme gives individuals (including sole traders) in England and Wales with problem debt the right to legal protections, known as “breathing space”, which include pausing most enforcement action and contact from creditors and freezing most interest and charges on their debts. The length of the breathing space will depend on whether it is a standard breathing space, in which case the protections can last for up to 60 days, or a mental health crisis breathing space, which will last as long as the debtor’s mental health crisis treatment plus 30 days.
Breathing spaces are accessed by an individual seeking debt advice from a debt adviser authorised by the FCA to offer debt counselling and administer breathing space moratoriums.
To qualify, an applicant must:
- be living in England or Wales
- owe a qualifying debt to a creditor
- not be subject to a debt relief order or an individual voluntary arrangement (IVA), or be an undischarged bankrupt, and
- not already have had a breathing space in the previous 12 months.
Additionally, in the case of a mental health crisis breathing space, an Approved Mental Health Professional (AMHP) must also certify that the debtor is receiving mental health crisis treatment. An application for a mental health crisis breathing space can also be made on behalf of the debtor by their carer, social worker, mental health nurse or others.
What is a “Qualifying Debt”?
The majority of unsecured, personal debts will fall within the definition of a “Qualifying Debt”. There are some specific exclusions, however, including student loans, child maintenance or obligations in family court proceedings and liabilities to pay fines imposed by a court for an offence.
Some business debts may also fall within the definition. However, where a debt only relates to a debtor’s business (and not the debtor personally) and the debtor is VAT registered, or the debtor is a partner in a business with someone else, it will not be classed as a qualifying debt.
What does this mean for creditors?
On receiving notification of a breathing space, a creditor must search its own records to identify any debts owed by the debtor and advise the debt advisor of any debts which are not included in the notification (it will be for the debt advisor to then confirm whether the breathing space will also apply to such debts). The creditor should immediately cease:
- applying certain interest, fees, penalties or charges for the debt during the breathing space;
- any enforcement or recovery action to recover that debt – where proceedings are ongoing, a creditor should notify the Court/ tribunal in writing on receiving the notification; and
- contacting the debtor to request repayment of the debt, unless permitted to do so by the Court. Note here that this does not mean that all communication with the debtor must cease, but any communication should be minimal and carefully drafted to avoid any inference that it is a demand for payment.
If a creditor fails to take the above steps, the debtor can complain to their debt adviser and/or directly to the creditor using its complaint procedure, which might include referring the complaint to any external ombudsman, oversight body or regulatory body.
We would recommend that creditors introduce a policy to ensure that any breathing space notifications received are recorded and monitored, and that requisite action is taken promptly.
A creditor has 20 days in which to challenge a breathing space, for example if it considers that the debtor does not meet the eligibility criteria or that the debtor has enough funds to pay their debts as they fall due, but they will need evidence to support any application. If, after consideration, the debt advisor does not cancel the moratorium, a creditor can apply to the County Court for it to be reviewed.
The way forward
Whilst the definition of qualifying debt is fairly wide, the Scheme should be limited to problem debt and/or debtors who are receiving mental health crisis treatment. It is not intended to give debtors free reign to delay payment indefinitely. It is also important to remember that qualifying debts are not written off, they will remain due and owing, but creditors will need to adjust their procedures to make sure that notifications from vulnerable debtors are acted on promptly, and action paused.
Although the Scheme will likely result in more frustration and further delays in recovering liabilities after an immensely challenging year, handled correctly, they should still get paid.
If you need advice on debt recovery or help with adjusting your processes and procedures, please contact any member of the Debt & Leasehold Recovery team.