Breathing space for individuals with problem debt

On 4^th May 2021 the Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England & Wales) Regulations 2020 come into force.  This scheme is aimed at people with problem debt and has the effect of putting a moratorium (known as a breathing space) in place which prevents creditors taking action to recover their debts and from charging interest and penalties on late payment of debts whilst the breathing space is in force.

There are two types of breathing space, a standard breathing space and a mental health crisis breathing space.

Applying for a standard breathing space

A debtor must contact a debt advisor who is authorised by the Financial Conduct Authority (FCA) to offer debt counselling.  Anyone who cannot or is unlikely to be able to repay their debts can apply to a debt adviser for a standard breathing space.

The debt advisor will consider all applications for a breathing space but may not in all cases consider that a breathing space is the best option.  This might be the case if the debtor has assets that can be sold to pay the debt or has access to income or other funds that can be applied.  There may also be cases where a breathing space is not required because the commencement of a formal insolvency process without the protection of a breathing space is the best option.

Eligibility criteria

The debtor must

1. be an individual
2. owe a “qualifying debt” to a creditor
3. live or usually reside in England or Wales
4. not have a debt relief order (DRO), an individual voluntary arrangement (IVA), an interim order, or be an undischarged bankrupt at the time they apply
5. not already have a breathing space or have had a standard breathing space in the last 12 months at the time they apply

The debt adviser must also be satisfied that their client meets both of the following conditions:

1. The debtor cannot, or is unlikely to be able to, repay all or some of their debt
2. a breathing space is appropriate for their client.

Most debts will be qualifying debts provided that they were incurred before 4 May 2021.  These include:

• credit cards
• store cards
• personal loans
• pay day loans
• overdrafts
• utility bill arrears
• mortgage or rent arrears
• Tax arrears

Any of the above which are joint debts will be caught.  However, debts incurred after the commencement of the breathing space will not be caught and neither will ongoing mortgage and rental liabilities.

The following liabilities are also excluded.

• debts incurred from fraud or fraudulent breach of trust.
• liabilities to pay fines imposed by a court for an offence.
• obligations from a confiscation order
• child maintenance or obligations under an order made in family court proceedings
• a crisis or budgeting loan from the social fund
• student loans
• damages they need to pay for death or personal injury
• advance payments of Universal Credit
• council tax liabilities have not yet fallen due.

Commencement of the breathing space

The debtor will provide the debt adviser with details of all qualifying debts.  If satisfied that the criteria are satisfied and a breathing space is appropriate, the debt advisor will enter the debtor’s details onto the breathing space register maintained by the Insolvency Service.  The breathing space commences the following day.  Creditors will be sent notice of the breathing space by post or electronically if they have opted in through the electronic service.  Postal notices are deemed to have been received four days after posting and electronic notices are deemed received on the day they were sent.  Many institutions have already been contacted by the Insolvency Service inviting them to opt in to electronic notices.  Any creditors who have not can do so by emailing breathingspace@insolvency.gov.uk

Creditors’ obligations following receipt of notice.

Creditors must identify the debt in their records.  If one or more other debts are discovered that were not included in the notice, the debt advisor should be informed immediately in order to determine if the additional debt(s) also qualify for the breathing space.

Effects of the breathing space on creditors

Creditors must not make any demand for payment during the breathing space or make any contact with the debtor with regard to repayment of the debt.  They may not apply interest or penalties on any qualifying debts either during or after the breathing space has ended. They may not issue any legal proceedings (including bankruptcy proceedings), seek to enforce judgment, enforce security or attempt to take possession of property.  If a creditor has commenced court proceedings or issued a bankruptcy petition, the creditor must notify the court of the breathing space as soon as they receive notification.  The court must stay bankruptcy proceedings until the breathing space has come to an end but other proceedings may continue to the point of judgment.

Any conduct by a creditor in breach of these restrictions is null and void.

If an agent has been appointed to recover a qualifying debt, it is the responsibility of the creditor to notify the agent of the breathing space.  Likewise, if the debtor has provided details of the agent and not the creditor, it is the responsibility of the agent to notify the creditor.

However, the debtor should continue to pay ongoing liabilities and monthly payments as and when they fall due.  A breathing space is not a payment holiday and only affects debts that were outstanding as at the commencement of the breathing space.  If on-going liabilities are not met as they fall due during the breathing space, the debt advisor is authorised to bring the breathing space to an end.

Duration of the breathing space

The breathing space lasts for 60 days.  However, it can be brought to an end earlier in any of the following circumstances.

1. The debtor has not met one or more of their on-going financial obligations.
2. The debt advisor has been unable to communicate with the debtor.
3. A formal debt solution has been put in place, such as a DRO, IVA or Bankruptcy Order
4. A creditor requests a review of the breathing space on the ground that they have been unfairly prejudiced and the debt advisor agrees.

Creditor’s request for a review of the breathing space

A creditor can ask the debt advisor to review the breathing space if it believes that one or more of the following grounds apply:

1. The debtor does not meet the eligibility criteria
2. One or more of the debts is not a qualifying debt
3. The debtor has sufficient funds to pay his or her debts
4. The creditor has been unfairly prejudiced by the breathing space.

The review must be requested within 20 days of the commencement of the breathing space or within 20 days of an additional debt being added to it.

If the breathing space is cancelled as a result of the review a creditor can begin enforcement action but cannot claim interest, charges or penalties during the period when the breathing space was in force.

If the breathing space is not cancelled as a result of the review a creditor can apply to court to challenge the decision.  Such application must be made within 50 days of the commencement of the breathing space or within 50 days of an additional debt being added to it.

Mental health crisis breathing space

The process for obtaining a mental health crisis breathing space is essentially the same as the process for obtaining a standard breathing space.

The main differences are:

Third parties can apply on behalf of the debtor, such as mental health care professionals social workers and carers.

The debtor must be receiving mental health crisis treatment as certified by an approved mental health professional.

The debtor is still eligible even if a previous application was made in the last 12 months.

The breathing space lasts for the duration of the debtor’s mental health crisis treatment plus an additional 30 days.

Summary

A breathing space is not an insolvency process.  It is similar to the moratorium for companies introduced by the Corporate Insolvency & Governance Act 2020 in that its purpose is give the debtor time to take advice as to the best options for resolving his or her financial difficulties without creditor pressure. 

Currently the only way for a debtor to obtain a moratorium is by obtaining an Interim Order in the course of proposing an IVA by which time he or she is already committed to going down that route which may not be suitable in many instances.

Mental health crises frequently go hand in hand with financial difficulties when individuals find themselves unable to deal with their affairs.  A recognition of this and the introduction of a breathing space for the full duration of treatment and beyond is therefore to be welcomed.