On 4 May 2021, a new Government scheme came into force that aims to offer greater protection to debtors with qualifying “problem debt”. The new rules are set out in The Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 (the “Regulations”).
This short article provides guidance for creditors on how the Regulations impact them.
The core rule
The Regulations prohibit a creditor from taking any action on a qualifying debt for the breathing space period. This means a creditor cannot:
- Require a debtor to pay interest accruing during the breathing space;
- Require a debtor to pay fees, penalties or charges on the debt accruing during the breathing space;
- Take any enforcement action in respect of a qualifying debt; or
- Instruct a third-party agent to take any of the above actions.
Enforcement is described in the Regulations as steps taken to collect a qualifying debt from a debtor, which includes sending letters before action or attempting to enforce a court judgment. It will also include taking any steps in court proceedings that are afoot, such as requesting default judgment.
Types of breathing space
The Regulations provide for two different types of breathing space:
- A standard breathing space for any qualifying debtor that offers protection for up to 60 days;
- A mental health breathing space for any qualifying debtor, that offers protection for the duration of the debtor’s treatment, plus 30 days.
The idea of the breathing space is to provide greater protection to eligible debtors so that they can utilise a period of time in order to seek advice and allow them the platform to take positive action to resolve their debt problems, without the threat of creditors pushing for payment or interest/charges adding to the problem.
The Regulations only apply to individuals living in England or Wales, and the individual(s) must have a qualifying debt. The debtor must not be subject to any other form of debt relief scheme, such as a debt relief order (“DRO”), or an individual voluntary arrangement (“IVA”).
In order to be eligible, within the 12 months prior to making an application, the debtor cannot already have utilised a period of standard breathing space.
Most debts are classed as a qualifying debt e.g. rent arrears, judgment debts, credit cards etc.
Business debts are qualifying debts, unless they are non-eligible business debts, which includes any debt that solely relates to a business carried on by the debtor and where the debtor at the point of applying for breathing space;
- Is registered for VAT;
- Is a partner in a partnership with any other person.
Ongoing commitments, such as mortgages, will not be classed as a qualifying debt and the debtor should continue to pay those commitments during the breathing space. Any arrears already accrued will be a qualifying debt.
If a debt is jointly owed but only one debtor applies for breathing space, creditors must apply the same protections against the joint debtor.
A debtor wishing to apply for breathing space may only do so via an authorised Debt Advice Provider (“DAP”). The DAP will assess the debtor’s eligibility and if eligible, enter the debtor’s details onto an electronic register.
A DAP can only grant a breathing space if it is satisfied that the debtor is unable, or is unlikely to be able, to repay some or all of their debt as it falls due.
Notice is then provided to all creditors that are subject to the breathing space (the “Notice”).
Upon receipt of a Notice, creditors have a number of obligations, such as:
- Stop any enforcement action (see above);
- If court proceedings are afoot, notify the court of the breathing space (the court may give permission for the proceedings to continue);
- Undertake a search to identify any other debts owed by the debtor and if debts are uncovered that were not included in the Notice, notify the DAP;
- Notify any third-party agents that have been instructed to recover the debt.
As mentioned above, creditors must also stop applying interest, fees or charges on the qualifying debt for the duration of the breathing space.
Creditors should also ensure that they, or their agents, refrain from any unnecessary contact with the debtor during the breathing space period, subject to certain exemptions. All contact, if possible, should be via the DAP.
A creditor who receives a Notice may request that the DAP reviews the breathing space, to determine if it should continue or be cancelled. Grounds for cancellation are:
- The breathing space unfairly prejudices the interests of the creditor;
- There is a material irregularity in relation to the debtor’s eligibility for the breathing space, whether the debt is a qualifying debt, or whether the debtor does have sufficient funds to discharge their debts as they fall due.
A request for a review must be made in writing within 20 days of receiving the Notice.
If the DAP does not cancel the breathing space following a creditor’s request, the creditor may apply to the court within 50 days of receiving the Notice.
The Regulations impose relatively strict obligations on creditors served with a Notice. Creditors need to ensure that they comply with those obligations. Any actions they take in breach of the obligations will be null & void, and the creditor may be liable for the debtor’s costs. Repeated breaches may be reported to the creditor’s relevant regulator.
Creditors also need to be aware that the protections afforded under the Regulations are in addition to obligations to comply with the Pre-Action Protocol for Debt Claim.
Further guidance on the Regulations can be found in the Government’s guidance for creditors. Alternatively, our debt recovery solicitors can provide guidance and advice on the Regulations and how they apply to creditors, as well as guidance on any changes to internal procedures. Contact us today.