From 4 May 2021 individual debtors facing debt problems were granted legal protection from creditor actions under The Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 (the “Scheme”).
The Scheme provides individual debtors with recourse through a debt adviser to one of two forms of moratorium:
- Breathing Space Moratorium; and
- Mental Health Crisis Moratorium.
Breathing Space Moratorium (“BSM”)
A private individual debtor is able to apply for a BSM through a debt adviser if they meet the eligibility criteria. The protections include the pausing of most enforcement action and contact from creditors and freezing most interest and charges on their debts.
The Scheme defines a ‘debt adviser’ as those who are authorised by the Financial Conduct Authority to offer debt counselling or a local authority where they provide debt advice to residents. Whilst anyone can seek authorisation, there is clearly a regulatory aspect to the appointment of any debt adviser, which should provide comfort to creditors.
Process
Individuals can only access a BSM through a debt adviser. The debt adviser checks the eligibility of the individual and whether breathing space is appropriate for them. For example, a debt adviser would not deem a BSM appropriate if an individual was able to repay their debt with some help in respect of budgeting, or if the individual had assets that could easily be sold to clear the debt.
Once the debt adviser has deemed the individual eligible for a BSM then they will start the process with the Government’s electronic service and register. The electronic register will hold details of the individual’s name, date of birth, residential address and the start and end date of the BSM. Once loaded onto the register by the debt adviser, the Government’s electronic service will send notification to the creditors by post or by email.
The Government’s breathing space register will only allow access to creditors once they have received notification of the BSM. The creditor would not be able to have access to any information in respect of other creditors of the debtor, any other breathing space debt owed to another creditor and the individual’s address if it has been withheld.
Therefore, the creditor will only be able to see the information if the debtor lists the creditor in their BSM application. Accordingly, it is not something that would be searchable in respect of prospective business.
Eligibility
The debt adviser must be satisfied that the debtor is eligible for a BSM in that the debtor must meet each of the below:
- the debtor is an individual;
- the debtor owes a qualifying debt;
- the debtor lives or resides in England or Wales;
- the debtor does not have a debt relief order, an individual voluntary arrangement, an interim order or be an undischarged bankrupt at the time that they apply;
- the debtor does not already have an active breathing space and has not had a BSM in the last 12 months; and
- the debtor must be unable to, or is unlikely to be able to, repay all or some of their debts.
Qualifying debts
Most debts will be a qualifying debt, except Government debts such as tax or benefit debt. Joint debts can also be covered by the Scheme and, if applicable, the same protections are offered to the joint debtor. A debt that was due prior to 4 May 2021 can also be included.
Excluded debts
The list of debts that cannot be subject to a BSM include:
- secured debts – the debtor is only able to apply for the BSM in respect of arrears incurred at the date of the application. Any new secured debt arrears incurred after the BSM starts are not covered;
- debts incurred from fraud or fraudulent breach of trust;
- liabilities to pay fines imposed by the court for an offence;
- obligations from a confiscation order under the Proceeds of Crime Act 2002;
- child maintenance or obligations under an order made in the family court;
- student loans;
- advance payments of Universal Credit;
- whilst some business debts will qualify for breathing space, they do not qualify if the debt only relates to the business (not the debtor personally) and the debtor is VAT registered, or the debtor is a partner in business with someone else; and
- council tax liabilities that have not yet fallen due.
In addition, any debt incurred after the commencement of the BSM will not be included in the BSM so could be pursued.
How long will it last?
From the commencement of the BSM the protections are in place for 60 days.
There will be a review of the BSM at 25 – 35 days. This is a requirement under the Scheme. The debt adviser should:
- Assess whether or not the debtor is complying with their obligations. Such obligations include the individual accessing debt advice, paying their ongoing liabilities, not seeking additional credit over £500 and that they have been engaging with the debt adviser, so there is a stress test of the process.
- Confirm whether or not the individual has entered into a debt solution. If they have then the BSM does not need to continue and can be cancelled.
- Decide whether or not the BSM ought to continue.
In addition to the midway review a creditor is able to request a review (not sooner than 20 days from the commencement of the BSM) if they believe that the BSM unfairly prejudices their interests or there has been some material irregularity in the application, i.e. if the creditor is aware that the debtor does have funds to clear their debt when it becomes due.
If, following the midway review, or a creditor review, the debt adviser decides to cancel the BSM they must tell the individual in the first instance and then update the electronic service. The electronic service will then send notification of the cancellation to all creditors.
Protections
When a creditor receives notification of a debtor in a BSM they must take immediate action to stop:
- the debtor from having to pay certain interest, fees, penalties or charges for that debt during the BSM;
- any enforcement action or action to recover the debt by the creditor or any agent appointed by the creditor;
- all contact with the debtor to request payment of the debt unless the creditor has permission of the court.
Interest can still apply in respect of the principal for a secured debt only, but cannot be applied to the arrears.
A debtor in a BSM is still required to make payment for any liabilities that arise after the start date of the BSM.
Court actions
If a creditor has already filed a petition for bankruptcy, or commenced any other action in the court, relating to a debt that is now subject to a BSM then the creditor must inform the court or tribunal in writing as soon as it receives the notification.
Where a judgment or order has not yet been issued by the court, the court having received notification of the BSM must stop the bankruptcy proceedings until the BSM has ended. Other court proceedings relating to the debt can continue until the court makes an order or judgment.
Where a court judgment or an order has been issued then the court must stay enforcement proceedings until the BSM period has expired.
Conditions
A BSM is not a payment holiday, therefore a debt that is due after the start date of a BSM will still be payable, this includes any repayment arrangements with the creditor or a high court enforcement officer (HCEO), although the HCEO is prevented from taking any enforcement action.
How often?
An individual is only entitled to one BSM in a 12-month period.
Mental Health Crisis Moratorium (“MHCM”)
A private individual debtor is able to apply for an MHCM through a debt adviser if they meet the eligibility criteria. The same provisions apply to these individuals and creditors as with a BSM except for the below differences:
Eligibility
The eligibility for an MHCM is the same as for a BSM with the below differences:
- the debtor must be receiving mental health crisis treatment at the time of the application; and
- there is no limit to the number of times a debtor can enter an MHCM.
How long will it last?
The moratorium period under an MHCM will last however long the crisis treatment lasts, plus 30 days. The debtor’s ongoing treatment must be confirmed every 20 – 30 days.
How often?
There is no limit to the number of applications by a debtor for an MHCM.
The effect for creditors
The new regulations will pause the recovery actions that creditors can take against individuals subject to either a BSM or an MHCM for the relevant period in respect of those debts that existed at the time of the application and DO NOT include those debts incurred during a moratorium. In addition a creditor is unable to contact the debtor in respect of the debt to which the BSM or MHCM relates, unless you have been requested to respond to a query or you are required to under legal proceedings.
If the creditor has sold the debt on then the creditor is required to provide notification to the purchaser and provide them with the contact details of the debt adviser. Should you fail to do so then you may be liable for any losses incurred by the debtor or the assigned creditor as a result.
Creditors should be comforted that this new scheme will provide greater formality and earlier involvement of debt professionals, but they will need to start taking steps to ensure that they have policies and procedures in place to ensure compliance with the Scheme.
If you require any further assistance on a debt recovery matter – please contact our expert team today. We are here to help.
