The Debt Respite Scheme – Will The Introduction Prove Beneficial To Creditors As Well As Debtors?

What is the Debt Respite Scheme?

The introduction of The Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 (“the Regulations”) will serve to, as the name would suggest, allow those in debt ‘breathing space’ from creditor pressure.

The Regulations – due to come into force on 4th May 2021 – are being introduced to incentivise individuals to consult professional debt advisers. They provide for two avenues of protection:

• Standard breathing space; and
• Mental health crisis breathing space.

A debtor granted ‘standard breathing space’ will be allowed a 60 day window of protection from their creditors.

Who is eligible for the Debt Respite Scheme?

A debtor looking to rely on the Regulations for ‘standard breathing space’ will need to satisfy the following criteria:

• They must be an individual, who:
  • Owes a ‘qualifying debt’ to a creditor;
  • Lives or usually resides in England or Wales;
  • Does not have a debt relief order, an individual voluntary arrangement (IVA), an interim order or an undischarged bankruptcy at the time which they apply; and
  • Has not already been awarded a ‘breathing space’ in the previous 12 months or is currently in a ‘breathing space’.

A qualifying debt includes all personal debts and liabilities, save for the exhaustive list provided for in the Regulations. A few examples of excluded debts include:

• Secured debts (mortgages, etc.)
• Fines imposed by a Court, note that this does not include penalty charge notices, including child maintenance orders made in a family Court
• Student loans and council tax liabilities not yet fallen due

The full list can be found on the Government website here.

A debtor looking to rely on the mental health crisis breathing space will be required to satisfy a further criterion – the debtor will need to be in receipt of treatment for a mental health condition which is certified by a mental health professional.

How does a debtor apply?

Standard breathing space

An individual debtor must make an application to a provider of debt advice. The provider must be either a debt advice provider authorised by the Financial Conduct Authority to offer debt counselling or a local authority who provided debt advice to residents.

The debt advice provider must, in the first instance, consider the situation and provide advice without collecting a fee for doing so. The aim should be for the adviser to consider the application and, if possible, assist with repaying the debt without the need for a breathing space. If there is the possibility that assets could be easily realised to pay the debt, then a breathing space should not be granted.

Mental health crisis breathing space

It is not a requirement that a person being treated for a mental health crisis has to access debt advice first before making an application. If an approved mental health professional certifies that an individual is undergoing treatment, this alone can be used by a debt adviser to commence the mental health crisis breathing space.

How does the Debt Respite Scheme operate?

During the 60 day period creditors are prohibited from directly, or through agents (debt collection agencies, solicitors, etc.), from doing the following:

• Taking enforcement action against the debtor (save for instances where permission is granted by the Court), including pre-legal chasing, issuing County Court proceedings, enforcing a judgment debt and presenting a bankruptcy petition;
• Requiring the debtor to pay interest accruing on the debt; or
• Requiring the debtor to pay any fees or penalty charges.

In essence, the breathing space will prevent a creditor treating non-payment of any of the above as an event of default, as well as preventing the pursuit of a debt.

A mental health breathing space will operate slightly differently for two reasons:

1. A person granted a mental health breathing space may enter the moratorium an unlimited number of times; and
2. A moratorium will not end until 30 days from the date which the debtor ceases to receive their mental health crisis treatment, 30 days after there is no response to a request made by the debt adviser or if the debtor dies.

Where does this leave a creditor?

If you take what you have just read at face value, then it would seem that the new Regulations further protect debtors and disadvantage creditors. However, the new Regulations may actually play into the hands of creditors.

In many instances, particularly where a debt is large in value, the default position for a debtor can be either declaring bankruptcy or proposing an IVA. The new formalities involved under the Regulations will undeniably encourage debtors to seek the advice of professional advisors which may result in taking an alternative repayment pathway.