Giving individuals legal protection from creditors
The Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 is due to come into force on 4 May 2021. It will provide individuals with problem debt (i.e. debtors) the right to legal protection from their creditors.
There are two types of breathing space for debtors:
- Standard breathing space; and
- Mental health crisis breathing space.
Standard Breathing Space
A standard breathing space affords a debtor legal protections from creditor action for up to 60 days. The protections include pausing most enforcement action, contact from creditors and freezing most interest and charges on their debts.
To benefit from a standard breathing space, a debtor must apply to a debt advice provider who is authorised by the Financial Conduct Authority to offer debt counselling or to a local authority (where they provide debt advice to residents).
A debtor must meet certain criteria in order to apply to a debt advice provider for a standard breathing space. The debtor must:
- be an individual;
- owe a qualifying debt to a creditor;
- live or usually reside in England or Wales;
- 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; and
- 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 advice provider must also be satisfied that the debtor meets both of the following conditions:
- the debtor cannot, or is unlikely to be able to, repay all or some of their debt; and
- a breathing space is appropriate for the debtor.
Mental Health Crisis Breathing Space
A mental health crisis breathing space is only available to an individual who is receiving mental health crisis treatment. It has some stronger protections than a standard breathing space. It lasts as long as the person’s mental health crisis treatment period plus 30 days (irrespective of the duration of the crisis treatment).
A debtor must meet the same conditions as for a standard breathing space save that a debtor must also be receiving mental health crisis treatment at the time of the application which must be certified by an approved mental health professional.
As with a standard breathing space, a debtor can make an application to the debt advice provider for a mental health crisis breathing space. Others can also make the application on behalf of the debtor (for a mental health crisis breathing space) including approved mental health professionals, carers and social workers (not an exhaustive list).
Qualifying Debts
For a debtor to obtain a breathing space the debt must be a qualifying debt. Such debts may include (not an exhaustive list):
- credit cards;
- store cards;
- personal loans;
- pay day loans;
- overdrafts;
- utility bill arrears; or
- rent arrears.
Excluded Debts
Debts unlikely to be considered qualifying debts are (not an exhaustive list):
- secured debts;
- 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 caused to someone else;
- advance payments of Universal Credit; or
- council tax liabilities that have not yet fallen due.
Notification of Breathing Space
Creditors should be notified by the Insolvency Service as to when a breathing space commences and ends.
Review of Breathing Space
Creditors dissatisfied with a decision by a debt advice provider to approve a breathing space application for a debtor can request a review of that decision. Various grounds can be raised for the review but one of those may include the debtor having sufficient funds/assets to satisfy the debt.
Reviews have strict time limits. Given that the moratorium for a standard breathing space is 60 days, creditors may wish to consider whether such a review is pragmatic and economical.
Effect of a Breathing Space on Creditors
Once a breathing space is invoked, a creditor cannot take enforcement action. Enforcement action includes:
- enforcing a judgment;
- enforcing security;
- commencing any legal proceedings including bankruptcy petitions;
- taking steps to disconnect a debtor’s premises from a supply of gas or electricity; or
- making an application for a default judgment for a claim for money.
It remains to be seen how the regulations play out practically. There may be debtors that genuinely need a breathing space. However there may also be debtors that exploit a breathing space. Creditors and debtors ought to be alert.
If you require help with the recovery of a debt and would like our assistance, please contact our Dispute Resolution Team on 01733 882800 or email [email protected].
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