The Debt Respite Scheme, or ‘Breathing Space’ as it is known, was introduced on 4 May 2021. The scheme allows Debtors some ‘Breathing Space’ when it comes to repaying their outstanding debts, with the aim of relieving some of the pressures caused by being in debt by giving them additional time and space to sort out their affairs. The guidance begs the question, where does this leave Creditors?
What is Breathing Space?
Breathing Space is a Government scheme that provides legal protection from Creditors to individuals who find themselves in debt. Once the Breathing Space is approved, for the duration of the relevant period, most enforcement action and contact from Creditors is paused. The majority of interest and costs chargeable on relevant debts will also be frozen for the duration of the Breathing Space. This gives Debtors the opportunity to seek expert advice in the interim as to how they may be able to deal with the debt without the added stress of debt recovery action being taken against them at the same time.
The Government has introduced two similar, but distinct, types of ‘Breathing Space’ for Debtors. These are as follows:
- ‘Standard’ Breathing Space; and
- ‘Mental Health Crisis’ Breathing Space.
Standard Breathing Space
The standard Breathing Space moratorium provides Debtors with legal protections from Creditor action for up to 60 days. This protection is available to anyone with a debt, provided they fit the following eligibility criteria:
- The Debtor must be an individual;
- They must owe a qualifying debt to a Creditor;
- They must live or reside in England or Wales;
- They must not already have a Breathing Space moratorium in place, or have had one in the last 12 months;
- They must not have some other form of repayment plan in place, such as an Individual Voluntary Arrangement (IVA) or a Debt Relief Order (DRO);
- They must not be an undischarged bankrupt.
Debtors are able to access the standard Breathing Space by seeking formal debt advice from a debt advisor, who must be satisfied that the above criteria is met, that the Debtor cannot, or is unlikely to, repay all or some of their debt, and that the Breathing Space would be appropriate in their circumstances.
Mental Health Crisis Breathing Space
The Mental Health Crisis Breathing Space provides stronger protection to Debtors, and as such, it is not available to such a wide pool of Debtors. While the above “Standard Breathing Space” criteria must still be met to be eligible, in addition, the “Mental Health Breathing Space” is only available to Debtors who are receiving mental health crisis treatments. For those eligible, there is no need to seek debt advice, provided that an Approved Mental Health Professional certifies that the Debtor is indeed receiving mental health crisis treatment.
There is no time limit on the legal protections in place for the Mental Health Breathing Space. It remains in place for as long as the Debtor’s mental health crisis treatment is in place, plus an additional 30 days, no matter how long the treatment lasts.
What is a Qualifying Debt?
To be eligible for both types of Breathing Space, the debt owed must be a ‘qualifying debt’. It is likely that all personal debts are considered to be qualifying debts, including the following:
- Credit cards;
- Store cards;
- Personal loans;
- Pay day loans;
- Utility bill arrears;
- Mortgage or rent arrears.
Qualifying debts can also include any debts that arose before the Breathing Space protections came into force. There are some non-eligible debts, including secured debts which do not amount to arrears, debts which were incurred by means of fraud, and student loans, to name a few.
What Does ‘Breathing Space’ Mean for Creditors?
Whilst we appreciate that this legislation may not be welcome news for Creditors, given that it means that repayment of your debts could potentially be put on pause for some time (and hence affect your cash flow), it is important to bear in mind that the debt is not “written off” and that once the Breathing Space period has ended, you can continue to seek repayment.
What Must a Creditor Do if a Debtor has ‘Breathing Space’?
The Insolvency Service provide an electronic service that sends Creditors a notification to tell them about the Breathing Space being put in place at that time and also the relevant date that the Breathing Space protections began, so that Creditors can keep their own up to date records in respect of each debt they are owed. If Creditors have not opted into the electronic system with the Insolvency Service, notifications by email and post are also available upon request. Once the notification has been received, Creditors must make a ‘reasonable search’ of their records to identify debts owed to them by the Debtor and then immediately ensure that they do the following:-
- Put a pause on the Debtor having to pay certain interest, fees, penalties or charges that accrue on a debt during the relevant Breathing Space period;
- Halt any enforcement or recovery action to recover the debt;
- Stop all contact with the Debtor requesting payment of the debt, unless the Court gives express permission otherwise.
What If a Creditor does not Comply with the Regulations?
If a Creditor does not comply with the protections after being notified, any action taken will be null and void, and might result in the Creditor having to pay the Debtor’s costs. Repeated breaches of the regulations can also be considered by a Creditor’s regulator, where appropriate.
Can a Creditor Appeal a Breathing Space Decision?
Creditors should be aware that within the first 20 days of the scheme, they can request a review of their Debtor’s Breathing Space for certain reasons. Examples of valid reasons include if the Creditor feels that the Breathing Space unfairly prejudices their interest, or feels that the Debtor does not meet the eligibility criteria, or believes the Debtor does in fact have enough funds to pay back their debts. To request a review, the Creditor must provide the debt adviser with a statement with the reasons for the request and any supporting evidence.
Where an additional debt is added to the Breathing Space, the clock effectively ‘restarts’ for Creditors in relation to requesting a review. If that request is unsuccessful, that is not the end of the road for Creditors. A Creditor can then apply to the Court to cancel the Breathing Space if they feel the decision of the review is incorrect. This needs to be done within 50 days of the Breathing Space starting or 50 days after an additional debt is added.
What Happens at the End of the Breathing Space Period?
When the Breathing Space period comes to an end, the Creditor will receive a notification that enforcement action can be resumed. At this point, the Creditor can start applying interest, fees, penalties and charges to the debt, although it should be noted that this cannot be backdated. They can also start or resume any legal proceedings relating to the debt. Creditors should bear in mind that the Debtor is not ‘in the clear’ as far as the outstanding debt is concerned and the Debtor will remain liable to pay the debt at the end of the Breathing Space.
If you would like to talk in confidence on this topic, please do not hesitate to contact a member of the Dispute Resolution team who will be happy to assist you.