New Debt Respite Scheme explained

27 April 2021
RECOVERIES

 

On 4th May 2021, the new Debt Respite Scheme (Breathing Space and Mental Health Crisis Moratoriums) comes into effect in England & Wales.

The Regulations are designed to give debtors legal protection from their creditors and create a period of “breathing space” so that they can seek appropriate debt advice or implement a manageable repayment plan for their debts with all creditors.

There will be two types of breathing space - Standard Breathing Space or the Mental Health Crisis Breathing Space. The standard breathing space allows debtors a 60-day period of protection. The Mental Health Crisis Breathing Space allows protection for the duration the debtor is receiving treatment for the mental health condition plus 30 days thereafter.

If eligible, an individual may then have access to the breathing space moratorium accessed via a debt advice agency. There is no limit on the number of times that an individual receiving mental health crisis treatment may enter a moratorium via this mechanism.

A debtor will need to apply for the breathing space through either a debt management company or their local authority. If the debtor is granted breathing space, then the Insolvency Service will add the debtor to a register and notify all relevant creditors.

Notification

The Insolvency Service will operate an electronic system to administer the scheme, including a register of persons in moratoria. Once the debtor has been granted the breathing space, notification will be sent to the creditor or their representatives by email, post or personal service.

Each creditor should register with the Insolvency Service and confirm their preferred method of notification, including all relevant communication addresses and contact details.

What debts will fall under the regulations?

Debts that are included in the breathing space are defined as monies owed to creditors by individuals and sole traders (who are not VAT registered) and liabilities which create obligations for the debtor to pay monies to a creditor.

Most debts will be counted as a qualifying debt, but these could include but are not limited to:

  • Store cards;
  • Overdrafts;
  • Utility bill arrears;
  • Credit card debts;
  • Personal loan agreements;
  • Payday loans;
  • Mortgage or rent arrears.

The debts need to have been incurred before the debtor applied for the breathing space under the regulations. Debts incurred after will not be included and are recoverable as the creditor deems appropriate.

Government debts like tax and benefit debts are all likely to qualify, unless they are included in the list of excluded debts.

Joint debts can be included in a breathing space, even if only one person applies for a breathing space. The joint debt would become a breathing space debt, and you must apply the same protections to the other people who owe that debt to you. The breathing space does not affect the other people’s debts and liabilities in their own names.

While guarantor loans can be included in a breathing space, the protections do not extend to the guarantor. The guarantor can apply for their own breathing space, if they’re eligible.

New debts incurred during a breathing space are not qualifying debts. Neither are new arrears on a secured debt that arises during a breathing space.

Excluded debts

All personal debts and liabilities are qualifying debts, except for:

  • secured debts (like mortgages, hire purchase or conditional sale agreements). You can only include arrears on these debts that exist at the date of an application for a breathing space. Any new secured debt arrears that happen after the breathing space starts are not protected. If a secured debt is also an ongoing liability and a debtor misses payments, it could mean the debt adviser stops their breathing space
  • debts incurred from fraud or fraudulent breach of trust. You should think of this in the same way you would if a person is bankrupt. Discharge from bankruptcy does not release a person from bankruptcy debts which they incurred by fraud. If you request a review of a breathing space because of fraud or suspected fraud, you might have to provide evidence to the debt adviser or to a court
  • liabilities to pay fines imposed by a court for an offence. This includes any interest on the fine and any penalties connected to it. This does not include penalty charge notices, like a parking ticket
  • 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
  • council tax liabilities have not yet fallen due. If all instalments for that financial year have fallen due and have not been paid, these are considered to be a qualifying debt. If a debtor has been served with a ‘reminder notice’ to pay a council tax bill, the remaining liability for the financial year is a qualifying debt

While some business debts also qualify for the 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 a business with someone else.

An eligible non-domestic rates debt (or business rates) is a qualifying debt if all instalments for that financial year have fallen due and have not been paid. If a debtor has been served with a ‘further notice’, the remaining liability for that financial year is a qualifying debt.

Challenging a moratorium

A creditor has 20 days to challenge a moratorium. You will need evidence to support your challenge on this ground. The debt advice provider will decide whether to cancel the moratorium. If the decision is against cancellation, a creditor may apply to the county court to cancel. Where a court has cancelled a moratorium in relation to a moratorium debt, the court can require the individual to pay any interest, fees or charges that accrued during the moratorium period in respect of the debt.

What does this mean for creditors?

If the debtor is granted breathing space, then a legal moratorium will be created whereby the creditor will not be able to take action against the debtor for the debt (provided that specific debt is included). Upon receiving notification, the creditor should check their records to identify any debts which are included in the breathing space. Once the relevant debts have been identified, the creditor must:

  • Freeze any interest penalties or charges on the debt;
  • Stop contacting the debtor requesting payment of the debt, unless the creditor has leave from the court to do so.
  • Cease any enforcement action in respect of the debt, which includes starting any legal proceedings against the debtor or the enforcement of a judgment order;
  • If court proceedings have already been issued, then the court will not allow creditors to enter default judgment, unless this is following a hearing;
  • Where a court hearing is listed, the court will adjourn the matter for 60 days, or in the case of mental health, adjourned generally, with liberty to restore once the treatment is finished:
  • Where a bankruptcy petition has been issued the court will stay the proceedings until the breathing space ends or is cancelled.

For further information contact, Mark Taylor, Partner, on 07887787982, email mark.taylor@wilkinchapman.co.uk or Paul Bowden, Partner, on 07780336983, email paul.bowden@wilkinchapman.co.uk

Guidance for creditors can be found here:,

https://www.gov.uk/government/publications/debt-respite-scheme-breathing-space-guidance/debt-respite-scheme-breathing-space-guidance-for-creditors


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