The Debt Respite Scheme: a breath of fresh air for debtors, another hurdle for creditors…

The Standard Breathing Space Moratorium

The standard breathing space moratorium is designed to give someone in debt the right to legal protections from their creditors for up to 60 days.

To be eligible for the scheme, the debtor must:

• Be an individual living in England or Wales;
• Owe a qualifying debt to a creditor;
• Not have a debt relief order, an individual voluntary arrangement, an interim order, or be an undischarged bankrupt at the time they apply; and
• Not have already had a breathing space in the 12 months prior to their application.

In considering whether to grant a breathing space, the debt adviser must be satisfied that:

• The debtor cannot, or is unlikely to be able to, pay some or all of their debt as it falls due; and
• A breathing space moratorium is appropriate.

What are “qualifying debts”?

A qualifying debt is defined widely within the regulations, so as to include most categories of personal debts and liabilities such as mortgage and rent arrears, credit and store cards, personal loans and pay day loans. Certain debts are excluded from the definition of “qualifying debts”, including but not limited to secured debts (such as mortgages, hire purchase or conditional sale agreements) which do not amount to arrears, fines, debts incurred from fraud, student loans and damages for personal injury liability.

A breathing space will include all qualifying debts that are owed at the time the breathing space is entered into, including debts the debtor had before the regulations came into force, but will not include new debts incurred during the breathing space period.

The debtor’s obligations

During the breathing space, the debtor must:

• Notify their debt adviser if there is a material change in their financial position or circumstances;
• Make any payment due in relation to an ongoing liability (such as mortgage payments, rent, insurance, taxes and utility bills);
• Not obtain additional credit (including hire purchase agreements or conditional sale agreements), either alone or jointly with another individual, that exceeds £500; and
• Engage with the debt adviser as appropriate.

The debt advice provider must carry out a review between days 25 and 35 of the 60-day breathing space to check that the debtor is meeting their obligations and decide whether the breathing space should continue or be cancelled.

Effect of the breathing space on creditors

Once a creditor receives a notification that their debt is included in the debtor’s breathing space, they must:

• Stop all interest, fees, penalties or charges accruing on the debt(s) for the duration of the breathing space;
• Stop any enforcement or recovery action that has been taken by the creditor or an agent appointed on their behalf (unless permission is granted by the Court);
• Stop contacting the debtor to request payment of the debt(s); and
• If proceedings have been commenced, notify the Court in writing as soon as the notification is received. The Court will stay any bankruptcy proceedings and enforcement, but other Court proceedings can continue until judgment.

Can a creditor object?

There is a mechanism provided for in the regulations to enable a creditor to request that the breathing space be reviewed, where the creditor considers that the breathing space unfairly prejudices their interests – for example, they think that there has been discriminatory treatment in respect of them, or their debt – or there was a material irregularity in relation to any of the following:

• The debtor does not meet at least one of the eligibility criteria for a breathing space;
• Any of the debts included in the breathing space do not qualify; or
• The debtor has enough funds to repay their debts.

A review must be requested within 20 days of the breathing space starting and the creditor must provide evidence in support of its request.

Comment

These moratoriums are designed to offer support to individual debtors, allowing them time and space to get their affairs in order without the mounting pressure from creditors and threat of enforcement, and is a tool provided by the government to relieve some pressure on debtors who may be struggling particularly as a result of the Covid-19 climate we find ourselves in. That said, a breathing space does not absolve a debtor of liability for its debts.

Creditors should review their procedures to make sure that, if a notification is received, it can be acted upon quickly so that the protections are applied as required. The scheme will understandably be of concern to lenders worried about the length of time it might take them to recover their outstanding debts. For business to business debts however, it seems unlikely that this new scheme will have a substantial impact.

The exercise of a right to a breathing space will likely result in Court proceedings being stayed and/or hearings being adjourned for the duration of the breathing space, and may reduce the burden on the Courts and seek to encourage negotiated settlements. However, it could also cause a potential surge in applications to cancel these breathing spaces by creditors.

If you are an individual debtor or a creditor and would like more information or assistance with the above, please do not hesitate to get in touch.

Disclaimer: We at Memery Crystal (and our parent company RBG Holdings plc) support and encourage free/independent thinking in relation to issues which are sometimes considered to be controversial subject matters. However, the views and opinions of the authors of articles published on our website(s) do not necessarily reflect the opinions, views, practices and policies of either Memery Crystal or RBG Holdings plc.