New Debt Respite Scheme to give individuals a breathing space from debt

The Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 (“the Scheme”) will come into force on 4 May 2021 and introduces a breathing space for people struggling with debt.

The Scheme provides the individual with a 60-day window that will stop any enforcement or legal action. It will also stop interest being calculated on the outstanding debt.

Who can apply?

The Scheme applies to individuals who are based in England and Wales only.

There is also a mental health breathing space scheme – available if a mental health professional provides evidence of mental health treatment, and the individual is in debt. This breathing space stays in place for as long as the treatment is ongoing, plus 30 days.

The individual must 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. They are also not eligible if they already have a breathing space or have had a standard breathing space in the last 12 months at the time they apply (as a new scheme this is not applicable now but should be considered for future applications).

Most debts for any amount are included such as credit cards, judgments, rental arrears, utility bill arrears, overdrafts, and loans. However, some debts are excluded, such as, secured debts and loans, debts that relate to fraud or breach of trust, new debts (the Scheme only relates to outstanding debts), liabilities for fines that are imposed by Court such as a parking ticket or driving offences, child maintenance or student loans.

Ongoing liabilities such as rent, mortgage, utilities, loan payments and taxes, should continue to be paid as normal, as these future debts do not qualify.

The individual is unlikely to qualify if they can clear their debts with budgeting support or by selling their assets.

Where rent arrears are caught by the Scheme, possession may not be taken on grounds of those rent arrears, nor may a notice of an intent to take possession on those grounds be served. However, the moratorium does not prevent enforcement by possession on grounds other than rent arrears such as anti-social behaviour.

How does it work?

The individual must access Financial Conduct Authority (FCA) regulated debt advice, or advice from an organisation exempt from FCA regulation (such as a local authority).

A breathing space scheme can only be started by:

• a debt advice provider who is authorised by the FCA to offer debt counselling
• a local authority (where they provide debt advice to residents)

Debt advice providers are responsible for the administration of a breathing space. They are the point of contact for the individual, their creditors (and appointed agents), and the Insolvency Service (who own and maintain the electronic service). The debt advisor will input any debts on an electronic register and creditors will either receive an email or a letter informing them that the individual has been granted a moratorium.

The moratorium lasts for 60 days after it starts and, 30 days after the individual’s mental health treatment has finished. 

Breathing space is designed to give individuals time to sort out their finances and give them protection from their creditors whilst they do so - the time should be spent seeking solutions to their financial difficulties.

Any steps taken by creditors in breach of a moratorium are invalidated and are likely to lead to cost penalties.

Conclusion

This is a new scheme and therefore no one knows how effective it might be, but clearly, this may have a cashflow impact on businesses if their customers seek protection under the Scheme.

The last 12 months have been financially challenging for many so the Scheme may be widely used. Government forecasts suggest the Scheme will help over 700,000 people in its first year, increasing up to 1.2 million a year by the tenth year of operation.

Further information on the scheme for individuals and their creditors can be found at the following:

• Government: https://www.gov.uk/government/publications/debt-respite-scheme-breathing-space-guidance/debt-respite-scheme-breathing-space-guidance-for-creditors
• Step Change: https://www.stepchange.org/how-we-help/breathing-space-scheme.aspx

If you are an individual seeking advice on the Scheme, free impartial debt advice is available to you.

Here are some debt advice organisations that specialise in assisting individuals who are in financial difficulty:

• Citizens Advice www.citizensadvice.org.uk
• National Debtline www.nationaldebtline.org
• StepChange www.stepchange.org

Learn more about our range of services

Further information on our range of services can be found below:

• Restructuring Services
• Insolvency Services