Many of our client creditors have faced difficulties during the pandemic in recovering debts legitimately owed to them, even when pursuing enforcement steps with the Court. However, on 4 May 2021, the Debt Respite Scheme (Breathing Space) came into force which provides debtors with increased legal protection from creditors.

Two schemes have been introduced; the standard breathing space and mental health crisis breathing space.

Effectively both schemes, from the date the debt is placed in a scheme, prevent creditors from taking enforcement action for a certain period, during which time they are obliged to freeze interest and charges on the debts. A debtor must provide all of their personal details and all creditor/debts details outstanding when the application is made. Creditors will be sent a notice by a debt advice provider either electronically or by post if a particular debt is part of the breathing scheme.

Standard Breathing Space Scheme

Debtors need to seek debt advice from a debt adviser who will consider their application and confirm if a breathing space scheme is appropriate.

The scheme is only available to individuals who owe a qualifying debt, resides in England or Wales and must not be subject to a Debt Relief Order, an Individual Voluntary Arrangement, interim order, be an undischarged bankrupt and not benefitted from a breathing space in the last 12 months.

The debt adviser will confirm that the debtor cannot, or is unlikely to be able to repay all or some of the debt and that a breathing space scheme is appropriate.

The scheme will end on the earliest of the following events:

  • 60 days from the date it started
  • the day after a debt adviser or a court cancels it
  • the day after the debtor dies
Mental Health Crisis Breathing Space Scheme

If a person dealing with a mental health crisis is unable to speak to a debt adviser first, then an Approved Mental Health Professional (AMHP) can certify that a person is receiving treatment and such certification can be used as evidence by the debt adviser to confirm the mental health crisis debt breathing space. A carer, care co-ordinator, mental health nurse, social worker, mental health advocate or other representative can make the application on behalf of the debtor as well.

The same criteria apply as for standard breathing space scheme and must be receiving mental health crisis treatment when the application is made, save for there are no limits as to how many times a debtor can apply for a mental health crisis breathing space scheme.

The mental health crisis breathing space continues for the duration of the debtor’s treatment plus 30 days. It will be cancelled if the debt adviser is provided with evidence that information received regarding the treatment was misleading, inaccurate or fraudulent and cancellation would not be unfair or unreasonable or if the debtor requests cancellation.

Relevant Debts

Qualifying debts are all encompassing and most, if not all debts will be considered to be qualifying debts as under the guidance provided, they will include the following if they arose before 4 May 2021:

  • credit cards
  • store cards
  • personal loans
  • pay day loans
  • overdrafts
  • utility bill arrears
  • mortgage or rent arrears
  • tax and benefit debts
  • guarantor loans (but not to the extent that they will automatically extend to the guarantor, who will need to make their own application)

For the avoidance of any doubt, any debts that accrue during the breathing space scheme will not be counted as qualifying debts.

Excluded debts include:

  • 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
  • council tax liabilities have not yet fallen due
  • debts that relate to the debtor’s business and the debtor is VAT registered, or the debtor is a partner in a business with someone else

A debtor remains liable for the debt and so they can still make payments towards the debt if they can and a creditor can still accept those payments. Ongoing liabilities such as mortgage and rent payments, insurance and utilities should still be paid and if not, the debt adviser can cancel the breathing space scheme so long as to cancel the same would not be unfair or unreasonable.

Creditor’s Responsibilities

Once you are in receipt of a breathing space scheme notification, you should search for any additional debts owed to you by the debtor and ensure that certain interest, fees, penalties or charges stop during the breathing space. You must also cease any enforcement or recovery action (such as commencing proceedings or issuing a bankruptcy petition) and cease from contacting the debtor regarding repayment, unless you have permission from the Court to do so but you can contact them to explain how you will have dealt with the debt under the breathing space scheme. If the breathing space scheme comes into being during Court proceedings, the creditor must inform the Court in writing. Bankruptcy proceedings must stop until the breathing space has ended or is cancelled, although other Court proceedings can continue until an order is made or judgment given.

If, as a creditor, you have assigned the debt, you must inform the assignee straightaway or you could be liable for any losses they incur as a result. If you do identify any additional debts, you should inform the debt adviser as soon as reasonably practicable as they will decide whether it is a qualifying debt that forms part of the breathing space scheme.

Reviews

A debt adviser must carry out a midway review between day 25 and day 35 of the standard breathing space scheme in order to review whether the debtor is complying with their obligations and whether the scheme should continue or not. A scheme can be cancelled if an alternative debt solution has been put in place. A Mental Health Crisis Scheme will not be reviewed but the debt adviser will check in with the debtor.

A creditor can ask a debt adviser to review the breathing space scheme if you will be unfairly prejudiced or there has been discriminatory treatment. Further, if you consider that the debtor does not meet the eligibility criteria, or the debt is not a qualifying debt or the debtor has sufficient funds to repay the debt. A request to review should be made within 20 days of the scheme starting by way of a written statement supported by evidence.

If the debt adviser agrees, they will cancel the scheme unless it is deemed unfair or unreasonable due to the debtor’s personal circumstances. If the creditor disagrees with the debt adviser’s decision, they can apply to the Court within 50 days of the scheme starting and after the debt adviser’s review. If the Court agrees that the scheme should be cancelled, the creditor cannot backdate interest, penalties, fees or charges unless the Court grants you permission.

Non-Compliance

A creditor risks a complaint from the debtor and potential disciplinary action/investigation via an ombudsman or regulatory body for non-compliance.

Conclusion

The above scheme will inevitably cause concern for creditors who may consider that, as a result of the pandemic, Government guidance and introductory schemes have placed them in a prejudicial position, particularly where they are prevented from charging interest, penalties, fees etc.

In particular, interest in any event should always be compensatory rather than punitive in nature and accounts for the delay of time in the creditor receiving payment from the date upon which the debtor became contractually liable to them.

It is also questionable what benefit a delay of 60 days actually serves debtors given the unlikely situation that such period will result in substantial change in financial circumstances and that potential it serves only to delay the inevitable.

In circumstances where a debtor retains the right to apply to the Court for a redetermination or instalment order, or where the creditor has exhausted all efforts in pre-action conduct to negotiate with a debtor, for many, if not all creditors will view the introduction of this scheme as a further tilt of the justice scales away from their favour which places them at risk of falling into debt. In a jurisdiction where impecuniosity is not a defence, it would appear that it nevertheless can be used to buy more time.

Should you have any questions regarding the above, the Dispute Resolution Team would be happy to assist and continues to provide debt recovery and breach of contract services, amongst others, throughout the pandemic. They can be contacted on 01206 574431 or by e-mail at info@tsplegal.com