A new scheme entitling individuals in England and Wales to legal protection from creditors via a breathing space moratorium came into effect this month. Melissa George and Mark Cullingford, partners in Thrings’ Business Restructuring and Insolvency team, assess its impact.
From 4 May 2021, an individual with ‘problem debt’ is now able to seek 60 days ‘Breathing Space Moratorium’ that will pause enforcement action for qualifying debts, freeze interest and charges on arrears, and require creditors to stop contacting a ‘protected person’ about those debts. It is not a payment holiday for ongoing debts but provides an opportunity to seek a ‘debt solution’.
These provisions are set out in The Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020.
If a person is receiving mental health crisis treatment, they or other persons on their behalf may seek a Mental Health Crisis Moratorium which provides stronger protections. Rather than lasting only 60 days, the duration would be for as long as they are receiving mental health treatment plus a further 30 days after the treatment ends.
How the schemes operate – the Standard Breathing Space Moratorium
The scheme launched on 4 May 2021. The individual seeking support must take advice from a regulated debt advisor who can activate the moratorium on their behalf for 60 days through the Insolvency Service.
The debt advisor will consider eligibility, the financial pressures on that person and the ways in which debts may be restructured. If appropriate, they can then register a moratorium. The moratorium does not mean that ongoing liabilities as opposed to arrears enjoy a payment holiday, and the ability to make those necessary payments is assessed by the debt advisor.
Eligibility of persons seeking protection
To be eligible a person must not be protected by any other process (e.g. bankruptcy, debt relief order or a voluntary arrangement). A protected person also cannot utilise a Breathing Space Moratorium more than once within 12 months.
Debts affected
The Breathing Space Moratorium will affect all personal debts (including judgment debts), albeit there are ‘non-eligible debts’. Non-eligible debts include those that are “secured” (for instance mortgages), as well as fines, student loans, damages for personal injury liability, repayment of benefits, debts due under family court orders.
Importantly, if an individual is a sole trader who is not VAT registered, their trade debts may also be included. If they trade in partnership, their partnership debts cannot be included. Joint debts may be included.
Commencement of the Moratorium
The debt advisor starts the process, by entering information onto the Insolvency Service’s electronic Breathing Space Register. The Insolvency Service then sends notifications to the person’s creditors by email or by post.
The moratorium starts the day after the information is entered onto the system by the debt advisor.
Moratorium – restrictions on the creditor actions
The moratorium prevents creditors taking the following steps against the protected person during the moratorium period, in respect of a moratorium debt, unless they obtain the permission of the court:
- requiring payment of interest on arrears accruing on moratorium debt during a moratorium period;
- requiring a protected person to pay fees, penalties or charges in relation to a moratorium debt that accrue during a moratorium period;
- taking or continuing any enforcement action or presenting a bankruptcy petition in respect of a moratorium debt (unless enforcing any attachment of earnings order that is already in place).
A court will temporarily suspend legal proceedings and will not give permission to enforce if it is detrimental to the protected person or undermines the moratorium protections.
It is important to note the scheme also prohibits unsolicited direct contact between a creditor and protected person about any moratorium debt during the moratorium period; unless deemed “necessary”.
Within the first 20 days of a moratorium, a creditor may ask the debt advisor to review whether the moratorium should continue in respect of some or all debts if they consider the moratorium is unfairly prejudicial to them or there has been a material irregularity in the procedure.
All claims to recover a debt are subject to limitation periods -i.e. time limits on enforceability. Those periods will automatically be extended up to eight weeks after the end of the moratorium.
Actions required of a creditor during the Breathing Space Moratorium
Once notified, a creditor should carefully consider what action to take.
The regulations do not change or reduce the protected person’s debts. They prevent enforcement of arrears. If a payment is due during the breathing space as normal, creditors are not required to make complex system changes to recalculate these payment amounts. Instead, creditors can make an adjustment to the overall balance owing on the debtor’s account as soon as they can.
Creditors: How to respond to notice of a Breathing Space Moratorium Creditors should:
- identify all debt owed to you by the protected person;
- tell the debt advisor what those debts are (the advisor will confirm whether any additional debts are also affected by the moratorium);
- apply protections to the moratorium debts:
- STOP the protected person having to pay interest, fees, penalties or charges on the moratorium debt during the breathing space;
- STOP any enforcement or recovery action to recover that debt, by you or any agent you have appointed;
- STOP contacting the protected person to request repayment of that debt.
- inform the court of the moratorium if there are pending claims;
- review the right to recover interest, fees and charges on arrears and prepare specific communications;
- tell any collection agents/solicitors about the notice and instruct them who should also then tell any agents/bailiffs etc they have appointed;
- carefully monitor whether ongoing debts are paid and report any non-payment to the debt advisor;
- review any enforcement against any joint debtor or guarantor.
Communications with the protected person
Creditors should suspend contact about collection or enforcement of the moratorium debt with the protected person and tailor other communications to the specific circumstances. Creditors can communicate about other matters, and these may be necessary to comply with the Consumer Credit Act 1974 or by the FCA Handbook.
If possible, communications about the ongoing liabilities or excluded debt sent to protected persons should not show interest, fees or charges that accrue on moratorium debt during the moratorium. If these are shown, creditors must not require the protected person to pay them.
Creditors can provide information about how they will deal with the breathing space but must not otherwise require payment of the moratorium debt or interest penalties or charges on it. Creditors can communicate with the debt advisor though, (for example, if ongoing liabilities are not met by the protected person) or to request a review by the debt advisor or the appropriateness of the protection/ inclusion of their debt.
If a creditor fails to comply
If a creditor fails to comply with the protection requirements, any action taken is null and void and a creditor may be liable for the protected person’s costs.
Any complaint about this may lead to intervention by the debt advisor and could lead to a referral to an ombudsman, oversight body or regulatory body or the Insolvency Service. Repeated breaches of the regulations can be considered by your regulator, where appropriate.
Guarantors
If a protected person obtained a breathing space moratorium, the restriction on enforcement does not apply to their guarantor.
Moratorium - restrictions on the protected person
The protected person must provide full information to the debt advisor of their debts and any changes to their financial circumstances and must pay all ongoing liabilities. A protected person may not incur additional credit exceeding £500 during the moratorium period.
End of the moratorium
It will last for up to 60 days unless terminated by the debtor’s debt advisor.
Once the moratorium ends the creditor may restart enforcement action and claim interest on arrears, fees and charges again, unless the protected person has entered into a debt solution with the creditors.
Public register
The new register is not an open searchable register. A creditor notified of a particular breathing space will have some access to the data on the system for that moratorium as a creditor.
Mental Health Breathing Space Moratorium
This a similar process but requires an Approved Mental Health Professional (AMHP) to certify that a person is receiving mental health crisis treatment. A debt adviser must still start the process. The following people can also apply to a debt adviser on behalf of a protected person for a mental health crisis breathing space:
- the protected person’s carer;
- approved mental health professionals;
- care co-ordinators appointed for the protected person;
- mental health nurses;
- social workers;
- independent mental health advocates or mental capacity advocates appointed for the protected person;
- a protected person’s representative.
These moratoriums will be notified in the same way and creditors should respond in the same way.
To qualify, a protected person must have:
- been removed to a place of safety or detained in hospital for assessment or treatment under the Mental Health Act 1983, or
- be receiving other crisis, emergency or acute care, or
- treatment in hospital or the community from a specialist mental health service in relation to a mental disorder of a serious nature.
The majority of the qualifying criteria for a standard moratorium must also be met.
If a debtor is receiving treatment they may be obtain the protection of a moratorium even if they have had a standard or mental health breathing space moratorium in the previous 12 months. It has some stronger protections.
These Mental Health Breathing Space Moratoriums cannot be cancelled simply because of non-payment of ongoing debts and last as long as the person's mental health crisis treatment, plus 30 days (no matter how long the crisis treatment lasts).
Comment
These protections are aimed at encouraging engagement through an approved debt advisor and protect persons receiving mental health treatment for serious mental health issues. The aim is to promote a fair process for the protected person and all creditors, by encouraging the protected person to seek appropriate support, and to enable constructive dialogue with creditors..
If you are a creditor or individual seeking specific advice on dealing with issues that arise under a Breathing Space Moratorium, please contact Melissa George or Mark Cullingford in Thrings’ Business Restructuring and Insolvency team.
