The Debt Respite Scheme
Please note that this Briefing Note is not maintained, and reflects the law as at the date of publication or update
From 4 May 2021, The Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulation 2020 (‘the Regulations’) will take effect.
The Regulations are designed to give debtors a period of protection from creditors. They can be used to create a “breathing space”, so that people with problem debts can seek appropriate advice and implement a manageable payment plan for their debts. This Briefing Note highlights the options and the impact for those concerned.
What is a Qualifying Debt?
A qualifying debt under the Regulations is widely defined. It generally extends to all personal debts and liabilities. Examples of debts which do not qualify include secured debts, child maintenance and debts incurred as a result of fraud or fraudulent breach of trust.
Under the Regulations two separate moratoriums, providing protection for individuals in different circumstances, are created:
- Breathing Space Moratorium: Available to any individual with a problem debt. If granted, it provides the debtor with 60 days of legal protection against creditors.
- Mental Health Crisis Moratorium: Only available to individuals receiving mental health crisis treatment. If granted, it provides individuals with legal protection throughout the time they are receiving crisis care treatment plus an additional 30 days once the treatment has ended.
Breathing Space Moratorium
To qualify for a Breathing Space Moratorium (’BSM’), a debtor must:
- Be an individual who is domiciled or resident in England or Wales;
- Have a qualifying debt;
- Not be in a voluntary arrangement, debt relief or an undischarged bankrupt; and
- Not have had a BSM in the previous 12 months.
Where an individual wants to obtain a BSM in relation to one or several of their debts, they must first seek and obtain advice from an approved debt advice provider. It is only once advice has been obtained that an individual can apply for the BSM.
Upon receiving the application for a BSM, the debt advice provider will look at the debtor’s individual circumstances and, provided they meet the eligibility criteria, will consider:
- Whether the debtor is unable, or is unlikely to be able, to repay some or all of their debts as they fall due; and
- Whether a BSM would be appropriate
Provided the debt advice provider is content that the necessary criteria are satisfied, it will provide the debtor’s information to the Secretary of State who will, by the end of the following business day:
- Make an entry on the register; and
- Notify creditors that the moratorium has started.
Once registered, the Breathing Space Moratorium period begins on the following day, continuing for a period of 60 days unless the debtor dies or the Moratorium is cancelled.
Between days 25 and 35 of the Breathing Space Moratorium period, the debt advice provider must carry out a midway review to ensure that the debtor is continuing to comply with their obligations and continues to meet the relevant criteria. If the debt advice provider does not believe these have continued, then the moratorium must be cancelled.
Mental Health Crisis Moratorium
Where a Mental Health Crisis Moratorium (‘MHCM’) is sought, there is no need to first obtain advice in relation to the debt from an approved debt advice provider. Rather, it is critical that the individual debtor is receiving crisis care treatment and can provide evidence, supplied by an approved mental health professional, supporting their circumstances.
Unlike the Breathing Space Moratorium, there are several individuals who can apply for the Mental Health Crisis Moratorium on behalf of the debtor. The individual making the application will then have to give it, and the supporting evidence, to a debt advice provider to continue the process.
Once the debt advice provider has obtained the necessary information, provided the individual is eligible for the moratorium they must consider:
- Whether the debtor is unable, or is unlikely to be able, to repay some or all of its debts as they fall due; and
- Whether a MHCM would be appropriate.
Provided the criteria are met, the debtor’s details are then entered onto the Secretary of State’s register and creditors are notified in the same way as they are under a BSM.
Once granted, the MHCM continues until the debtor has stopped receiving crisis care treatment, plus an additional 30 days, unless:
- A request is made to the debtor’s nominated point of contact by the debt advice provider and there is no response, 30 days after a request is made; or
- The debtor dies.
Effect of the Moratoriums
Once a moratorium has been granted, whether under a BSM or MHCM, details of the debtor and their relevant debts will be added to a register maintained by the Secretary of State (in practice the Insolvency Service). Once registered, all creditors are notified and, upon receipt of this notification, must from that point until the moratorium ends:
- Stop/stay any enforcement action;
- Stop contacting the debtor, either personally or through an agent, in relation to the debt; and
- Stop charging the debtor interest, fees, penalties or charges.
In addition, where there are existing legal proceedings in relation to the debt, the creditor must notify the court or tribunal of the moratorium so that the court can ensure that enforcement action concerning the debt does not occur until the moratorium period ends.
However, when a debtor is granted a moratorium in relation to one or several of their debts, it does not mean that they do not have to continue to pay ongoing liabilities. Rather, the effect of the moratorium means that the debtor does not pay the arrears accrued in relation to the debt before the moratorium began. Failure to pay ongoing liabilities may result in the debt advice provider cancelling the debtor’s moratorium.
Options for a creditor receiving notification from the Secretary of State
The Regulations, in articles 18 and 19, provide a mechanism for creditors to request a review of a moratorium in particular to ensure that it is correct and, if it is not, that it is cancelled.
There are two grounds on which a creditor can request a review:
- The Moratorium unfairly prejudices the interests of the creditor; and
- There are material irregularities in the application.
All review requests will initially be dealt with by the debt advice provider who granted the moratorium but can be escalated to the County Court.
Creditors will need to consider the Regulations carefully in order to prepare for their implementation in May 2021. Processes and procedures will also need to be established to ensure that notifications are received, shared with agents where needed, and acted upon promptly so that activity is paused as required under the Regulations and required searches are undertaken.
There is a relatively short time frame for these steps to be taken and businesses likely to be impacted need to be considering the requirements sooner rather than later.
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