Pursuing debtors for monies owed? Are you aware of the new Debt Respite Scheme (Breathing Space)?
The Scheme came into effect on 4 May 2021 as part of The Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 and was designed to give those in problem debt rights to legal protection from creditors.
In this advice note we will cover:
- The types of Breathing Spaces available to debtors.
- The effect of these Breathing Spaces.
- What happens at the end of the Breathing Space?
- Qualifying debts.
- Excluded debts.
- Creditor responsibilities.
- What does this mean for you?
- How we can help.
The Types of Breathing Spaces
The Scheme provides for two types of Breathing Space:
- A Standard Breathing Space.
- A Mental Health Crisis Breathing Space.
A breathing Space can only be started by either a debt advice provider, authorised by the Financial Conduct Authority to offer debt counselling or a local authority providing debt advice to residents.
Standard Breathing Space
This is available to those in problem debt and provides legal protection from creditors for up to 60 days.
The effect of the Standard Breathing Space
Protections under the Standard Breathing Space include:
- Limiting contact from creditors.
- Pausing enforcement action.
- Freezing interest and charges on debts.
Mental Health Crisis Breathing Space
This is only available to a debtor who is receiving mental health crisis treatment.
The effect of the Mental Health Crisis Breathing Space
The protections under this Breathing Space reflect those under the Standard Breathing Space detailed above but are stronger as they remain in place for the duration of the debtor’s mental health crisis treatment, plus 30 days (no matter how long the crisis treatment lasts).
What happens at the end of a Breathing Space?
Upon conclusion of a Breathing Space, creditors can:
- Start applying interest, fees, penalties and charges to the debt from the date the Breathing Space came to an end. Interest, fees, penalties and charges cannot be backdated unless permitted by the court.
- Commence enforcement action.
- Initiate or resume court proceedings.
Qualifying debts
Debts included in a breathing Space must be qualifying debts and a “qualifying debt” will include:
- Credit cards.
- Store cards.
- Personal loans.
- Pay day loans.
- Utility bill arrears.
- Mortgage or rent arrears.
Where multiple individuals are jointly liable for payment of a “qualifying debt”, creditors may be able to pursue the other individual(s), subject to whether they also benefit from a Breathing Space.
Likewise, if a debtor has the benefit of a Breathing Space but a guarantor is present, the guarantor is unlikely to benefit from any protections favouring the debtor, meaning creditors may be able to pursue the guarantor.
“Qualifying debts” include those incurred prior to 4 May 2021 but new debts incurred during the Breathing Space are not deemed to be qualifying– this includes new arrears and secured debts.
Excluded debts
Excluded debts include:
- Secured debts, including mortgages, hire purchase and/or conditional sale agreements – arrears existing as of the date of a Breathing Space application can be included in the request for protection but arrears arising thereafter are deemed excluded and where ongoing liabilities exist and debtors fail to maintain payments, any existing Breathing Space may cease to have effect if a debt advisor is instructed and opts to stop the protection.
- Debts incurred from fraud or fraudulent breach of trust.
- Liabilities to pay fines imposed by a court for an offence, including any applicable interest and/or penalties relating to the fine – this does not however include parking tickets.
- 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 a debtor needs to pay for death or personal injury caused to someone else.
- Advance payments of Universal Credit.
- Council tax liabilities which have not fallen due – if all instalments for the year in question have fallen due, these may be deemed qualifying debts.
Creditor responsibilities
If you are pursuing a debtor for monies owed and are notified by either the debt adviser or Insolvency Service that your debt is included under one of the above Breathing Spaces, you must apply the applicable protections forthwith.
It may not be the case that you are notified of your debt being included in a Breathing Space in the first instance, your debt may be added later and if so, you must apply protections from the date you are notified or the date the regulations deem you to have been notified, whichever is earlier.
You must carry out searches to identify any additional debts owed by the debtor and consider applying the same protections to any such debt and notify the debt adviser. The debt adviser will decide whether the additional debt constitutes a “qualifying debt” or not.
Creditors often sell debts on and if this occurs, and you receive notification of a Breathing Space having been entered, you must notify the assigned creditor and provide the debt adviser with their details. Failure to do so could expose you to liability for any loss the debtor or assigned creditor may have as a result. Likewise, if you are the assigned creditor, you must, upon notification by the original creditor, apply the protections above.
Whilst the scheme prevents contact between creditors and debtors during a Breathing Space, it does not prevent creditors from contacting the debt adviser to discuss possible solutions, nor does it prevent creditors from challenging the Breathing Space if they believe there are grounds for cancellation or applying to court if the debt adviser rejects the challenge to cancel the Breathing Space.
What does this mean for you?
The new Debt Respite Scheme (Breathing Space) appears to be geared toward protecting individual, private debtors from potentially aggressive recovery action by creditors – this reflects the thinking behind the October 2017 Debt Recovery Pre-Action Protocol, which was designed to reduce the burden on the court service and encourage negotiated settlements between creditors and debtors, specifically in the case of business creditors pursuing individual debtors.
The impact on court proceedings could be substantial – notification of Breathing Spaces will likely result in proceedings being stayed and the hearing being adjourned for the duration of the Breathing Space, whilst also causing a potential surge in applications to cancel Breathing Spaces by creditors.
It is notable that whilst Breathing Spaces are designed to protect debtors from recovery action by creditors, they do not constitute payment holidays – meaning debtors are still required to settle liabilities even if they benefit from protections provided under the scheme.
For business-to-business debt however, it seems unlikely the new scheme will have a significant impact, as whilst some business debts may amount to “qualifying debts”, it is unlikely to be the case that, where the debt relates solely to the business, the debt would be deemed to qualify. This is especially the case where the debtor is VAT registered.
How we can help
Bradley Haynes Law is home to a dedicated and specialised Debt Recovery Team, which can offer a range of recovery options to suit your needs.
The Team can advise on all debt related matters, including those affected by the 2017 Debt Recovery Pre-Action Protocol and the 2021 Debt Relief Scheme.
The Team regularly acts on matters ranging from pre-proceedings collections, focussing on working with debtors to achieve negotiated settlements through to formal debt recovery proceedings including all pre-action communication, court proceedings and enforcement of judgments.
If you need support with recovering monies from debtors, want to discuss recovery options and strategy or have any questions or concerns about recovery matters – including the new Debt Relief Scheme, get in touch by email – neil@bradleyhayneslaw.co.uk or phone – 01905 900 919