The impact of Covid-19 has created financial hardship for many, causing a demand for short term borrowing and increased arrears on existing loans. The Debt Respite Scheme (Breathing Space etc) Regulations 2020 (the ‘Debt Respite Scheme’), introduced by the Government 0n 4 May 2021, have therefore come as welcome news for many people in financial difficulties.
However, from a creditor’s perspective it is a further set of regulations which must be complied with in any relevant debt recovery scenario. In this article Trainee Solicitor, Macauley Cubitt explains how the scheme is designed to work and the implications for creditors.
What is the Debt Respite Scheme?
The Debt Respite Scheme aims to provide a period of relief, or a ‘breathing space’, for those suffering from financial difficulties. It enforces a window of 60 days, during which time creditors are prevented from sending letters or commencing enforcement action in respect of retrieving payments against debts. Interest and penalties are also paused during this time although it is important to understand that although all steps to recover a debt are suspended during the breathing space this does not represent any form of waiver. If a debtor cannot pay, the breathing space will thwart a creditor from pursuing action within the 60 day window. Once the period has come to an end recovery proceedings (including the application of interest) can restart unless the debtor has entered a debt solution, which would normally involve an arrangement with all of the eligible creditors.
The Debt Respite Scheme also provides those in financial difficulty with the benefit of tailored debt advice and helps them to explore their options.
How does a debtor apply for a breathing space?
Applications are made by seeking debt advice from a debt adviser who will then submit an application to the Insolvency Service. The advisor will confirm whether or not the Debt Respite Scheme is appropriate for each applicant. Their decision will be based on each individual’s circumstances including the amount and type of the debt, their income and general ability to repay. The debt advisor must be authorised by the Financial Conduct Authority to offer debt counselling. This includes local authorities.
The debt advisor will generally aim to set up long term solutions to help their clients manage their debts and prevent the situation re-occurring in the future.
If a debtor wants to apply for breathing space, they must meet the following criteria:-
- Resident in England or Wales
- Owe a qualifying debt to a creditor (most types of debt are covered under the Regulations)
- Agree to access debt advice and be assessed by a debt advisor
- Not have used the scheme in the past 12 months
There are a number of charities that provide free debt advice and are able to make an application for breathing space on a debtor’s behalf.
Following a consultation if the application is accepted then it will be submitted by the debt advisor to the Insolvency Service and the breathing space is started, often within two working days.
There is typically a ‘mid-way review’ where the advisor will contact the debtor to review their situation.
Can an application be made in joint names?
Applications to the scheme cannot be made in joint names; however where a debt covered by a breathing space is in joint names, both of the debtors are protected.
Are any types of debt excluded from the scheme?
The majority of debts will qualify for breathing space – the most common of which are credit cards, personal loans, overdrafts and even arrears on mortgage, rent or utility bills. The scheme does not extend to court ordered fines, student loans, child maintenance payments or universal credit. If further debts are created during a breathing space, these will not be protected by the scheme.
It is important to note that debts created before the Debt Respite Scheme came in to place on 4th May 2021 will still be eligible for breathing space.
Are there different types of breathing space?
There are two types of breathing space – what is known as ‘standard’ breathing space and a ‘mental health crisis’ breathing space. The latter is a similar but separate scheme.
The mental health crisis breathing space applies were an approved health professional is able to confirm that a debtor is receiving care for a mental health crisis. The protection given in these circumstances lasts throughout the course of the treatment with an additional thirty days thereafter. There is no limit on the length of time of the treatment which will be assessed on a case by case basis. Having said this, the nominated debt advisor can request updates from the debtor’s nominated representative and they will be entitled to cancel the breathing space should they not receive a response.
Unlike the standard scheme, a mental health crisis breathing space can be applied for more than once a year. To make an application, the debtor can apply directly to a debt advisor, though there is not the requirement for them to access debt advice. Alternatively, an application could be made by the debtor’s representative, including their carer, an approved mental health professional, mental health nurses or social workers.
What happens when a breathing space ends?
It is possible for creditors to contact the debt advisor within the 60 day window and request that the breathing space is reviewed. Creditors are likely to do this where they believe that the debtor does not fall within the eligibility criteria. A creditor might also seek to prove that the debtor has sufficient funds. All such requests will have to be considered by the debt advisor who will have discretion to continue the breathing space for the remainder of the 60 days, or cancel it.
Once a breathing space has come to an end, the debtor will be notified with the reason – in most cases due to the sixty day window expiring. Following this, the ordinary charges will continue to apply to the debt, including interest, fees and penalties. If the creditor was seeking to commence any legal proceedings or enforcement action they can continue to do so.
What is the impact of the scheme on Creditors?
Creditors seeking to recover debt against individuals must make sure they are aware of the Regulations and have measures in place to deal with the procedures in the event that they are notified that a breathing space has come in to effect. In particular, a creditor must be able to identify the debt that is subject to the application and ensure the following:
- No further interest, fees or penalties are charged against debt during the breathing space
- No enforcement or recovery action takes place against the debt. It is important to identify whether any agents have been instructed by the creditor in respect of the debt, and if necessary, inform them.
- No correspondence is sent to the debtor in respect of recovering their debt unless permitted by Court.
Where a creditor fails to apply the relevant protections, any action they have taken will be null and void. The debtor or their advisor will be entitled to lodge a formal complaint whether through internal procedures or to an external regulatory body. Repeated breaches may result in contact from the Insolvency Service which has wide ranging of powers.