This article looks at the changes likely in the personal debt recovery regime when the Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 come into force next year.
The draft regulations for statutory breathing space in relation to personal debts (‘the regulations‘) have now been published with the intention that the scheme goes live on 4 May 2021. It is understood that additional guidance for both creditors and money advisors will be published in the coming months.
Background and general provisions
The definition of debts which qualify for inclusion is widely drawn and includes debts owed to the Crown, sums which a debtor is due to pay under a warrant for possession of residential or business premises, and sums under a court judgment. Whilst non-eligible debts include secured debt which does not amount to arrears, the arrears themselves are qualifying debts.
There are two types of moratoria within the regulations – a breathing space moratorium (generally lasting for 60 days) and a mental health crisis moratorium (which lasts for 30 days after the date on which the debtor stops receiving mental health crisis treatment as detailed in the regulations).
Once a moratorium is effective, there are a number of steps which a creditor cannot take. These include requiring a debtor to pay interest, fees, penalties, and charges that accrue during the moratorium period. The creditor will also be prevented from taking steps to collect the debt, commencing legal proceedings, enforcing a judgment or enforcing security. It should be noted that, for secured debt, the prohibition on charging interest only applies in relation to arrears, and ongoing liabilities (e.g. monthly mortgage payments) should be maintained. Clearly there are some practical considerations here as to how systems etc cope with this requirement.
The issue of limitation has been recognised and provision made in the regulations to extend limitation periods which expire during, or shortly after, the moratorium period. Likewise there are extensions to enforcement time limits.
Where there are legal proceedings in existence at the date of the moratorium, the creditor will be required to notify the court or tribunal. A pending bankruptcy petition will be stayed and whilst it appears that a court claim can proceed to judgment (in particular if an admission is filed) no enforcement action should be taken or continued.
The regulations now recognise that a creditor may have appointed an agent to act on their behalf and it is the creditor’s responsibility to notify their agent of the moratorium. Other requirements of the creditor include making a reasonable search to identify any debts of the debtor in question and notifying the debt advice provider of any debts not included within the original notification. The same applies to a debt which has been assigned to another party, where the creditor must inform both the purchaser of the debt and the debt advice provider. The creditor will be liable to the debtor and to the debt assignee for any losses if they fail to take these steps as soon as reasonably practicable.
There are some obligations placed on the debtor, including a requirement to provide accurate information and not deliberately withhold relevant information. The debtor is also required to notify the debt advice provider of material changes during the moratorium period, make payments of ongoing liabilities (as defined in the regulations) and not obtain additional credit in a collective sum exceeding £500.
The regulations also provide a mechanism for a creditor to challenge a moratorium and ask for it to be reviewed (e.g. if the creditor considers there is a material irregularity). This can be escalated to a court in certain circumstances.
Breathing space moratorium
A debtor can apply to a debt advice provider for a breathing space moratorium but needs to have obtained advice first and the application must be to the debt advice provider who provided that advice. The debt advice provider needs to consider:
- if the debtor is eligible
- if the debts are qualifying debts
- certain other conditions.
The debtor must:
- be an individual domiciled or resident in England or Wales owing a qualifying debt
- not be in an IVA, DRO, or an undischarged bankrupt
- not have had a breathing space moratorium in the previous 12 months
The debt advice provider must consider that the debtor is unable to pay some of their debt as it fall due and that a moratorium would be appropriate. To be appropriate the debt advice provider must consider a number of things including whether the debtor has sufficient funds/income to discharge their debt as it falls due, whether the debtor would benefit from a debt solution, and whether the moratorium is necessary to provide time to assess which debt solution may be appropriate.
The debt advice provider must notify the appropriate authority of the moratorium so that an entry can be made in the register which is to be established for these purposes, and creditors can be notified.
The moratorium lasts for 60 days unless brought to an end early under any relevant provisions and the debt advice provider must conduct a midway review between day 25 and 35. This review may result in a cancellation of the moratorium in certain circumstances. If the moratorium is cancelled, then the debt advice provider has to notify the appropriate authority so that an entry can be made in the register and creditors can be notified.
Mental health crisis moratorium
This is intended for a debtor who is receiving mental health crisis treatment which is defined in the regulations and relates to serious mental health issues.
There are a range of persons who can apply for such a moratorium including the debtor themselves and those considered carers or health professionals. Sufficient evidence needs to be provided to show that the debtor is receiving mental health crisis treatment.
Where a debt advice provider is considering an application for such a moratorium, in addition to the usual considerations, the debt advice provider must obtain information as to the financial standing of the debtor from at least one credit reference agency.
The process for initiating such a moratorium is similar to that for a breathing space moratorium but in this case, in general, the moratorium lasts for 30 days after the date when the debtor stops receiving mental health crisis treatment (unless brought to an earlier end in line with the requirements of the regulations).
Administering the scheme
The regulations provide that the Secretary of State must maintain an electronic system for the purposes of maintaining a register of moratoria and giving and receiving notifications in relation to moratoria. The regulations set out what information must be held on the register and who is entitled to see what. The regulations also confirm how notifications may be provided and they include both electronic means and postal methods.
Whilst creditors, in the financial services sphere, have been used for several years to providing breathing space to customers in order to support them in seeking appropriate debt advice, the new scheme brings with it a much greater level of formality.
Creditors will need to consider the regulations in some detail in order to prepare for the implementation in May 2021. For example, systems will need to be reviewed to ensure that interest and charges can be supressed where needed.
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 clearly need to be considering the requirements, in conjunction with their advisors, as soon as possible.