Creditors are to be banned from initiating debt recovery action during a new 60-day breathing space period in which individuals in debt in England and Wales will be able to seek professional advice on structuring their debt repayments. The new regime takes effect from 4 May 2021.
- 60 day breathing space for individuals
- Applies to eligible debts, including certain business debts.
- The Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020
The moratorium is provided for in The Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 and will apply to eligible individuals who have debt problems.
The purpose of the Regulations is to give individuals a breathing space during which they can obtain professional debt advice and find a long-term debt solution. The breathing space is only accessible via a debt advice provider who will assess whether the individual is eligible. During the moratorium, creditors and their agents cannot take any enforcement action and interest or other charges are frozen. The moratorium is not a payment holiday and ongoing liabilities will need to be met. The new rules allow an eligible person to apply for one standard breathing space each year.
Implications for creditors
Creditors need to be aware of the new scheme and should ensure that their systems and processes take account of the new rules, do not allow any debt recovery enforcement action to be taken during a moratorium, including by their agents, and prohibit any interest, fees, other charges and penalties to accrue on debts covered by the moratorium.
The government has published detailed guidance regarding what steps a creditor can and cannot take when notified of an individual moratorium, and this includes guidance where the creditor's IT systems cannot be easily adapted. Under the new scheme until the moratorium ends creditors can't issue a bankruptcy petition or start or continue with any legal proceedings to recover debts covered by the scheme unless the court or a tribunal gives permission.
The changes also mean landlords cannot serve a ‘Section 8’ eviction notice, apply for a warrant, seek a money judgment or possession order during the moratorium.
After the moratorium ends a creditor cannot retrospectively apply interest, fees, penalties or charges or treat the non-payment during the moratorium of these fees, interest etc. as a default under or breach of the agreement between the debtor and creditor.
The court or a tribunal will grant permission to take enforcement action if it thinks the action is reasonable and that the action will not be detrimental to the borrower or undermine the moratorium.
The scope of the scheme
The scheme applies to all debts owed unless they are carved out as non-eligible debts. Loans, credit cards, overdrafts, utility bill arrears, tax and benefit debts are caught by the scheme. It applies to business debts if the turnover of the business is under £85,000, however the scheme does not cover a person's business debts if the debtor's business is registered for VAT or if they are in partnership with anyone else. It appears from the wording of the scheme that it applies to taking enforcement action in relation to a personal guarantee given by a director in respect of a loan to a company which has become due; no doubt this may be tested before the courts in due course.
Secured debts which do not amount to arrears in respect of secured debt are excluded from the moratorium. Secured debt includes mortgages, hire purchase agreements and conditional contracts. Any interest on the arrears covered by the moratorium is frozen, but interest on the principal secured debt can still be charged.
During a moratorium the debtor must continue to meet their ongoing liabilities, as they fall due where they have the means to do so. Those ongoing liabilities can include payments in relation to a mortgage over their home, utility bills, insurance, taxes, or rent for their home. If the debtor fails to meet their liabilities where they have the means to do so, the debt advisor has discretion to cancel the moratorium unless the debtor's personal circumstances make the cancellation unfair or unreasonable. During a moratorium a debtor also cannot obtain credit of more than £500.
How a moratorium is granted
A moratorium is obtained by making an application to a debt advice provider who must confirm that all of the eligibility criteria has been met. A private central registry of individual moratoriums will be maintained, and a creditor will be notified by the Insolvency Service if any of their customers/borrowers enters or exits a moratorium.
Upon receipt of notification of a moratorium a creditor should check its records for any other debts owed by the individual and notify the debt advisor of these; similarly if the debt has been assigned the creditor should notify the assignee of debt of the existence of the moratorium.
There are limited circumstances in which a creditor can contact a debtor once they receive notification of a moratorium. Creditors have the right to ask for the moratorium to be cancelled if they can show that it unfairly prejudices their interests.
It is possible that the measures will lead to higher recovery rates as people get professional help with their debts.
For eligible borrowers receiving mental health crisis treatment, the Regulations also provide for a mental health crisis breathing space to access the same protections offered under the standard breathing space and can last as long as the debtor receives treatment plus an additional 30 days thereafter. There is no limit on the number of times individuals receiving mental health crisis treatment can apply for a breathing space each year.
Co-authored by Louisa Chan, a restructuring expert at Pinsent Masons.
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