Pressing pause on bankruptcy and possession action under new the Debt Respite (Breathing Space) Scheme
By Richard Hanstock of Cornerstone Barristers, and Vicki Hanstock, Lawyer at One Legal, the shared legal services for Gloucester City, Stroud District, Cheltenham and Tewkesbury Borough Councils.
On 4 May 2021, regulations will bring into effect two new forms of debt respite: the Breathing Space Moratorium and the Mental Health Crisis Moratorium. These periods do not extinguish the debts, but they do prevent enforcement action being taken against debtors for as long as they have effect. This includes the taking of possession action or the institution of bankruptcy proceedings.
The HMT Impact Assessment states that the policy aims “to incentivise more people to access professional debt advice and to access it sooner”, and “to provide debtors who engage with this advice with the headspace to find a debt solution by pausing creditor enforcement action, interest, and charges”. Framed as part of the ‘levelling-up’ agenda, the government envisages that the scheme will encourage some 700,000 people across the UK to get professional help with problem debt, increasing to 1.2 million per year within a decade; of these, some 25,000-50,000 people each year are expected to benefit whilst undergoing mental health crisis treatment.
Practitioners should familiarise themselves with the Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 (“the Regulations”) and the associated guidance for creditors and money advisers.
Breathing Space Moratorium (‘BSM’)
A BSM provides a qualifying debtor with a 60-day window within which creditors may not enforce specified debts. To access this support, a qualifying debtor must access FCA-regulated debt advice, or advice from an organisation exempt from FCA regulation (such as a local authority), who will arrange the BSM free of charge.
Where a qualifying debtor is receiving mental health crisis treatment, certified by an Approved Mental Health Professional, the moratorium will last for as long as the treatment continues (plus 30 days) and on more generous terms to the debtor.
A debtor is unlikely to qualify if they can clear their debts with budgeting support or selling their assets.
Effect of a BSM
Creditors (including landlords and local authorities) notified of a BSM must not take any enforcement action in relation to the debt, nor require the debtor to pay any interest, fees, penalties or charges arising during the moratorium period.
Where rent arrears are caught by a BSM, possession may not be taken on grounds of those rent arrears, nor may a notice of an intent to take possession on those grounds be served. The moratorium does not prevent enforcement by possession on grounds other than rent arrears, though the practical coincidence of rent arrears with e.g. anti-social behaviour is likely to cause fractious litigation issues, especially if non-rent breaches of tenancy are said to arise in connection with a mental health crisis leading to a moratorium on such grounds. In practical terms, local authorities will need to consider holistically whether and how commencement of a moratorium impacts on the proportionality of continued possession action in each case.
Creditors generally will need to amend their existing procedures to ensure they are able to comply with a moratorium notification. Steps taken in breach of a moratorium are nullified and are likely to lead to costs penalties, not to mention reputational damage. Creditors must not only pause certain enforcement actions, they must notify in writing any court seised of relevant proceedings, pause the accrual of interest or penalties arising from the qualifying debt, disclose details of any additional debts to the Debt Advice Provider, and notify any assignees of the debt that a moratorium is in effect.
Once registered, a moratorium continues for 60 days unless cancelled by the Debt Advice Provider. Notification to Creditors is likely to be electronic and is deemed served the day it was sent. Any additional debt does not become a moratorium debt until the Debt Adviser Provider has updated the Insolvency Register and notified the creditor, but creditors should consider treating such debts as if they were caught by the moratorium from the outset.
In practice, it may well be that BSMs are used to provide immediate relief whilst a provider works to secure a Debt Relief Order.
Debt Advice Providers
The role of Debt Advice Provider (‘DAP’) is onerous. The DAP initiates, registers and administers the BSM. They act as a point of contact for creditors and the Insolvency Service as well as the debtor themselves. They must conduct a mid-way review and consider requests from creditors to cancel the BSM. Essentially, they are charged with deciding what fairness and reasonableness demands in each individual case. As the Impact Assessment recognises, DAPs will “need a deep understanding of the Breathing Space regulations and guidance in order to advise their clients effectively”.
The Regulations include Local Authorities within the definition of DAP, but the government guidance envisages that only Local Authorities that provide debt advice to residents will fulfil the role of DAP.
Once the DAP has satisfied itself that the debtor qualifies for relief and establishes all the qualifying debts to be covered by the BSM, the moratorium begins the day after it has been entered electronically on to the Insolvency Register.
During the BSM the debtor remains liable for payment of ongoing liabilities, such as rent and council tax. Failure to discharge ongoing liabilities could result in the cancellation of the BSM but not a Mental Health Crisis Breathing Space.
Most debts are likely to be qualifying debts. For Local Authorities (and other landlords), qualifying debts will include rent arrears and council tax arrears for liabilities that have already fallen due. Other qualifying debts include credit cards, store cards, utility bill arrears, pay day and personal loans. The Regulations also include several excluded debts such as debts incurred from fraud, obligations from confiscation orders and council tax liabilities which have yet to fall due.
Qualifying debts can include any debt incurred before the Regulations came into force. However, any new debts incurred during a BSM are not qualifying debts.
End of a Breathing Space Moratorium
All creditors will be notified of the BSM end date.
When a BSM ends, provided that no other debt solution (e.g. a debt relief order) has been entered into by the debtor, any creditor is then able to take the next steps to recover outstanding debts and recommence the application of any interest, fees or other penalties. A creditor cannot, however, backdate or apply any interest, fees, penalties or charges that accrued or would have accrued during the BSM, unless permitted by a court.
Overall, whilst it is hoped that the provision of debt advice will be beneficial for debtors, the scheme is likely to have teething difficulties in the early stages as DAPs and creditors adapt to the new Regulations. In time, the authors hope that the scheme will deliver against its ambition to encourage the uptake of professional debt advice in an effort to sustain tenancies and stall the downward spiral of chronic endebtedness and mental health crisis. In the meantime, creditors will need to work hard to ensure that their processes and policies are fit for purpose so as not to fall foul of the new regulations and risk being blamed for frustrating government efforts to support vulnerable debtors.