A draft of the Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 (the “Regulations”) was published on July 15, with a view to implementing the scheme in England and Wales. It is anticipated that the Regulations will come into force on May 4, 2021.

Overview

The Regulations propose to provide a debtor (specified as an individual in one of the eligibility criteria) with the opportunity to obtain a moratorium that provides “breathing space,” during which creditor action is prohibited, to allow debtors to engage with a debt adviser in order to seek a sustainable solution to their debt problems with their creditors.

How Can Someone Obtain a Breathing Space Moratorium?

In order to enter a breathing space moratorium, a debtor will first have to access advice from a “debt advice provider,” meaning an FCA-regulated debt adviser or an adviser from another organization that qualifies for an exemption from FCA authorization (such as a local authority).

It is worth noting that for the purposes of the Regulations, the “insolvency exclusion” ordinarily available under FSMA 2000 will not apply to a debt advice provider, thus preventing the application of the exception that removes debt counseling as a regulated activity when undertaken by an insolvency practitioner as an officeholder or in reasonable contemplation of an appointment.

Furthermore, a debtor is excluded from accessing a breathing space moratorium if that individual has entered a breathing space moratorium in the previous 12 months.

When considering whether a breathing space moratorium ought to apply, the debt advice provider must assess whether:

1. the debtor has sufficient funds or income to discharge or liquidate his debts as they fall due;
2. it would benefit the debtor to enter into a debt solution (such as bankruptcy, an individual voluntary arrangement or a voluntary debt management plan);
3. the debtor may be eligible to enter into a debt solution during a moratorium or as soon as reasonably practicable after the moratorium ends; and
4. the moratorium period is necessary in order for the debt advice provider (i) to assess which debt solution would be appropriate for the debtor, (ii) to advise the debtor on which debt solution would be appropriate or (iii) for a debt solution to be put in place.

What Are the Protections of a Breathing Space Moratorium?

During the breathing space moratorium, the accrual of contractual and default interest is stopped, as well as the incurrence of fees and charges. Creditors are also prevented from taking enforcement action against the debtor. The creditor recovery and enforcement moratorium extends to any contact between the debtor, the creditor or his agent relating to the repayment of debts covered by a breathing space moratorium. A breathing space moratorium will include almost all personal debts with broadly the same set of exclusions as apply in bankruptcy and will cover the business debts of sole traders who have a turnover under £85,000.

Additionally, creditors are barred from the retrospective application of interest and charges should a debtor leave the breathing space moratorium without entering a debt solution.

However, if a debtor falls into arrears on an ongoing liability (such as mortgage payments, rent, insurance premiums, taxes and utility bills) as it falls due to be paid during the breathing space moratorium, he will not be protected from enforcement action or the charging of additional interest, fees and charges on these missed bill payments.

Creditor Notifications

It is proposed that entries and exits of debtors to and from a breathing space moratorium would be recorded through an Insolvency Service-run central portal that will be populated with information supplied by the debt advice provider. Creditors would be informed through this service of any entries and exits.

Additionally, it is proposed that there will be a private register of debtors in the scheme, and individual creditors will have access to a register of those individuals who owe them debts who are in a breathing space moratorium and have been included in the portal. However, creditors will not be able to access details of other debtors on this register.

Mental Health Moratorium

Additionally, an alternative mechanism to a breathing space moratorium will be available to debtors receiving treatment for a mental health crisis. In such cases, a debt advice provider would not carry out a financial assessment, but instead would provide access to a breathing space moratorium on the basis of evidence demonstrating that the debtor is receiving mental health crisis care.

Evidence of such a mental health crisis will be available from social workers, nurses, occupational therapists or clinical psychologists who have specific training in mental health and mental capacity law, are experienced in supporting people in crisis and are usually based in community, crisis or home treatment teams and approved by local authorities.

The mental health moratorium benefits from the same protections as the breathing space moratorium, although it is not fixed at 60 days and instead will continue for however long the individual’s crisis care lasts.

Timescales

The protections afforded by a breathing space moratorium last for a period of 60 days, and as noted above, debtors may not access a breathing space moratorium if they have entered a breathing space moratorium in the previous 12 months.

No earlier than 25 days and no later than 35 days after the commencement of the moratorium, the debt advice provider will have to complete a “midway review” to ensure that the debtor is continuing to comply with the ongoing eligibility requirements.

Our Thoughts

The Regulations will offer welcome relief for debtors. Although it is uncertain what the “state of play” will be when the Regulations come into force in May 2021, the ongoing Covid-19 pandemic has led and is likely to continue to lead to a greater number of defaults on debts. While many creditors have been accustomed to providing informal breathing space moratoria to debtors in order to support them in seeking appropriate debt advice, the Regulations introduce greater formality to the process. It is likely that without the introduction of the Regulations, during a period with an uncertain economic outlook, many creditors would have been more reluctant to provide informal breathing space moratoria.

Notwithstanding the above, the Regulations will be particularly relevant when it comes to payday loans and credit cards, where the high rates of interest charged can be very burdensome. With the pausing of interest and default interest under the Regulations, individuals will be offered some respite from such debts.

Finally, in a world where mental health is becoming an increasingly discussed topic, it is a positive step that the Regulations will introduce mechanisms to protect vulnerable individuals in society.