The Debt Respite Scheme - friend or foe?
The Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 (“the Regulation”) comes into force on 4 May 2021.
Purpose of the Regulations
As at August 2019 the Government estimated that there were 9 million overindebted people in the UK, of which only around 1.1 million received advice each year. Tragically, as a result of the Coronavirus pandemic these numbers will have increased dramatically. Of those that do seek help the Government research shows that it is often sought at a late stage and that sometimes the quickest rather than most sustainable solution is taken. Evidence suggests that people’s emotions, knowledge and attitudes to their debt create barriers to accessing advice. These internal barriers include the stress and anxiety that comes with problem debt, which can be compounded when creditors start to take enforcement action such as chasing for repayment, starting court processes or using bailiffs.
The aim of the Regulations is to incentivise more people to access professional advice and to access it sooner, helping them to reach sustainable debt solutions. The government also wants to provide debtors who engage with this advice with the headspace to find a debt solution by pausing creditor enforcement action, interest, and charges.
How is the purpose achieved?
The Regulations give debtors who receive debt advice access to a 60-day period in which interest, fees and charges are frozen and enforcement action is paused. This is extended further for debtors receiving mental health crisis treatment, for the duration of their crisis treatment.
How can an individual obtain this breathing space?
Breathing Space Moratorium
An individual must apply to a debt advice provider (“an Advisor”) for a breathing space moratorium.
The Advisor must initiate a breathing space moratorium if they consider that the individual meets the eligibility criteria[2], the requisite conditions are met, and the debts to be included in the moratorium are qualifying debts[3].
The moratorium is commenced by the Advisor providing confirmation to the Secretary of State that the individual meets the eligibility criteria and that the requisite conditions are met. The Secretary of State then makes an entry on the register and sends a notification of the start of the breathing space moratorium to those creditors and agents whose contact details have been provided[4]. The moratorium commences the next day and continues for 60 days unless it is cancelled or the individual dies.
Before day 35 of the moratorium the Adviser must review and determine whether it should continue or be cancelled.
Mental health crisis moratorium
In order to be able to apply for a Mental Health crisis Moratorium an individual must be receiving mental health crisis treatment.
The process to initiate a mental health crises moratorium is the same as that of a breathing space moratorium save for the application to an Advisor can be made not only by the debtor but also by a debtor’s representative or by a range of carer’s and mental health professionals and the application must include evidence from an approved mental health professional that the individual is receiving mental health crisis treatment.
A mental health crisis moratorium does not end until 30 days after the individual stops receiving mental health crisis treatment or the Advisor makes a request to the individual’s nominated point of contact but does not receive a response, or the moratorium is cancelled or the individual dies.
The Advisor must request confirmation of whether the individual is still receiving mental health crisis treatment from their nominated point of contact, within 30 days of the start of the moratorium.
Effect of the Moratorium
During a moratorium period a creditor may not, in relation to any moratorium debt, take any of the following steps[8]:
- require an individual to pay interest that accrues on a moratorium debt during a moratorium period;
- require a debtor to pay fees, penalties or charges in relation to a moratorium debt that accrue during a moratorium period;
- take any enforcement action in respect of a moratorium debt; or
- instruct an agent to take any of the actions mentioned above.
Continue with any court or tribunal action pending in relation to a moratorium debt. Any action taken contrary to Regulations shall be null and void
After the end of the moratorium, a creditor or their agent (including a creditor’s solicitors) must not require an individual to pay interest, fees, penalties or charges that accrued during the moratorium, or treat the non-payment during the moratorium of interest, fees, penalties or charges as a default by the individual.
Impact of the Regulation
It is questionable how effective this Regulation will be in achieving its aim. Individuals often “bury their head in the sand” when it comes to their creditors and if remains to be seen how beneficial it will be to those individuals to allow them to “kick the can down the road” rather than facing and dealing with their creditors as soon as they can. Particularly given that during a moratorium an individual must continue to make any payment due in relation to ongoing liabilities, which in reality they are unlikely to be able to do, otherwise they would not have found themselves in the situation whereby they need the help of an Advisor. Debtors liabilities are therefore, more than likely, going to continue to accrue during a moratorium to the detriment of both the individual and their creditors.
It is also questionable how many Advisors will want to offer this service, given that they are not able to charge for their services but will be responsible for adhering to tight timetables for conducting reviews and may have to liaise with a substantial number of creditors. In terms of the mental health crisis moratorium there is also no certainty as to how long the moratorium will run for and one can envisage that these cases will be extremely labour intensive.
There is also a question mark as to whether the purpose of the Regulation justifies the negative impact it will have on tackling fraud. Fraud is on the increase year on year and for those debtors who never intend to pay their debts and who will use whatever means possible to take their assets out of the reach of creditors, the moratorium will provide them with further time to hide their assets.
From the point of view of creditors, this is arguably one more “kick in the teeth” and is likely to result in more creditors seeking to obtain security on debts wherever possible as secured debts (save for non-capitalised arrears) are excluded from the Regulations.
Clearly, anyone dealing with consumer debt will be impacted by this Regulation and will need to ensure that they have systems in place to ensure that during a moratorium:
- debtors are not charged interest, fees and charges;
- no enforcement action is taken against a debtor; and
- debtors are not contacted direct.
Creditors should also carefully consider the grounds upon which an individual applies for a moratorium and ensure that any request to the Advisor for a review is made within the required 20 days of the moratorium commencing.
In these unprecedented times, there is little doubt that a moratorium will come as a welcome relief to those struggling with their finances, the question is whether that relief will truly benefit the individual in the long run or simply delay the inevitable!
