Debt Respite Scheme: the impact on both creditors and individual borrowers
Background and purpose of the regulations
The regulations are designed to help individuals in problem debt and individuals suffering from serious mental health issues. A qualifying debt for the purpose of the regulations is widely drawn and, in the context of private wealth transactions, seemingly captures loans provided in reliance on the high-net-worth exemption normally relied upon for loans to high net worth individuals ("HNWI") as well as loans to individuals more commonly subject to the Consumer Credit Act.
Certain debts are excluded from the regulations: secured debts are excluded but non capitalised arrears are not. By way of example, a debtor in arrears on their mortgage will be entitled to the protection afforded by the regulations in relation to their arrears but not their ongoing liability to make mortgage repayments which the debtor must continue to pay during the moratorium period.
The regulations provide that individuals in problem debt have to seek advice from a dedicated debt advice provider in order to apply for a moratorium which, if granted, gives the debtor certain legal protection from creditors during a sixty day moratorium window, referred to as the "Breathing Space Moratorium". In the case of individuals suffering a mental health crisis, a "Mental Health Crisis Moratorium" can be obtained and such moratorium will apply throughout such individuals' mental health crisis treatment and for a period of thirty days following the end of such treatment.
During a moratorium, interest, fees and charges in relation to the debt are frozen and any enforcement action is paused. To the extent a moratorium is implemented, creditors will be responsible for notifying their agents of the existence of such moratorium to avoid those agents taking any prohibited action and, accordingly, LPA receivers will need to be aware of the regulations and their implications.
We set out below more detail as to how the moratoria work and discuss the potential impact on creditors.
Mental Health Crisis Moratorium
Where an individual debtor is in receipt of mental health crisis care and can provide evidence of such care from an approved mental health professional, a debt advice provider will be able to initiate a mental health crisis moratorium. Importantly from a private wealth perspective, the regulations do not require a debt advice provider to carry out a full financial assessment of the debtor meaning that the regulations apply equally to a HNWI as to any other borrower.Where it is established that a mental health crisis moratorium should apply, the debt advice provider must then carry out an assessment as to whether the debts are qualifying debts and will need to obtain information regarding the debtor from at least one credit reference agency. If the debt advice provider instigates the moratorium it will run until:
- the date falling 30 days after the debtor stops receiving mental health crisis treatment;
- the date falling 30 days after the provider makes a request to the debtor’s nominated point of contact but receives no response; or
- the debt adviser otherwise decides to cancel the moratorium or the debtor dies.
Breathing Space Moratorium
In order to qualify for a Breathing Space Moratorium, an individual debtor must:- be an individual domiciled or resident in England or Wales owing a qualifying debt;
- not be in an individual voluntary arrangement, debt relief order, or an undischarged bankrupt; and
- not have had a breathing space moratorium in the previous 12 months.
- whether the debtor is eligible;
- whether the debts are qualifying debts; and
- certain other conditions, including whether or not the debtor is unable to pay all or some of their debt as its falls due and whether a moratorium would therefore be appropriate.
If a debt advice provider considers that a moratorium is appropriate, it 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.
Where a Breathing Space Moratorium is granted, the debt advice provider must carry out a review between days 25 and 35 of the 60-day moratorium to decide whether it should remain in place or be cancelled. The debtor has notification obligations in respect of changes of circumstance. When the moratorium begins or ends the moratorium creditors will be notified through a government portal (to be set up and maintained on an electronic basis by the Secretary of State).
During a Breathing Space Moratorium a debtor must:
- inform their adviser of any material change in circumstances or financial position;
- make any payment due in relation to an ongoing liability;
- not obtain additional credit exceeding £500; and
- engage with the debt adviser in such a way as the adviser considers to be appropriate.
What is the impact on creditors?
During a moratorium period, creditors (or their agents) may not:- require an individual to pay interest accruing (for secured debts this applies only to interest that accrues on any arrears during the moratorium and not the interest on ongoing liabilities);
- require an individual to pay fees, penalties or other charges for the moratorium period; and
- take any enforcement action (unless permission is given by the court or other tribunal).
It should be noted that debt advice providers will have a discretionary power to cancel a Breathing Space Moratorium if the debtor does not pay ongoing liabilities during the period.
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 or the moratorium unfairly prejudices the interests of the creditor). This can be escalated to a court in certain circumstances.
What happens if there is an existing legal proceeding against the debtor?
A debtor must notify the court or tribunal of the moratorium. During a moratorium, a court or tribunal must take all necessary steps to ensure that any action or proceedings to enforce a court order or judgment concerning a moratorium debt does not progress during the moratorium period.Consideration for creditors going forward
If approved, the regulations will come into force on 4 May 2021. In order to ensure compliance with the regulations, creditors will need to ensure that adequate systems and operations are put in place to ensure that neither they nor their agents take any action against debtors subject to a moratorium.Equally, systems will need to be in place to ensure that interest and charges do not accrue during the moratorium.
Private banks should be aware that that they could potentially be affected by the Breathing Space Moratorium and the Mental Health Crisis Moratorium as they could potentially apply to HNWIs.
LPA receivers will need to check with creditors whether the debtor is subject to a moratorium before accepting any appointments.