Debt Respite Scheme Regulations
The Debt Respite Scheme Regulations have recently come into effect; debtors and creditors alike should be aware of how the new moratoriums introduced by these Regulations may impact them.
The Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 (the “Regulations”) came into effect on 4 May 2021, introducing a new set of protections for debtors. The Regulations create two new types of insolvency procedure:
- the Breathing Space Moratorium (“BSM”); and
- the Mental Health Crisis Moratorium (“MHCM”).
Creditors will be unable to take action to recover certain debts while one of these is in place.
Impact on debtors
Breathing Space Moratorium
A debtor may apply for a BSM through a debt advice provider (“DAP”).
The debtor must be individually domiciled or ordinarily resident in England and Wales, must not have been subject to another BSM in the 12 months prior to the application, and must be unlikely to repay some or all of the debt as it falls due.
The debtor must also owe a “qualifying debt”, which is any debt not specifically excluded by the Regulations. One example of such specifically excluded debts is non-eligible business debts. These are debts incurred in connection with a business carried on by the debtor, where the debtor is VAT-registered or in a partnership with another in relation to said business, and the debt relates solely to that business. This significantly limits the extent of debts for which a BSM can be sought.
A BSM must be appropriate in the view of the DAP, taking into account various factors found in Regulation 24(5) of the Regulations.
If all these conditions are met, the DAP will notify the Insolvency Service of the BSM, who in turn will enter information about the debtor and its debts on a register and notify creditors. A BSM will last for 60 days, unless it is cancelled beforehand or the debtor dies.
Mental Health Crisis Moratorium
The process is much the same in applying for an MHCM, although there are two main differences.
The first is that the application does not have to be made by the debtor; it may be made by any of the persons listed in Regulation 29(1), which includes mental health professionals, carers, and social workers.
Secondly, the application must contain evidence that the debtor is receiving mental health crisis treatment. A MHCM will last until 30 days after the debtor stops receiving mental health crisis treatment, unless it is cancelled beforehand or the debtor dies.
The moratoriums do not provide complete protection for debtors. For example, debtors protected by a BSM are still obliged to continue making payments in respect of ongoing liabilities, defined as any payment, other than in respect of a payment shortfall, which is due in relation to a lease relating to the debtor’s primary residence.
Impact on creditors
Creditors and their agents must not impose any interest, fees, penalties or charges in respect of debt that accrues during the moratorium period. They are also forbidden from taking any enforcement action in respect of the debt whilst the moratorium is in place; this includes taking any step to collect the debt or enforce a judgment or order relating to the debt, selling or taking control of the debtor’s property or goods, and bringing legal proceedings against the debtor in relation to the non-payment of the debt.
But the Regulations go further than simply preventing creditors from recovering their debts. Positive obligations are imposed on creditors notified of a moratorium. Such creditors must notify any agent appointed in relation to the debt of the moratorium and its effect, and notify any court or tribunal involved in proceedings regarding the debt of the moratorium. Furthermore, creditors must search their records for debts relating to the debtor in question and for any assignees of the relevant debt, notifying these assignees of the moratorium. The creditor must then pass details of these debts and assignees on to the DAP. Failure to comply with these obligations as soon as reasonably practicable may lead to the creditor being liable for any resulting loss of the debtor.
It is not all doom and gloom for creditors, however. A creditor restricted by a moratorium may request a review by the relevant DAP on the grounds that the moratorium unfairly prejudices the creditor’s interest, or that there has been some material irregularity regarding the debtor’s eligibility for the moratorium, the debtor’s solvency, or whether the debt is in fact a qualifying debt. The DAP must then conduct a review and must cancel the moratorium if said review reveals that the creditor’s interest has been unfairly prejudiced or that there has been a material irregularity as considered above. If a DAP review does not result in the moratorium being cancelled, a creditor can apply to the County Court.
Alternatively, a creditor may apply to a court or tribunal for permission to take steps prohibited under the moratorium. The court has discretion to determine such an application “in any way it thinks fit”, but it can only grant the creditor permission to take steps where it considers it reasonable to allow the creditor or their agent to take such steps, and the step will not be detrimental to the debtor or significantly undermine the protection afforded by the moratorium.
