By Robert Edge, lawyer at Devonshires
SMEs looking to recoup debts now face a further hurdle to getting their money after the government introduced the Debt Respite Scheme. But what is it and how should creditors deal with the new option for debtors?
What is the scheme?
The Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium), to give it its full catchy name, was brought in in May 2021. It is aimed at giving greater protection to debtors with qualifying ‘problem debt’ and allows them to apply for ‘breathing space’ to get their affairs in order before they need to start repaying their debts.
What is breathing space?
The scheme allows for two different types of breathing space. The first is ‘standard breathing space’, that allows any qualifying debtor protection for up to 60 days. The second is ‘mental health breathing space’, which offers any qualifying debtor protection for the time of their treatment plus a further 30 days. The idea is to allow debtors to seek advice and take action to resolve their debts without being threatened by creditors pushing for payment or adding interest and charges.
What creditors can’t do during the breathing space period
The regulations prohibit a creditor from taking any action at all on a qualifying debt for the duration of the breathing space period. This includes:
• Requiring a debtor to pay interest, fees, penalties or charges accruing during the period
• Taking an enforcement action over the debt
• Instructing a third-party agent to enforce the debt
Enforcement is effectively any steps taken to collect the debt, including sending letters or attempting to enforce a court judgment.
What debts fall under the regulations?
Any money owed to creditors by individuals and sole traders (who are not VAT registered) are generally included. The debts need to have been incurred before the debtor applied for the breathing space. New debts racked up during the breathing space period do not qualify, neither do new arrears on a secured debt that arises during the period. Joint debts can be included, even if one person applies for it. As a creditor, you must apply the same protections to all parties in the debt.
What do debtors have to do to apply?
An application can only be made via an authorised Debt Advice Provider (DAP). The DAP will assess whether the debtor is eligible and, if they are, enter their details onto an electronic register. A DAP can only grant breathing space if they are satisfied that the debtor is unable to repay all or some of their debt as it falls due. Notice will then be provided to you and you will have to abide by the breathing space regulations.
What else do I need to do as a creditor?
As well as stopping enforcement action, you must notify the court of the breathing space if court proceedings are active. It is possible that the court may allow proceedings to continue. You have an obligation to carry out a search to identify further debts owed. If more are uncovered, then you need to inform the DAP. Finally, you must ensure that they or their agents do not contact the debtor directly. Any contact should be through the DAP.
What can you do about an application for breathing space?
If you receive a notification of breathing space, the good news is that you can appeal if you think the application is not genuine. To appeal you must request that the DAP reviews the breathing space to determine if it should be cancelled. Any application to review must be made within 20 days of receiving the notice.
Grounds for cancellation are:
• The breathing space unfairly prejudices the interests of the creditor
• The debtor isn’t eligible for breathing space, such as the debtor having enough money to pay their debts when they are due
What’s the best advice on handling breathing space notices?
My advice is simply not to take a notice on face value as there will be debtors who are just chancing their arm to get a bit of time. If you believe the application from the debtor isn’t genuine, consider employing an expert to help or appeal to the DAP directly.
But if the debtor is in real financial hardship and the application was genuine, you must adhere to the guidelines of the breathing space and wait until it is over before you can recover your debt.