The covid-19 crisis has resulted in great financial distress for individuals on a personal level, but it has undoubtedly been made worse for entrepreneurs who, as directors of personal service companies (PSC), have also become found between the cracks of government financial support for businesses.
To help relieve some of the pressure on individuals, the government has introduced new legislation through the Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020, which is otherwise referred to as ” Breathing Space ”, writes Mark Davies, insolvency partner at Aaron & Associates.
What is Breathing Space and how does it relate to entrepreneurs?
The device entered into force on May 4, 2021 and aims to offer legal protection to people in problematic debt situations. It gives people facing financial difficulties a “breathing space” to receive debt counseling, allowing them to get their finances back on track and while it does not cover PSC business debts, it grants effectively to each eligible person a temporary protection shield that companies that they may owe money in their personal lives cannot then bypass.
Thus, for entrepreneurs with personal debts, Breathing Space could be an essential tool in their efforts to manage repayments in an orderly fashion, without fear of facing other actions from creditors (i.e. – say those to whom they owe money).
What forms of breathing space are available?
There are two types of breathing space available for people who owe money.
1. Standard breathing space
The standard Breathing Space regulation provides the debtor with legal protection for up to 60 days. The protection includes the freezing of costs and certain interest on debts, as well as the suspension of enforcement measures and contact with creditors.
2. Mental health crisis Breathing space
Under the Mental Health Crisis Breathing Space regulation, debtors receive protection throughout their treatment in the event of a mental health crisis, plus an additional 30 days.
To be eligible for this protection, debtors will need to obtain evidence from a Licensed Mental Health Professional (AMPH) certifying that they are receiving mental health crisis treatment.
How does a respite begin?
Breathing Space protection is only accessible through a debt advisor, who is authorized by the Financial Conduct Authority (FCA) or a local authority.
Before a debt advisor can approve Breathing Space, they must be satisfied that the debtor is eligible and meets all the conditions, namely that the debtor:
- is an individual – it’s important to remember that the new law only applies to personal debt (not a limited liability company or corporate debt)
- usually lives or resides in England or Wales
- has an eligible debt to a creditor
- is not subject to a debt relief order, an individual voluntary arrangement (IVA), an interim order or is an undischarged bankrupt
- does not already benefit from Breathing Space or has benefited from it within the last 12 months.
The debt counselor must be convinced that the debtor cannot (or is unlikely to be able to) repay all or part of his debt – and that a “breathing space” is the appropriate solution.
The debt counselor may decide that Breathing Space is not appropriate for the debtor. For example, if the debtor can access financing or income, they might be able to repay their debts with budgeting advice. Another example is that the debtor has assets that could easily be sold to pay off the debt.
The electronic register
If Breathing Space is approved, the details of the debtor will be entered in an electronic register maintained by the Insolvency Department called the “Breathing Space Register”. This will include the contact details of any debtors benefiting from a breathing space, namely:
- last name and first name
- Date of Birth
- usual place of residence
- the date the breathing space begins
- the date the breathing space ends (when it does)
- details of the debt (s) included in the respite
Creditors will be able to access information in the register relating to the debtor and the respite debt owed to them. However, creditors will not have access to any information about other creditors and the Breathing Space debt that the debtor has, or the debtor’s usual place of residence (if retained).
Responsibilities of creditors during periods of respite
Once the debtor’s details have been registered, a notification will be sent to the creditors that the debtor has included in his request for Espace Breath.
The notification will be sent either by electronic communication (email or electronic service) or by post. Creditors should follow the protection against the date they receive the notification. Creditors who have opted for electronic notification are deemed to have received the notification the same day it was sent. For postal notices, creditors are deemed to have received the notification four working days after it was sent.
After receiving this notification, creditors should identify all claims owed to them by the debtor. Creditors should do this as soon as possible, as they will need to notify the debt counselor of any debts that were not included in the notification.
Upon receipt of the notification, the creditors must cease:
- any enforcement or collection action taken for any interest, charge, penalty or charge for the duration of the breathing space
- any enforcement or collection action to collect the debt (this includes any appointed agent)
- contact the debtor to request payment of the debt unless authorized by the court
Stop coercive measures
As mentioned above, once the Breathing Space has started, creditors or anyone acting on their behalf must do not take any enforcement action against the debtor.
An enforcement action is when a creditor attempts to:
- enforce a judgment or order made by a court or tribunal
- assert their security on a Breathing Space debt
- obtain a warrant or a writ
- apply to the Department of Work and Pensions (DWP) for a new third party deduction to be taken from an individual’s benefit payments
- obtain or apply for a liability order
- sell or take control of the debtor’s assets
Limitations of the computer system?
To the extent possible, all interest, fees, penalties and charges accrued on debts should be frozen for the duration of the Breathing Space. However, when computer limitations prevent it, the amounts can continue to accumulate as long as the debtor is not asked to pay them.
The regime does not expect creditors to make complex changes to the system. Instead, creditors can make specific adjustments to reflect the correct balance owed by the debtor.
All debts included in a breathing space must be qualifying debts, this will include:
- credit card
- personal loans
- store cards
- payday loans
- overdue utility bills
- mortgage or rent arrears
Government debts such as tax and benefit debts may also be eligible unless they are included in the list of excluded debts (see below).
Eligible debts can include all debts that the debtor had before the entry into force of the Breathing Space Regulation. Debts incurred during a Respiratory are not eligible. Neither do the new arrears on secured debt that crop up during Breathing Space.
Joint debts can be included in a breathing space, even if only one person applies for the breathing space. The common debt would become a debt of Breathing Space and creditors must apply the same guarantees of execution to other people who owe this debt.
Secured loans can also be included in the Breathing Space. However, the protections do not extend to the guarantor. The guarantor can request his own breathing space if he is eligible.
Not all debts are included in the protection, examples of excluded debts are:
- secured debts (such as mortgages, lease-purchase or conditional sale contracts)
- debts incurred as a result of fraud or fraudulent breach of trust
- obligation to pay fines imposed by a court for an offense
- obligations arising from a confiscation order
- maintenance of children
- a crisis or budgetary loan from the social fund
- student loans
- Universal Credit down payments
- housing tax debts not yet due (if all the installments for this fiscal year are due and have not been paid, those aree deemed to be qualifying debt).
How do you know when a breathing space is finished?
A standard breathing space will end:
- 60 days from the start date
- the day after a debt counselor or court is dismissed
- if a debtor dies during the period of the Breathing Space, it will end the next day
A breathing space in a mental health crisis will end:
- 30 days after the end of the debtor’s mental health crisis treatment
- 30 days after the date a debt counselor receives no response after requesting confirmation of a debtor’s continued treatment for a mental health crisis.
Creditors will be notified of the end of a breathing space. If the Breathing Space has been revoked by a debt counselor or the court, creditors will be notified. Likewise, if the Breathing Space period ends because the debtor has died, the creditors will be notified.
Final Considerations on the Breathing Space
Before last, entrepreneurs should be aware. From the date the Breathing Space ends, creditors can resume applying interest, fees, penalties, and charges to debts.
Creditors can also pursue any formal enforcement action to collect debts. However, it is important to note that creditors can not apply any interest, fees, penalties or charges that may have accrued during the breathing period, unless the court authorizes it.
As a relatively new form of protection, so far there is little evidence that creditors or claimants have taken shelter from Breathing Space. However, any business chasing a debt should check to see if it has been applied to the debtor. Any attempt to collect payments during a period of Breathing Space could result in penalties for the creditor, although the severity of any potential penalty remains to be confirmed.
And finally, although protection is still in its infancy, everything suggests that it will grow very quickly. The introduction of Breathing Space comes after the Money Advice Service estimated that 8.3 million people in the UK are in debt, with the impact of the pandemic meaning 4.6 million people had racked up more than 6 billion dollars. pounds of debt and arrears by May 2020.