A breath of fresh air: the latest ‘breathing space’ consultation

05 February 2019

The Government’s latest consultation on the breathing space and Statutory Debt Repayment Plan concluded recently in January. We’re pleased that the policy has now completed this stage, as we strongly support the introduction of a breathing space. Our consultation response, which you can read in full here, does, however, highlight some issues for the Government to consider further. This R3 Thinks post looks briefly at some of those issues.

Why R3 members support a breathing space

Last year saw personal insolvencies rise for a second successive year. The latest figures from the Insolvency Service show there were 115,299 personal insolvencies in 2018, up 16% on 2017, and the highest annual total since 2011. Slow wage growth, inflation, and the rising cost of living have put pressure on people’s finances.

This chimes with recent research from R3 and ComRes, which found that one in five British adults (20%) would find it somewhat difficult, very difficult or impossible to immediately pay an unexpected bill for an amount as little as £20, without assistance from an external source. The findings suggest that many could be vulnerable to financial shocks, needing to find loans to cover sudden expenses such as a higher than expected energy bill.

With serious indebtedness on the rise and financial resilience low, it’s more important than ever that people can get accurate debt advice, and have access to the right insolvency procedure for their situation. Our members say this doesn’t always happen; members have pointed out that problem debt can be exacerbated when individuals do not seek advice about the options available to them, or feel pressured into entering the first available debt solution as a means of preventing further creditor pressure. These factors are not conducive to individuals ending up in debt solutions which are appropriate to their situation. When the ‘wrong’ debt solution is used, both the individual in debt and their creditors are less likely to see an optimal outcome.

To address this, we’ve long called for a ‘breathing space’ for people in debt so that they can be given time to seek advice about their situation. A breathing space would ensure people who are experiencing financial distress are able to seek advice in an environment free from creditor pressure, and would help individuals to enter a debt ‘exit strategy’ appropriate to their situation.

The Government’s latest proposals

As proposed by the Government in its latest consultation, the breathing space would allow individuals that have been assessed as being in problem debt to enter a breathing space lasting 60 days, with a 30-day check in to ensure they are taking steps to seek advice. While this is longer than the 28-day breathing space first proposed by R3, and the six week period previously suggested by the Government, we support the new time frame and mid-point check-in. We’re also pleased that the Government has proposed an alternative access mechanism for individuals with mental health issues, and the inclusion of business debts for sole traders, although more work is needed to finesse both these points.

60 day breathing space

The Government’s call for evidence put forward a six week breathing space, which was extended to 60 days in the latest consultation.
There will now be a 30 day check in point, in which the debt advisor will contact the individual in the breathing space to discuss what action the individual has taken to tackle the issue. In order to continue to be eligible for the scheme, the individual must demonstrate that they have taken steps to seek advice.

We think that this 30 day check- in is essential to ensure that individuals in the breathing space take proactive action to tackle their financial difficulties, and helps to strike a balance between the needs of debtors and the rights of their creditors.

Business debts and the breathing space

In addition to consumers, sole traders with business debts will also be able to access the breathing space.
However, sole traders that are VAT registered (so those with a turnover of £85,000 or higher) will not be eligible for the scheme, and would be excluded from the breathing space and its protections.

R3 is pleased that the government has proposed the extension of the breathing space to sole traders, as they could be among those that benefit most from a breathing space. Sole traders can come under pressure from both personal and business debts.

While this is a step in the right direction, the government should not impose a limit on sole traders that may be eligible for the scheme. Many sole traders with a turnover of £85,000 or over would benefit from accessing debt advice, and yet could be excluded from the scheme despite having lower debt levels than a consumer with personal debts. For example a VAT-registered sole trader with debts of £12,000 would be ineligible for the breathing space, but a consumer with £100,000 debts would be.

Mental health alternative access

R3 is pleased to see that the government has taken steps to address the difficulties faced by vulnerable individuals in problem debt, by putting forward proposals for an alternative access mechanism to the breathing space for those with mental health problems.

There is a growing body of evidence that links mental health problems to financial difficulties. The Money and Mental Health Charity has found that, not only are those with mental health issue more likely to have problem debt (one in four British adults with a mental health problem have problem debt, compared to one in eight without), but that mental illness can worsen someone’s financial situation.

The proposals would allow vulnerable individuals to enter into the breathing space without undergoing the initial full assessment, instead debt advisors will record that the individual is in crisis and would benefit from the protections afforded by the scheme.
Individuals that entered the scheme under the alternative access mechanism would not be limited to a 60-day breathing space; instead they would have “open ended” access to the breathing space.

While the proposals have some way to go, and would benefit from the government providing clarification on the eligibility criteria for the alternative access mechanism, R3 is very supportive of the extra steps being taken to consider those with mental health issues.

Statutory Debt Repayment Plan

The consultation also outlines a new, separate Statutory Debt Repayment Plan, which would allow indebted individuals to fully repay their debts over a period of up to ten years and would involve the agreement of the individual’s creditors.

There are a number of statutory and non-statutory procedures available to indebted individuals, so it is not entirely clear whether a new statutory debt repayment plan is necessary. The plan would benefit a small group of people whose asset levels are higher than £1,000, excluding then from Debt Relief Orders (DROs), but have insufficient surplus income levels to be able to enter into an Individual Voluntary Arrangement (IVAs). However, a more effective way to provide these individuals with a debt solution could be to simply increase the threshold for DROs, as opposed to creating a new plan all together.

Next steps

The Government will now review the responses to the consultation, and publish their final proposals – Brexit means that short term legislation for the breathing space is unlikely, but further proposals could come in the medium-term. The Government has indicated that it would also like to hear from the Single Financial Guidance Body, which is not yet fully operational, so this could delay the introduction of the breathing space still further.

R3 looks forward to engaging with the Government on the breathing space in the near future.

A breath of fresh air: the latest ‘breathing space’ consultation

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