Breathing Space for individuals – Draft legislation published

28 August 2020

The UK has moved closer to the introduction of a breathing space for indebted individuals with the publication of the draft legislation for "The Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020" (or 'breathing space scheme' for short). This document sets out what will be contained in the scheme when it is introduced on 4 May 2021, who will be affected, and how the scheme will operate.

Designed to help individuals in England and Wales struggling with debt, by giving them a period of time (60 days initially) in which to consult a debt advisor and decide on an appropriate remedy for their situation, the breathing space scheme is something that R3 is pleased to see becoming a reality, after years of calling for its introduction.

How will the breathing space scheme work?

During the period when the breathing space is in force, all creditor action has to stop. This means no communications are to be sent to individuals in a breathing space, and interest and charges will not accrue during the breathing space period.

A register of individuals in a breathing space will be maintained by the Insolvency Service, with lenders and finance providers able to search the database to check for their customers. Individuals in a breathing space will have to pay debts as they fall due during the period of the breathing space, but cannot be pursued for pre-breathing space arrears. Most debts will be included, but some types will be excluded, such as child support payments, non-eligible business debts, and student loans.

The breathing space will give individuals the time they need to weigh up their options and go for the solution that is the most appropriate for their specific circumstances, such as a form of personal insolvency, rather than feeling pressured into accepting the first offer of help they find. Individuals can make use of the scheme once in every 12-month period.

Individuals who are experiencing a mental health crisis, and who are receiving medical treatment, are automatically granted a breathing space if they are in debt, which will last as long as they are being treated for their crisis period. This is welcome news, as many organisations, notably the Money and Mental Health Policy Institute, have released research into the links between poor mental health and worse financial outcomes. However, we are concerned that people who are experiencing mental health problems, but who are unable to access treatment due to long waiting periods and overstretched services, may not be able to benefit from this provision.

Throughout the consultation process, we noted that the needs of smaller creditors should be considered - not all of this group will have sophisticated systems which are able to stop interest and penalties on overdue loans automatically, for example. While it remains to be seen how the scheme will work in practice, as the IT systems and structures are yet to be unveiled, we are hopeful that the Government has taken the interests of all stakeholders into account, and tried its best to balance them. The 60-day initial period is an example of this; some debt charities wanted a much longer breathing space to apply, but our members were of the opinion that this would be unfair to creditors, and could lay the scheme open to misuse. The scheme should be a route to a solution of some kind - not a form of debt solution in itself.

Debt advice

Ensuring that individuals in financial distress are able to access high-quality debt advice, from a reputable source, will be a key plank of the breathing space scheme's success. The Government's impact assessment of the scheme estimates that over 700,000 individuals could be helped in the scheme's first year alone, out of the estimated 9 million overindebted individuals in the UK, of whom only 1.1 million receive advice every year.

This anticipated increase in demand for debt counselling - while welcome - could put a strain on the debt advice sector, which is predicted to see a sharp increase in the number of clients as the pandemic hits people's incomes. The Money and Pensions Service (MaPS) estimates that "the number of people needing help with debt will climb for at least the next 18 months - increasing by over 60% and peaking around the end of 2021" at around 8 million people.

Our own research indicates that personal insolvency professionals expect a wave of new cases, starting from the end of this year, due to the pandemic. It is therefore very welcome that MaPS has announced £38 million in extra funding for digital debt advice services, to help the debt advice sector gear up for greater volumes of individuals needing their help. In addition to debt charities and advisors, many insolvency practitioners who offer personal insolvency advice will offer an initial free consultation (you can find an R3 member here).

Moving towards the statute book

It is gratifying to see the breathing space scheme close to becoming reality. R3 has worked closely with other stakeholders, including relevant Government departments, the debt advice sector, and our own members who do personal insolvency work, in order to get across the profession's views and make sure that the final shape of the scheme works well for all who are affected by it. We will be looking through the draft legislation closely, and - if we find anything we think will be unworkable - we will engage with the Government to convey the profession's views, and to try and find a workable solution.

Especially given the backdrop of the pandemic, the breathing space is a concept whose time has more than come. In Scotland, for example, the Scottish Government introduced a raft of changes to personal insolvency in response to the coronavirus. We would have been keen to see a similar response in the rest of the UK, and think there is still more that could be done, such as reducing the fee for bankruptcy applications from its current level of £680 to a more manageable sum, and allowing it to be paid over the course of the bankruptcy, rather than before the procedure can start. Still, the breathing space will be a great help to a great number of people, and should - we hope - lead to more people finding a pathway out of debt which is tailored to their needs and situations.