Breathing space and mental health crisis moratoriums: what do they mean for creditors and debtors?

Posted: 01/06/2021

Suffering with mental health problems and being in financial difficulty are often strongly linked, with one frequently causing or worsening the other. The introduction of The Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 (referred to in this article as the ‘debt respite regulations’), which, with very limited exceptions, came into force on 4 May 2021, allows an eligible individual breathing space from any action a creditor may take for a ‘problem debt’.

What is the difference between the two moratoria?

Breathing space
A breathing space moratorium will protect an eligible debtor from enforcement action commenced by a creditor in relation to a moratorium debt for up to 60 days or until the moratorium is cancelled (or if the debtor dies, until the day after the death of the debtor).

Eligibility depends upon several factors including residency, ability to pay debts and whether a debt is a qualifying debt. A debtor must apply for a breathing space moratorium via a Financial Conduct Authority (FCA) authorised debt advice provider. The adviser must be satisfied that the debtor is unable to pay some of the debt as it falls due and that a breathing space moratorium would be appropriate.

A debtor is expressly required to pay ongoing liabilities, such as rent, and the moratorium may be terminated if the debtor does not do so.

Mental health crisis
A debtor must firstly satisfy all the criteria required for a breathing space moratorium to be eligible for a mental health crisis moratorium. However, there are a few notable differences between the two. A mental health crisis moratorium:

• is only available to a debtor who is receiving mental health crisis treatment;
• ends 30 days after the debtor stops receiving treatment or once the moratorium is cancelled. It will also end if 30 days pass and the debt advisor receives no treatment update from the nominated contact;
• can be applied for by other parties on behalf of the debtor if the debtor is unable to make the application;
• has no limit on the amount of mental health crisis moratoria that can be applied for and the debtor can apply for a mental health crisis moratorium if an existing breathing space moratorium is in place; and
• has no requirement for a debtor to continue to pay ongoing liabilities to remain in the mental health crisis moratorium.

What is a problem debt?

Qualifying debt includes credit cards, unsecured personal loans, and rent and bill arrears.

Non-eligible debt includes fines imposed by a court; those incurred from fraud; child maintenance or obligations under an order made in family court proceedings; and student loans. Any debt incurred that relates solely to a debtor’s business, where the business is registered for VAT or where the debtor is in partnership with anyone else, is also excluded.

The moratorium can only include arrears in existence at the time of the application in relation to secured debt such as mortgages and conditional sale agreements. There is no financial limit on the size of the qualifying debt and the debt may have accrued prior to 4 May 2021.

If a debtor’s application for a moratorium is successful, the moratorium will include any qualifying debt owed by the debtor at the time the debtor applied and about which the debtor gives details to the Insolvency Service, which will notify those creditors affected.

What should the creditor do (and not do) if/when notified of a moratorium?

If a creditor receives a notification that a debtor is in a breathing space moratorium or a mental health crisis moratorium, the creditor in question must hold all action pursuing the debt and apply the protections.

The protections include:

• the debtor not having to pay interest, fees, penalties and charges during the moratorium (interest, fees, penalties and charges do however continue to accrue during the moratorium);
• stopping any enforcement (the definition of which is broad) or any recovery action that is in progress to recover the debt; and
• stopping any contact with the debtor which demands repayment.

Non-compliance: any actions the creditor takes in contradiction of the above requirements are null and void and they may become liable for debtors’ costs. Complaints may be made to any relevant external ombudsman or regulatory body.

Can a moratorium be challenged?

Yes, a creditor can request a review if the moratorium unfairly prejudices the creditor’s interests, or if there has been some material irregularity, within 20 days of the moratorium starting. The creditor must provide the debt advisor with a written statement outlining the reasons for the review and include any supporting evidence.

A note for creditors

It is unclear how much traction the debt respite regulations will gain, but it is important that creditors understand what they can and cannot do if they receive a notification that a debtor has been granted a breathing space or mental health crisis moratorium.

There will, without doubt, be a minority of debtors who abuse the use of the moratoria to shield themselves from enforcement where they can pay. However, if prompt action is taken, creditors can seek to cut through such attempts and, if there is any uncertainty, should seek independent legal advice to avoid pitfalls.

For more information on how the debt respite regulations apply to landlords, please see this article for more specialised guidance.

This article has been co-written with Lara Wylder, a trainee solicitor in the commercial dispute resolution team.

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