Breathing Space Scheme Guidance

Overview of the Breathing Space Scheme

The new government Breathing Space scheme (also known as the Debt Respite Scheme) is designed to give those in problem debt time and space to assess their financial circumstances and enter an appropriate and sustainable debt solution. The Breathing Space scheme regulations are due to come into force on 4^th May 2021 for both England and Wales.

The Breathing Space scheme will allow those in problem debt to enter a ‘breathing space’ period, where they are protected from both the accruing of fees and enforcement actions on their debt. This means that credit unions will be legally restricted from accruing interest and charges and taking a range of enforcement actions on debts which are subject to the Breathing Space scheme regulations.

The Breathing Space period is referred to as a moratorium. The Breathing Space scheme has two types of moratorium: a breathing space moratorium and a mental health crisis moratorium. The former applies generally to anyone in problem debt who would benefit from a breathing space period and the latter is specifically for those in problem debt who are receiving mental health crisis treatment. There are slightly different rules for the two types of moratorium, that will be clarified throughout the guide.

Debtors will have to apply to enter a moratorium through an FCA approved debt advice provider. To qualify, debtors must be unlikely to repay some of their debt and a breathing space period is considered as an appropriate response to their problem debt. Debt advice providers will work alongside the Insolvency Service to administrate the Breathing Space scheme. The Insolvency Service will notify credit unions  when a relevant moratorium is entered or exited. The debt advice provider administrating a breathing space period will be the main point of contact for credit unions.

This information guide informs on the legislation for the scheme, as well as any other relevant information available. The full legislation is available to view here.

If you have any questions on the Breathing Space scheme, please email policy@abcul.org.

Debtor and Debt Eligibility

Debtor Eligibility

Below is an overview of the requirements for a debtor to enter a breathing space moratorium and for a mental health crisis moratorium. Though this information on debtor eligibility is useful for credit unions, the assessment of who qualifies for a moratorium is the responsibility of debt advice provider. A credit union may need to refer to these requirements if they wish to request a review of a moratorium. The scheme eligibility should also give a credit union an idea of how many of its members will potentially qualify for the scheme.

The debt advice provider may put in place a moratorium for the debtor if they consider that the debtor is unlikely to be able to repay some or all of their outstanding debts and that a breathing space/mental health crisis moratorium would be an appropriate response.

A breathing space moratorium will be considered appropriate if such a moratorium would be necessary or helpful in getting the debtor to enter a beneficial debt solution. If it is clear that a debtor needs to enter a formal debt solution and they can do so straight away, the debtor will not qualify for a breathing space moratorium. Further, if the debt advice provider would advise the debtor of something other than a debt solution, such as budgeting, the debtor would also not qualify for a breathing space moratorium.

For a mental health crisis moratorium, the debt advice provider is not required to carry out as thorough an assessment on whether the moratorium will be appropriate. However, the debt advice provider will still need to assess if the debtor already has sufficient funds to discharge or liquidate their debt.

To be eligible for either type of moratorium, a debtor must:

• Owe a debt that qualifies for a moratorium
• Be a resident of England or Wales
• Not be subject to a debt relief order
• Not be subject to an interim order or individual voluntary arrangement
• Not be an undischarged bankrupt
• Not have another breathing space or mental health crisis moratorium in place

To be eligible for a breathing space moratorium, a debtor must also not have had a breathing space moratorium in place within the 12 months prior to the date of application. In addition, the debtor must have first obtained debt advice from the FCA-regulated debt advice provider.

To be eligible for a mental health crisis moratorium, a debtor must also be receiving mental health crisis treatment. The debtor does not need to have received debt advice before the moratorium and there is no restriction based on when they last had a moratorium.

Debt Eligibility

This section specifies qualifying debt, which is any debt or liability that is eligible for the breathing space scheme restrictions. The vast majority of debts qualify as moratorium debt, as long as they were owed by the debtor at the point of application and have been reported to the Government Insolvency Service by the debt advice provider for the moratorium.

Qualifying debt includes liabilities in relation to an order or warrant for possession of a debtor’s place of residence or business, a court judgement or a controlled goods agreement

There are a few types of debt that may be owed to credit unions that do not qualify for a moratorium:

1. Debt acquired by debtor through any fraudulent behaviour.
2. Business debt incurred by the business of the debtor, where the business is large enough to pay VAT or the business debt is also owed by a business partner of the debtor.
3. Secured debt which does not amount to arrears in respect of secured debt.

The exemption above  for secured debt means that the principal on a secured debt may still accrue fees and interest during a moratorium, with only the arrears protected from fee/interest accrual and enforcement action. For example, debtors with mortgages will still have interest accrue on their principal mortgage loan, but a moratorium will apply to any mortgage arrears. It should be noted that new arrears on a secured debt that arise during a breathing space period do not qualify as moratorium debt, so enforcement action may still be taken on new arrears that occur during a moratorium.

Secured debt includes mortgages and hire purchase or conditional sale agreements. The moratorium exemption may also apply to the principle on an attached share loan, if it is secured. This is only in cases where an attached share loan meets the conditions to be classified as a secured loan, which are that: it is clear in the loan agreement that the loan is secured; the loan is secured against shares that are equal to or greater than the loan; and the shares are non-withdrawable to the member.

Restrictions of a Moratorium

Restrictions on Moratorium Debt

A moratorium prevents credit unions from taking certain actions whilst it is in place. There are two main types of restriction put in place by a moratorium. The first type of restriction is a pause on interest, fees and charges. The second type is a pause on creditor recovery and enforcement action for a debt.

During a debtor’s moratorium period, a credit union must not:

• Require a debtor to pay interest that accrues on any moratorium debt. Note that if this moratorium debt is a secured debt, a creditor is only prevented from accruing interest on the arrears on this debt.
• Require a debtor to pay any fees, penalties or charges in relation to a moratorium debt that accrues
• Take any enforcement action in respect of a moratorium debt
• Instruct an agent to carry out any of the above

In summary, a credit union must stop the accrual of fees and interest on a moratorium debt during the moratorium period, as well as ceasing any enforcement action regarding any moratorium debt.

It should be noted that a moratorium is not a payment holiday. Debtors will still be required to repay their debts during a Breathing Space period. This means that credit unions should accept payments from a Breathing Space debtor, but they may not take any step towards collecting the debt.

Enforcement Actions

A credit union may not take enforcement actions during a moratorium. The following steps are classified as an enforcement action in respect to a moratorium debt:

1. Taking any step to collect the moratorium debt
2. Taking a step to enforce a legally issued judgement or order regarding the moratorium debt
3. Start any action or legal proceedings against the debtor in relation to the non-payment of the moratorium debt. This includes starting a bankruptcy petition.
4. Make an application for a default judgement, relating to a claim for money against the debtor
5. Contact a debtor for the purpose of enforcement of a moratorium debt

Any agent working on the creditor’s behalf, is also prevented from taking these actions. Agents include enforcement agents, solicitors and appointed debt collectors.

It also must be noted that the restrictions of enforcement action extends to joint debtors for any moratorium debt that is on a joint account.

After the moratorium period has finished, a creditor or agent cannot ask the debtor for any interest, fees, penalties or charges that accrued during the moratorium period. They also cannot treat the non-payment of these charges as a breach of agreement between the debtor or creditor, i.e. a creditor cannot penalise a debtor for the moratorium period.

Deductions made under the Eligible Loan Deduction Scheme count as taking an enforcement action towards collecting a debt, and so should be paused during a breathing space period. If a moratorium is entered for a debt that is being collected by ELDS deductions, the credit union must notify DWP to pause these deductions.

However, other deductions that are used as the standard repayment mechanism for a debt may continue as normal during a moratorium, as long as interest and fees are paused on that debt. For example, loan repayments via payroll deduction and deduction from Child Benefit for family loans may continue during a breathing space period.

Further, a moratorium does not affect the following:

• A charging order made before the start of the moratorium
• An attachment of earnings order made before the start of the moratorium
• Enforcement actions on ongoing liabilities, which includes the principle of a mortgage

In addition, a creditor may also take enforcement action if there has been legal permission to carry out this action during a breathing space period, issued by a court or tribunal.

Extension of Limitations Periods and Deadlines

In cases where a moratorium debt was due to become statute barred during a breathing space or in the following 8 week period, an extension is allowed for creditor. In either situation, a limitation time limit or enforcement time limit is extended so that the debt becomes statute barred 8 weeks after the end date of the moratorium.

Contact between creditor and debtor during a moratorium

During a moratorium period, a creditor or a creditor’s agent cannot contact a debtor with regards to the enforcement or payment of a moratorium debt. However, a creditor or agent is permitted to have contact with a debtor’s debt advice provider, in relation to the debtor’s moratorium debt or debt solution.

The creditor or agent is also allowed to have contact with the debtor regarding:

• Anything unrelated to the moratorium debt, including ongoing liabilities or non-eligible debt
• The moratorium debt or a debt solution, at the debtor’s request
• A complaint or query made by the debtor
• Any legal actions or proceedings that are still permitted during a moratorium
• A routine update on debt balances – as long as this is not related to the enforcement of debt collection

Administration of the Moratorium

Administration and Communication

The administration and communications for the scheme will be handled by the Insolvency Service. The Insolvency Service will provide an electronic portal for credit unions receive notifications regarding moratoria . The electronic system will be used to notify credit unions of when a debtor is entering or exiting a moratorium.

The debt advice provider will act as the main point of contact for creditors in regards to a moratorium. Credit unions should direct queries on an individual moratorium case to the debt advice provider stated in the moratorium’s notification.

The debtor must apply for a moratorium through the debt advice provider. The debt advice provider will inform the Insolvency Service that the debtor qualifies for a moratorium. The Insolvency Service will then enter this on the register and notify the credit union of the start date of a moratorium on any debt. Once the credit union has been notified of a moratorium, it is the credit union’s  responsibility to notify any third party or agent involved in the collection of a moratorium debt.

It also the responsibility of the debt advice provider and Insolvency Service to administrate a cancellation or end of a moratorium. Credit unions will be notified of the date on which a moratorium is no longer in effect by the Insolvency Service.

The Insolvency Service have now sent out emails to credit unions asking them to register for Breathing Space. Credit unions must respond to this communication with their preferred contact details for the Scheme, if they have not already done so.

If a credit union is unable to receive notifications electronically, they will be able to be notified by an alternative method, such as by post.

Duration of a Moratorium

A breathing space moratorium lasts for 60 days from its start date – unless it ends due to cancellation or the death of a debtor.

The duration of a mental health crisis moratorium differs to a breathing space moratorium, as this type of moratorium will last as long as the debtor’s mental health crisis treatment continues, plus 30 days. The mental health crisis moratorium will end on the earliest of:

• 30 days after the date the debtor stopped receiving mental health crisis treatment
• 30 days after the date the debt adviser tried to contact the debtor’s nominated point of contact about the mental health crisis treatment, if no response is received
• The date on which the mental health crisis moratorium is cancelled
• The date on which it ends due to the death of the debtor

Pausing the Accrual of Interest and Fees

The regulations allow some leniency if a credit union has logistical issues in pausing the accrual of interests, fees and charges during a Breathing Space period. This may apply to credit unions with limitations due to their IT systems or number of staff. If it is not possible to stop interests and fees accruing, they are still allowed to accrue, as long as there is no request or requirement for debtor to pay the accrued balance either during or after the moratorium. These credit unions are instructed to adjust and update the debt balance as soon as possible. Credit unions should try not to send or show a balance with accrued interest or charges during a breathing space, though it is not strictly against regulations if this occurs, as long as the debtor is not asked for payment of the accrued balance.

The guidance on how to administrate the pause in interest accrual states that only the debt balance needs to be adjusted for the interest pause, whilst the regular loan repayment amount can remain the same. There is not an expectation that creditors will need to make complicated systems changes to recalculate repayment amounts, but there is an expectation that you will adjust the balance on the debt to account for the interest pause as soon as possible.

Access to Information on Moratorium Debtors

Credit unions will have access to information on the Breathing Space scheme register about the moratorium debt that is owed to them, as well as some limited information on the debtors that owe them moratorium debt. Credit unions will not be able to access information on moratorium debt owed to other creditors, nor see information on debtors who do not have a moratorium debt owed to them.

This anonymity of breathing space debtors on the register extends to credit referencing. Credit unions will not need to report to credit reference agencies that a member has a moratorium in place. Accordingly, credit unions will not be able to check if a person applying for a loan already has a moratorium in place through a credit report.

However, a credit union may still ask a member applying for a loan if they have a moratorium in place. A credit union may decline a loan applicant for having a moratorium in place at its own discretion.

Key Steps to Take for Credit Unions

Preparation for the Breathing Space Scheme

Credit unions need to prepare for implementation of Breathing Space both logistically and financially.

Credit Unions need to prepare to be able to administrate and respond to moratoriums placed on debts. In May 2021, credit unions must be ready to monitor and be responsive to notifications of a moratorium.

Credit Unions should put mechanisms in place to administrate a temporary pause in the accruing of interest, fees and charges. There must also be the administrative capacity to cease enforcement actions from the credit union and any third party involved on the enforcement of a moratorium debt. This means that credit unions must be ready to promptly notify any agents or creditors by assignment working on their behalf for a moratorium debt.

ABCUL would strongly recommend that credit unions prepare financially for the Breathing Space scheme and consider the impact on provisioning.

The effect of the moratorium on income from loan interest and fees is difficult to predict. There is a range of possible effects on revenue that will come from the implementation of the scheme. A moratorium will bring a temporary loss of income from loan interest and fees to credit unions. As debtors are required to seek financial advice from FCA approved firms, they may be more likely to enter a sustainable debt repayment plan with larger payments to creditors compared to other debt solutions. The introduction of Statutory Debt Repayment Plans should also increase the number of debtors entering sustainable repayment plans, though these are not due to be implemented at the same time as the Breathing Space scheme. ABCUL will provide guidance once there has been further announcement on this new type of repayment plan.

On the other hand, a member’s participation in the scheme is not conditional on them entering a debt solution so this may just result in a loss of fees and interest during the moratorium with no improvement in the member’s financial circumstances in the longer term.

As a result, we advise that credit unions are cautious in their planning and preparation for the implementation of the scheme. If possible, it is recommended that credit unions dedicate some additional provisioning for problem debts that are due to be eligible for the scheme, to ensure they can absorb any loss presented by the new regulations. Once the scheme is underway, credit unions will be better able to assess the impact of moratoria on the credit union’s income and determine whether continued additional provisioning is necessary.

Steps to Take Following Notification of a Moratorium

There are key steps that a credit union must take as soon as possible after they have been notified of a moratorium:

1. Cease all enforcement action and accruing of fees and interest on the moratorium debt on the start date provided in the notification.
2. Identify any agents acting on behalf of the credit for a moratorium debt and notify them of the moratorium.
3. Carry out a search to identify any additional debt. If additional debt is found, the credit union must notify the debt advice provider.
4. Check whether the debt has been sold on. If a moratorium debt has been sold on, the credit union must notify the creditor by assignment and provide their contact details to the debt advice provider.
5. If there are any legal proceedings pending for a moratorium debt, the creditor must notify the court or tribunal of the moratorium.

Agents Appointed by Creditor

If a creditor has appointed an agent to act on their behalf in relation to a moratorium debt, the creditor needs to notify the agent of the moratorium and the impact this will have on their actions. It is a creditors responsibility to notify the agent as soon as reasonably practical. If the creditor fails to do so, they are liable to any losses caused for the debtor or agent.

Search for Additional Debt and Creditors by Assignment

Once a credit union has received notification of a moratorium, they must, as soon as practical, undertake a search of their records to identify any other debt owed to them by the debtor and if the moratorium debt has been sold on to another creditor.

If a credit union finds any debt that was not included in the notification of the moratorium, they must provide details of this debt to the debtor’s debt advice provider. The debt advice provider will then assess whether this debt is qualifying debt and then report any additional qualifying debt to the Insolvency Agency. From the point of this notification, this additional debt is then counted as moratorium debt, until the original end date of the moratorium.

If the credit union identifies that a moratorium debt has been sold on to an assigned creditor , the credit union must notify this creditor of the moratorium and provide their contact details to the debt advice provider. A creditor by assignment is any person who has the right to carry out the duties of creditor or has been passed the right to claim any part of the debt.

A credit union is liable for any losses incurred to the debtor or assigned creditor as a result of not notifying the debt advice provider of any additional debt or creditor by assignment.

Existing Legal Proceedings

If the credit union has any legal proceeding pending for a moratorium debt, the credit union must notify the court or tribunal of the moratorium at  soon as they receive notification of the moratorium. This includes any action or proceeding regarding the moratorium debt, such as a bankruptcy petition.

The court or tribunal will pause any proceedings that are prevented from progressing by the debt respite regulations.

There may be a situation where the debtor has made an admission, either before or during a moratorium, relating to a proceeding that concerns the moratorium debt. In this case a creditor party to that proceeding is permitted to enter judgment during the moratorium, if they would normally be allowed to do so.

Reviewing and Cancelling a Moratorium

Requesting a Review

If a credit union considers that a moratorium on a debt should be cancelled, they are permitted to request a review of that moratorium. There are two grounds on which a creditor may request a review of a moratorium:

1. The moratorium unfairly prejudices the interests of the creditor.
2. There has been a material irregularity, in that either:
   1. The debtor did not meet the eligibility criteria at the time of applying for the moratorium.
   2. A moratorium debt is not a qualifying debt.
   3. The debtor has sufficient funds to discharge or liquidate their debt that is due.

A request for a review must be sent in writing to the debtor’s debt advice provider for that moratorium. The written request must contain a statement of the grounds on which the review is being requested and evidence in support of the statement.

A request for a review of a moratorium must be done within 20 days of the day on which the moratorium started. If a creditor has requested a review regarding an additional debt, this 20 day period begins on the day the moratorium started for that additional debt.

Review and Cancellation of a Moratorium

Once a creditor has requested a review, the debt advice provider will carry out the review within 35 days from the day the moratorium started on this debt. The debt advice provider might incorporate the requested review into the mandatory midway review.

The debt advice provider will cancel a moratorium on a debt following a review, if they consider that the creditor has provided sufficient evidence that there are grounds on which to cancel the moratorium. Even if sufficient evidence has been given, however, the debt advice provider is not required to cancel a moratorium if they consider that a cancellation would be unfair on the debtor, given their personal circumstances. The debt advice provider should inform the creditor of the outcome of a review.

Court Application for Cancellation

If a credit union requested a review which did not lead to the cancellation of the moratorium, the credit union may make another application to request a cancellation to the county court.

A court application for a cancellation must take place within 50 days of the day that the moratorium started. In the case of additional debt, the application must be done within 50 days of the day the moratorium took effect on that debt.

The grounds for cancellation of a moratorium remain the same as for the initial review, that either the moratorium unfairly prejudices the interests of the creditor or there has been some material irregularity.

If the court considers that there is evidence of either of these grounds, they may cancel the moratorium on the debt owed to the creditor, as well as on any other debt. If the court cancels the moratorium, they can also require the debtor to pay any interest or fees that accrued during the moratorium.

Midway Review and Cancellation of a Breathing Space Moratorium

The debt advice provider for a moratorium is required to carry out a review of whether a breathing space moratorium should continue or be cancelled.  The midway review is carried out during the period of 25-35 days after the moratorium start date.

The debt advice provider may cancel a moratorium on a debt, if the midway review finds that either a debt solution has been entered for the moratorium debt or the debtor has not fulfilled their obligations. These obligations that the debtor must fulfil include:

• Providing full and accurate information to the debt advice provider
• Informing the debt advice provider of any change to the debtor’s financial circumstances
• Making any payments due during the moratorium period for ongoing liabilities
• Not taking out additional credit that would total more than £500
• Interacting with the debt advice provider in an appropriate manner

Cancellation of a Mental Health Crisis Moratorium

A debtor in a mental health crisis moratorium does not have to satisfy the same obligations as a debtor in a breathing space moratorium. However, a creditor can still apply for the cancellation of a mental health crisis moratorium, on the grounds of the moratorium unfairly prejudicing the interest of a creditor or if there has been a material irregularity. The debt advice provider will also cancel the moratorium at the debtor’s request or if the information provided by the mental health professional is found to be inaccurate or fraudulent.

If you have any questions on the Debt Respite Scheme, please contact policy@abcul.org.