Breathe in – wait 60 days – and out

Breathing space regulations

Following a long running consultation on personal debt issues in the United Kingdom – notwithstanding something called Brexit slowing everything else down significantly – the Government has finally taken steps to implement a new scheme to assist “millions of people with problem debt.“

Individuals with personal debt will shortly – around 2021 – be permitted a further 60-day period of grace in connection with additional interest, fees and charges in new proposed regulations which are being colloquially named or known as a “breathing space scheme”.

The scheme is planned to also cover smaller sole traders (where their turnover is under the VAT threshold – currently £85,000) and any debts incurred up to an individual entering into the scheme.

Following the Pre-Action Protocol for Debt Claims coming into force on 1 October 2017 (“the Debt PAP”), debtors are already entitled to a 30-day response period to seek independent debt advice following a formal letter before action but this time can be extended to allow for proposals and requests for further information to be made. The breathing space scheme, whilst it will not always be invoked in connection with pending debt litigation, will supplement the requirements under the Debt PAP to allow debtors a greater period of time to consolidate their position and take steps to tackle their outstanding liabilities head on.

Qualifying for the breathing space

It is envisaged that breathing space will be available to individuals once they meet the following criteria:

• They must be seeking to access debt advice from individuals who are regulated by the Financial Conduct Authority;
• It is the view of the debt advisor that it is realistic to assume that the individual will enter into a formal debt solution but they simply require time to do this; and
• The individual has not utilised the breathing space provisions in the preceding 12 months.

It is interesting to note that (to qualify for the breathing space) this advice cannot be paid for. The Government has suggested that such advice would be obtained from Citizens Advice or specific debt charities such as StepChange or the Debt Advice Foundation but it is likely that the best personal debt advice would be available from a qualified insolvency practitioner accountant, who typically would not charge for this type of advice, as they will be able to advise on all available personal debt options (which, if suitable in the circumstances, may be advice on applying for bankruptcy or entering into an Individual Voluntary Arrangement (“IVA”)) and not just debt management plans.

A slight variation applies to breathing space used by people who are receiving NHS Mental Health crisis treatment in that whilst they receive treatment, the protection will continue to apply. As is the case in most criteria-based schemes, there is always a possibility for these to be abused by individuals who may not otherwise be entitled and there I anticipate that appropriate checks will need to be implemented in order to minimise any potential abuse.

Creditors will be informed of both the individual’s entrance into and exit from the breathing space by an electronic portal which will be managed by the Insolvency Service. It is planned that there will be private registers for creditors to search against individuals who may owe them money, but the information provided will be limited. It is not envisaged that a public register of individuals in the breathing space will be available.

The flip side of the coin

At first sight the breathing space provisions may sound unashamedly helpful to those suffering from debt and the scheme is broadly welcomed by insolvency trade body R3, who had a hand in shaping the proposals into something more practical. However, we cannot forget to consider the potential impact the scheme may have on creditors.

With insolvency rates slowly rising (Mike Pavitt’s recent blog looks at this topic) and without complete specifics on the entirety of the breathing space provisions (although these are understood to be progressing) there appears to be a potential opportunity for debtors to abuse both the breathing space and the Debt PAP in tandem.

For example, say a creditor looks to commence recovery action against an individual debtor who then enters into breathing space in response to this correspondence. Sixty days later (the period of the breathing space) the debtor has not put forward any proposals or entered into any suitable form of appropriate debt solution or repayment plan, so the creditor is forced to “ramp it up” by instructing debt recovery solicitors who send a letter before action which must permit, under the Debt PAP, a 30-day response period. The debtor responds on the final 30th day confirming that they now need some further information from the creditor, providing a further extension of up to a further 30 days (4 months down the line) and unless the creditor can provide such information on the same day the request is made, an additional 30 days will run from when the creditor provides those documents. It is therefore possible that the debtor could attempt to run rings around legitimate creditors unless some form of balance is achieved between the proposed regulations and the current Debt PAP.

It is hoped that the government’s regulations on the breathing space regulations, once detailed, will tie-in sufficiently with the Debt PAP to ensure no unnecessary delay occurs.

If the Debt PAP and breathing space can work together fairly – then the regulations will be a welcome attempt at addressing an ever growing debt problem. However, in the event that the detailed regulations are left open to abuse by savvy debtors, then it could be creditors who will lose out in the long term which may have a knock-on effect on the economy on the whole. Only time will tell!

Okay, you can breathe out now.

For more information on this topic, or if you require any advice in connection with bankruptcy, insolvency or any other associated debt issues, please feel free to contact Christopher Parsons.