Contractors, can the new Breathing Space law resuscitate your personal finances?
The covid-19 crisis has led to a great deal of financial distress for individuals on a personal level, but this was undoubtedly compounded for contractors who as personal service company (PSC) directors also found themselves falling through the cracks of the Government’s financial support for businesses.
To help relieve some of the pressure on individuals, the government has introduced new legislation through the Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020, which is otherwise referred to as ‘Breathing Space,’ writes Mark Davies, insolvency partner at Aaron & Partners.
What is Breathing Space, and how does it relate to contractors?
The scheme came into force on May 4th 2021 and is designed to give legal protection to individuals who are in problem debt. It gives those facing financial difficulties ‘Breathing Space’ to receive debt advice, allowing them to get their finances back on track and although it does not cover any business debts for PSCs, it does effectively grant each eligible individual a temporary protective shield that companies they may owe money to in their personal life cannot then bypass.
So for those contractors with personal debts, Breathing Space could be a vital tool in their efforts to manage repayments in an orderly fashion, without the worry of facing further action from creditors (i.e. those they owe money to).
What forms of Breathing Space are available?
There are two types of Breathing Space available to individuals who owe money.
1. Standard Breathing Space
The standard Breathing Space regulation provides a debtor with legal protection for up to 60 days. The protection includes freezing charges and certain interest on debts, along with pausing enforcement action and contact from creditors.
2. Mental health crisis Breathing Space
Under the Mental Health Crisis Breathing Space regulation, debtors are provided with protection throughout the entirety of their mental health crisis treatment, plus a further 30 days.
To be eligible for this protection, debtors will need to obtain evidence from an Approved Mental Health Professional (AMPH), certifying that they are receiving mental health crisis treatment.
How is a breathing space started?
Breathing Space protection can only be accessed through a debt adviser, who is authorised by the Financial Conduct Authority (FCA) or a local authority.
Before a debt adviser can approve Breathing Space, they must be satisfied that the debtor is eligible and meets all the requirements, namely that the debtor:
- is an individual – it’s important to remember the new law only applies to personal debt (not a limited company or corporate debt)
- lives or usually resides in England or Wales
- owes a qualifying debt to a creditor
- is not subject to a debt relief order, an Individual Voluntary Arrangement (IVA), an interim order or is an undischarged bankrupt
- does not already benefit from Breathing Space or has had such benefit in the previous 12 months.
The debt advisor must be satisfied that the debtor cannot (or is unlikely to be able to) repay all or some of their debt – and that a ‘breathing space’ is the appropriate solution.
The debt adviser might decide that Breathing Space is not appropriate for the debtor. For instance, if the debtor can access funding or income, they might be able to repay their debts with some budgeting advice. A further example is that the debtor owns assets which could easily be sold to pay off the debt.
The electronic register
If Breathing Space is approved, the debtor’s details will be entered onto an electronic register which is maintained by the Insolvency Service, referred to as the ‘Breathing Space register’. This will include details of any debtors benefiting from a Breathing Space, namely:
- full name
- date of birth
- usual place of residence
- the date when the breathing space starts
- the date when the breathing space ends (when it does)
- details of the debt(s) included in the breathing space
Creditors will be able to access information on the register relating to the debtor and the breathing space debt which they are owed. However, creditors will not have access to any information about any other creditors and Breathing Space debt which the debtor has, or the debtor’s usual place of residence (if it is withheld).
Creditors’ responsibilities during a Breathing Space
Once the debtor’s details have been registered, notification will be sent to any creditors that the debtor has included in their Breathing Space application.
Notification will be sent either by electronic communication (email or the electronic service) or by post. Creditors must follow the protection from the date they receive notification. Creditors who have opted for electronic notification are deemed to have received the notification on the same day it is sent. For postal notices, creditors are deemed to have received notification four business days after it was posted.
Having received this notification, creditors must identify all debt owed to them by the debtor. Creditors should do this as soon as possible, as they will need to inform the debt advisor of any debts which have not been included in the notification.
Upon receiving notification, creditors will need to cease:
- any enforcement or recovery action being taken for any interest, fees, penalties, or charges for the duration of the Breathing Space
- any enforcement or recovery action to recover the debt (this includes any appointed agent)
- contacting the debtor to request payment for the debt unless permission is granted by the court
Stopping enforcement action
As mentioned above, once the Breathing Space has commenced, creditors, or anybody acting on their behalf must not take any enforcement action against the debtor.
Enforcement action is when a creditor attempts to:
- enforce a judgement or order issued by a court or tribunal
- enforce their security over a Breathing Space debt
- obtain a warrant or writ
- apply to Department for Work and Pensions (DWP) for a new third party deduction to be taken from an individual’s benefit payments
- obtain or seek a liability order
- sell or take control of the debtor’s assets
IT system limitations?
Where possible all interest, fees, penalties, and charges accruing on debts should be frozen for the duration of the Breathing Space. However, where IT limitations prevent this from happening, the amounts can continue to accrue provided that the debtor is not asked to pay them.
The scheme does not expect creditors to make complex system changes. Instead, creditors can make specific adjustments to reflect the correct balance owing by the debtor.
Any debts included in a Breathing Space must be qualifying debts, this will include:
- credit cards
- personal loans
- store cards
- pay day loans
- utility bill arrears
- mortgage or rent arrears
Government debts such as tax and benefit debts may also qualify unless they are included in the list of excluded debts (see below).
Qualifying debts can include any debts which the debtor had before the Breathing Space regulations came into force. Debts incurred during a Breathing Space do not qualify. Neither do new arrears on a secured debt which arises during the Breathing Space.
Joint debts can be included in a Breathing Space, even if only one person applies for the Breathing Space. The joint debt would become a Breathing Space debt and creditors must apply the same enforcement action safeguards to the other people who owe that debt.
Guaranteed loans can also be included in the Breathing Space. However, the protections do not extend to the guarantor. The guarantor can apply for their own Breathing Space if they are eligible.
Not all debts are included in the protection, examples of excluded debts are:
- secured debts (such as mortgages, hire purchase or conditional sale agreements)
- debts incurred from fraud or fraudulent breach of trust
- liabilities to pay fines imposed by a court for an offence
- obligations from a confiscation order
- child maintenance
- a crisis or budgeting loan from the social fund
- student loans
- advance payments of Universal Credit
- council tax liabilities which have not yet fallen due (if all instalments for that financial year have fallen due and have not been paid, these are deemed to be a qualifying debt).
How to know when a Breathing Space has ended?
A standard Breathing Space will end:
- 60 days from the date it started
- the day after a debt adviser or a court revokes it
- if a debtor dies during the Breathing Space period, it will end the following day
A Mental Health Crisis Breathing Space will end:
- 30 days after the debtor’s mental health crisis treatment ended
- 30 days after the date a debt advisor receives no response after asking for confirmation of a debtor’s ongoing mental health crisis treatment.
Creditors will be notified when a Breathing Space comes to an end. If the Breathing Space was revoked by a debt advisor or by the court, creditors will be notified of the reason why. Similarly, if the Breathing Space period comes to an end because the debtor has died, creditors will be informed.
Final Breathing Space considerations
Penultimately, contractors ought to be aware. From the date the Breathing Space ends, creditors can re-start applying interest, fees, penalties, and charges to debts.
Creditors can also continue with any formal enforcement action to collect debts. However, it is important to note that creditors cannot apply interest, fees, penalties, or charges which would have accrued during the Breathing Space period, unless the court allows.
As a relatively new form of protection, so far there is little evidence of creditors or applicants falling foul of Breathing Space. However any business chasing debt should check whether it has been applied to the debtor. Any attempts to collect payments during a period of Breathing Space could lead to penalties for the creditor, although the severity of any potential penalty is yet to be confirmed.
And finally, although the protection is in its infancy, all the signs are that it will grow up very quickly. The introduction of Breathing Space comes after the Money Advice Service estimated that 8.3 million people in the UK are in debt, with the impact of the pandemic meaning that 4.6 million people had accumulated over £6 billion worth of debt and arrears by May 2020.