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Debt Respite Scheme (Breathing Space)

The government, conscious of the increased stress on those individuals with spiralling debts and creditor pressure, has put legislation in place to allow a breathing space where they are protected from creditor action while they take advice on how to deal with the issue. These regulations came into force on 4 May 2021, and many debt charities have signed up to give advice to individuals who might need temporary protection from creditors while they figure out the best course of action.

There are from the outset two categories: Standard Breathing Space and a Mental Health Crisis Breathing Space. There are differences between the two, which we will explain later in this blog.

The Standard Breathing Space (SBS) is available to any individual with creditor issues. It gives them up to 60 days’ protection from most “creditor action”. This means that in most cases creditors can’t contact them, and that interest and charges will be frozen.

A Mental Health Crisis Breathing Space is only available for an individual who is currently receiving mental health crisis treatment and as such is certified by an Approved Mental Health Professional (AMHP). If those criteria are met then the breathing space will last as long as the person is receiving treatment plus an additional 30 days (irrespective of how long the treatment lasts).

It should be noted that the breathing space in both cases can only be accessed through a debt advisor. The advisor in the case of the Standard Breathing Space must review the position between days 25 and 35, and the SBS can only last up to a maximum of 60 days.

The individual must engage with their debt advisor (either licensed by the FCA or a Local Authority) to prevent people just putting one in place and then not dealing with the issues. Whilst subject to the Breathing Space, individuals must also pay their ongoing liabilities and not incur any further debt over £500.

An SBS is only available once a year, whereas the Mental Health Crisis Breathing Space has no limit.

Is everyone eligible for an SBS?
Broadly speaking, most individuals are eligible for an SBS. However, sole traders who are registered for VAT or are part of a partnership aren’t.

In addition, anyone who’s subject to a current Bankruptcy Order, Debt Relief Order, Interim Order or Individual Voluntary Arrangement (IVA) may not apply.

The debtor must also agree to give all relevant information about their debts to their advisor, as they may decide that an SBS isn’t appropriate for you.

Is this going to catch on?
As the Insolvency Service doesn’t (yet) publish statistics about the debt respite scheme, it’s unclear how many people will take advantage of it. It’s also slightly unclear as to what benefit it will be for many people with debt problems.

In October alone the figures for personal insolvencies were as follows:

  • 7,031 IVAs registered (using a three-month rolling average)
  • 1,937 DROs (Debt Relied Orders)
  • 601 bankruptcies (518 debtor applications and 83 creditor petitions)

Many will question the benefits of an SBS if it only lasts for a short period and doesn’t solve the problem. More than likely, after the breathing space, the majority of individuals will end up going into an IVA anyway. Our view is that when an individual is facing financial hardship the level of stress is extremely high. Taking advantage of a breathing space to reduce the immediate pressure and give that person the time to take a step back to give proper evaluation to the options available can only be seen as a positive step. Hopefully this will also prevent people being pressurised into going into an IVA when perhaps bankruptcy was a better option.

For obvious reasons, the Mental Health Crisis Breathing Space is a very different animal, and with the reported huge increase in those suffering mental health issues, this is a very positive step by the Government to provide some help when it is most needed.