Breathing space initiative for individuals with problem debt

In June 2019 the Government announced a plan to introduce a new “breathing space” scheme to protect individuals and families struggling with problem debt and to give those individuals and families extra help and time to get their finances under control. 

The impact assessment (“IA”) and press release in relation to the scheme were published on 6 February 2020 and have gathered quite a lot of attention in the press, especially in light of recent statistics which have shown an increase in the number of personal insolvencies, particularly amongst women. In the latest published figures (for Q3 2019), the number of insolvencies was up by 22.7% compared to the same period in the previous year (Q3 2018).  

So what is the “breathing space” scheme and why has it been introduced?                                                   

The what

In a nutshell, the new plans will see the introduction of a 60 day breathing space period from early 2021, during which people with problem debt will be protected from enforcement action from creditors and will see their interest payments frozen.

• The quid pro quo here is that during this period individuals must engage with professional debt advisers so that they can find a long-term solution to their debts and get back on track with their payments.
• The new breathing space regime will also give those with mental health issues the same protections on creditor enforcement and frozen interest payments while they receive NHS treatment, but these individuals will not be required to seek debt advice during the 60 day period.
• The scheme will cover a broad range of debts including credit cards and loans and arrears owed to central and local government (including council tax arrears, personal tax debts and benefit overpayments).

The why

• The IA reports that there are around 9,000,000 people in the UK struggling with their debts, with approximately 1,100,000 people receiving advice each year and an additional 650,000 to 2,900,000 people would benefit from debt advice but do not seek it
• The IA also reports that those who do take advice often obtain it too late because stress, anxiety and other internal barriers (for example, the perceived stigma of being in financial difficulty) delay them seeking advice. This situation is often compounded when creditors start chasing for repayment, initiate court processes or instruct bailiffs
• The “breathing space” period is designed to:
  • encourage and incentivise more people to access debt advice and to do so sooner, in the hope that this will help them to achieve better and more sustainable outcomes in relation to their financial debt issues;
  • require creditors to provide forbearance for those individuals who are taking debt advice, in order to enable those debtors to take that advice on board and action it without the pressure of creditor enforcement action; and
  • benefit creditors, as over £400,000,000 in extra repayments are expected in the first year of the scheme as individuals get the support they need to get their payments back on track.
• In addition, a statutory debt repayment plan scheme is slated for introduction after the breathing space scheme, which will offer similar protection and help individuals to repay their debts over a manageable timeframe and which will flex as people’s life circumstances change.

The view

David Steinberg, co-head of Restructuring & Insolvency at Stevens & Bolton comments: “The breathing space announcement is consistent with earlier government initiatives to alleviate the impact of problem debt, including consumer credit reform and widening access to professional debt advice. However, further detail on the breathing space regime will be needed, including in relation to:

• ensuring individuals in the 60 day breathing space period do take proactive action to tackle their financial difficulties;
• balancing the needs of debtors and the rights of their creditors;
• the qualification criteria for support with mental health issues; and
• how the statutory debt repayment plan scheme will work in light of and possibly in conjunction with existing personal bankruptcy processes, for example, individual voluntary arrangements or debt relief orders.

That said, the introduction of breathing space is a positive move and is something that many industry bodies have advocated for some time (including R3, the association of business recovery professionals).  So too is the news that government debts will be included in the breathing space regime, as this provides vulnerable individuals with greater protection from creditor pressure (for example, bankruptcy proceedings initiated by HMRC)”.