Draft legislation on the Breathing Space and Mental Health Crisis Moratoriums

A draft version of the Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 was published and laid before Parliament on 15 July 2020 and has recently been amended. You can access the draft Regulations here, and the explanatory memorandum here.

The Regulations seek to introduce two separate moratoriums for debtors and most of the Regulations are expected to come into force from 4 May 2021. We have set out the effect of, and the eligibility requirements, for each moratorium further below.

The effect of the moratoriums

During the moratorium, creditors must refrain from charging interest, fees, penalties or charges. The creditor will also be unable to take any enforcement action in respect of the debt or instruct an agent to enforce. 

The term "enforcement action" is widely defined. Creditors will be unable to: commence legal proceedings, apply for judgment, obtain a warrant, enforce a judgment, take steps to collect a moratorium debt, serve notice to take possession of a property, petition for bankruptcy, or contact a debtor for the purpose of recovering/ enforcing a debt. These restrictions will also apply to joint debtors, irrespective of whether they themselves are subject to the moratorium.  

If a debtor enters a moratorium whilst legal proceedings are ongoing, then the creditor must inform the Court. During the moratorium, the courts must take all necessary steps to ensure that any action or proceedings to enforce a court order or judgment concerning a moratorium debt does not take place during the moratorium period, although the proceedings may continue until the court makes an order or judgment in conclusion of such proceeding.

Equally, if the debtor enters a moratorium whilst a creditor presents a bankruptcy petition to the court then the petition must be stayed by the court until the moratorium ends.

Breathing Space Moratorium

For a debtor to benefit from the 60 day Breathing Space Moratorium, the debtor must seek professional advice from an authorised person (which must be an FCA regulated debt advisor, or an organisation which qualifies for exemption) or a local authority and apply to their advisor for a moratorium. It will then be for the advisor to correspond with the Secretary of State (i.e. the Insolvency Service) to formalise the moratorium, who then maintain a central private register of persons in moratoria.

Mental Health Crisis Moratorium  

The Mental Health Crisis Moratorium will be available to debtors detained in hospital under the Mental Health Act 1983 or is receiving "any other crisis, emergency or acute care or treatment in hospital or in the community from a specialist mental health service in relation to a mental disorder of a serious nature".

The Mental Health Crisis Moratorium will last for the duration of the debtor's treatment plus 30 days. However, the debtor will likely be able to enter a Breathing Space Moratorium to extend the period of non-enforcement.

Comment

The moratoriums are another form of support being offered to debtors. This will present creditors with a further delay to recovering outstanding liabilities which will undoubtedly impact creditors' cash flow predictions and recovery processes, which have already been negatively impacted by the COVID-19 pandemic and the current recession.

The Regulations pose many questions, for instance how will the Mental Health Moratorium apply to debtors who have long term mental health issues? Do creditors need to ask the Insolvency Service if a customer is in moratoria, or will the Insolvency Service inform creditors? Will the Insolvency Service require evidence that the person is indebted to the enquiring creditor? What will happen if the Insolvency Service fails to inform creditors, or will the Insolvency Service only inform high street lenders? Creditors should expect to receive further guidance in due course.

Before the Regulations have effect in May, creditors and lenders should assess their processes and computer systems and make improvements where necessary. Creditors should consider whether their current systems allow an immediate hold on correspondence which is sent automatically to customers, and whether interest and charges can be put on hold.

The Regulations propose that where a limitation period falls within a moratorium, then the limitation date will be extended and will expire at the end of the period of eight weeks from the day on which the moratorium ends. However, many creditors may prefer to agree a stay in order to push back the limitation date further.

We will provide a further update once the Regulations have been approved, together with any relevant amendments to the operation of the moratorium periods.

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