Breathing Space: Are there Lessons to be Learned?

The UK Government has laid the draft Regulations for its much-awaited Breathing Space Scheme for people struggling with problem debt in England and Wales.

The new Debt Respite Scheme is outlined in Regulations made under the Financial Guidance and Claims Act 2018, and essentially contains two, new short-term, statutory solutions for people in debt.

The first of these is a Breathing Space Moratorium and the second is a Mental Health Crisis Moratorium.

Both are planned to commence on the 4th May 2021.

The UK Scheme’s are more far reaching than Scotland’s, in the level of protection they offer, but the dynamics behind them are different.The UK version requires more preliminary checks. Its like they don’t trust the debtor and miss the point behind a Moratorium.

Statutory Moratoriums

In the UK, the only Scheme that currently exists that is similar, is what is known as a Statutory Moratorium and has operated exclusively in Scotland since 2011. Initially introduced for the Debt Arrangement Scheme, the process was extended in 2015 so it can now be used without reference to any one formal type of debt solution.

Clearly the Scottish Scheme has been the inspiration for the UK Scheme, but how do the different Scheme measure up, when compared?

What are the Differences between the UK’s Debt Moratoriums?

How Long does a Moratorium Last?

The first point to note is which Moratoriums you use will depend on where you live.

Scottish Statutory Moratoriums can only be use by those who live in Scotland, whilst Breathing Space and Mental Health Crisis Moratoriums will only be available to those who are usually resident in England and Wales.

Another important difference will be how long they can last.

Scottish Moratoriums normally only last 42 days (although they have currently been extended to six months under emergency legislation related to the Covid 19 crisis, but this is due to be repealed on the 30th September 2020 – although Scottish Ministers can extend the emergency provisions for  another two successive six month periods).

A UK Breathing Space Moratorium, however, will last for up to 60 days normally.

UK Moratoriums, for those who are experiencing a Mental Health Crisis will continue to receive protection from their creditors for up to 30 days even after their treatment stops, and then will be able to apply for a Breathing Space Moratorium. There is, therefore, no time limit on how long the Mental Health Crisis Moratorium can be used for.

The UK’s Scheme’s are, therefore, more generous than the Scottish Moratorium, putting aside the current emergency arrangements in place.  Scotland also has nothing that is the equivalent to the Mental Health Crisis Moratorium.

Which Schemes offer the Greatest Protection?

Scottish Moratoriums are, relatively speaking, simple in the protection they provide. They stop Sheriff Officers (the Scottish equivalent of Bailiffs) from taking any legal recovery action, such as wage arrestments and bank arrestments and stop any creditor raising a bankruptcy petition if someone has registered a Moratorium. They are free to apply for and can be done relatively quickly online by either the client themselves or their money adviser on their behalf (although the client is required to sign the application form).

The UK Moratoriums, on the other hand will offer far greater levels of protection.

First, they will stop any interest, fees, charges, and penalties being applied to a Moratorium Debt by a creditor whilst it is active, and the Creditors will not be able to recover these charges even after the Moratorium ends.

However, they will also prevent a Creditors from commencing any court action to obtain a court order or judgement against the person in debt for a Moratorium debt or using Bailiffs or Enforcement Agents to recover the debt. They will also normally require a Court to pause an action where it has already been commenced before the Moratorium has been applied for and will stop landlords from applying for or executing an order to take possession of a property from a tenant, for a Moratorium Debt. They will also prevent mortgage lenders taking action to enforce the security they have over someone’s home, where the homeowner has mortgage arrears.

Scotland’s Moratoriums do not offer the same protection, albeit under housing and repossession legislation, Sheriff’s may choose to delay an eviction or repossession order where a Moratorium has been applied for.

The UK’s Moratoriums, however, also offer protection from utility providers installing prepayment meters and disconnecting gas and electricity supplies that the Scottish procedure does not (though it’s likely the Scottish Parliament does not have the authority to legislate to introduce these protections).

Other protections that UK Moratoriums have, that Scottish Moratoriums don’t, is they prevent lenders from relying on missed payments during a Moratorium to put an agreement into default, although it’s unlikely the Scottish Parliament would have such power under the Consumer Credit Act 1974, as it is a reserved matter.

In conclusion, even allowing for those areas that the Scottish Parliament cannot legislate in, it is clear that Scottish Moratoriums have significant short comings in term of the level of protections they offer people in debt, when compared with what people in England and Wales will have once their Schemes are introduced.

One other issue is the UK’s Moratoriums clearly put a responsibility on the creditors to observe them and raise the prospect that where lenders do not, they may be liable to the person in debt for any losses they suffer. In Scotland, although it is incompetent for lenders and Sheriff Officers to take enforcement action during a Moratorium, few Sheriff Officers bother to check before acting. This often means people still get their bank accounts frozen and wages arrested during a moratorium, which can have costs for them. These actions are usually recalled once it pointed out a Moratorium has been registered, but as Sheriff Officers face no repercussions, they regularly still take these actions without checking. Its never been heard of a Sheriff Officer or Creditor paying compensation.

How does the Administrative Arrangements for Moratoriums Compare?

Scotland’s Moratorium procedure is administratively lite. The provisions that cover it are contained in 4 Sections of the Bankruptcy (Scotland) Act 2016. The UK’s procedure is contained in 40 provisions in the draft Regulations.

The reason for this is simple. First Scottish Moratoriums do not offer anywhere near the same level of protection that the UK procedures offer.

However, another reason is in Scotland, there is a different legal tradition where all debts are included in most formal debt solutions, so the concept of eligible debts that exists in England and Wales for bankruptcy and IVAs, doesn’t apply in Scotland. The Scottish tradition is all debts are included, albeit, there are certain debts, when it comes to bankruptcy, where you do not get them written off at the end. Also, with the Debt Arrangement Scheme, some Creditors still deduct their debts via direct deductions from benefits.

This means in the Scottish provisions there is not an exhaustive list of what debts are eligible as a Moratorium Debt and which are non-eligible.

Also, the Moratorium in Scotland has also always been an emergency step that a person takes because of the urgency of their situation, especially when they may not be able to obtain advice before applying. There is, therefore, almost no eligibility criteria, other than you cannot have applied for one within the last 12 months (currently suspended because of Covid 19) and you must be habitually resident in Scotland.  Its for this reason, someone in debt can apply themselves.

In contrast, the UK Schemes specify what types of debts can qualify and which cannot. They also require a person to apply via an approved Debt Advice Provider and require that provider to be satisfied that the consumer meets the extended eligibility criteria, that includes answering the question whether they can pay their debts as they fall due. This undoubtedly will create a problem in a free money advice sector that is currently under capacity and inevitably will require advice agencies to carry out checks and verify information, before they are prepared to apply for a Moratorium. Often, in Scotland, the reason a Moratorium is applied for is to provide a consumer protection before this often-lengthy process is undertaken.

In addition to that, under the UK’s Scheme’s Creditors can request a review of an application for a Moratorium from the Debt Advice Provider.  This will undoubtedly place an administrative burden on advice providers, if Creditors or their Agents choose to use the option with any regularity.

Advice Providers will then have to decide whether to cancel the Moratorium for that Creditor within 35 days of the Moratorium being registered.

This forces Agencies into the role of having to judge their clients, and become decision makers, possibly making decisions that will not be in their client’s best interest. A role that is contrary to the fundamental money advice principle of being non-judgemental.

Where Advisers choose to cancel Moratoriums for one Creditor, this may also lead to other Creditors requesting a review based on the fact excluding one Moratorium Debt, and not another, may unfairly prejudice the interests of the other Moratorium Debt Creditors.

The problem is not made any easier, where the Debt Advice Provider refuses to cancel a Moratorium, as Creditors can then seek a Court Review as to whether the Scheme should be cancelled. This then raises the question of whether advisers will be expected to defend their decision and their client in Court, and if, they are unsuccessful, who will be liable for possible legal expenses incurred by the Creditors.

Advisers will also be required to carry out reviews of Breathing Space Moratoriums before the expiry of 35 days after it has been registered and every 30 days for a Mental Health Crisis Moratorium.

In addition to this, there are circumstances when advisers will be required to cancel programmes, if for example the client cannot be contacted.

Likewise, with Mental Health Crisis Moratoriums, due to the circumstances that clients may find themselves in, it is unclear how advisers will obtain credit reference agency checks for clients, when that client may be unwilling or lack the capacity to apply for one, or provide information about their income and expenditure, to allow the adviser to say whether they can afford to repay their debts or not.

What are the Lessons to be Learned?

There are lessons to be learned from the various types of Moratoriums across the UK, for all the home legal systems of the UK.

Scotland’s Moratoriums clearly do not go far enough and although when compared with the UK Government’s Scheme are simpler and more accessible, arguably as they don’t offer the same level of protection, less people will probably use them than the England and Wales Schemes.

The Scottish Moratorium, however, still has an advantage in that people who use the Moratorium Scheme can use the Debt Arrangement Scheme afterwards, which is a non-insolvency statutory repayment plan. This at least offers more than temporary respite for those struggling with problem debt and is not a form of insolvency.

However, there are plans in the pipeline for a statutory repayment plan for England and Wales, like Scotland and will eventually compliment the two new Moratoriums. Once that is in place, it is likely it could be said the English and Welsh systems will offer more protections than the Scottish Schemes. Particularly, as it appears the English and Welsh Schemes will mean the interest, fees, penalties, and charges will not be recoverable even if they come to a premature end, as people stop paying.

In Scotland, Creditors are still able to recover interest, fee, charges, and penalties, if a Debt Payment Programme is revoked.

However, the English and welsh moratoriums do appear like they will be administratively burdensome and will require more intensive advice to provided before people can access the short-term relief that Moratoriums can provide. It also appears this may be an obstacle for agencies wanting to provide them.

The Scottish Government, should, however, learn more from England and Wales’ Breathing Space and Mental Health Crisis Moratoriums and look to do more to increase the protections for Scottish Consumers.

They should ensure not only can a Statutory Moratorium freeze interest, fees, penalties and charges, but also stop Creditors from raising court action, once a moratorium is registered, and stop secured lenders from enforcing securities held for debts, whilst a client is using a Moratorium. They should also ensure no eviction can take place when a tenant has arrears on their rent and is using a Statutory Moratorium or paying those arrears though the Debt Arrangement Scheme.

All these powers are currently withing the legislative competence of the Scottish Parliament, and the only thing stopping them at present, is a lack of imagination and political will by the Scottish Government.

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