Debt Respite Scheme: Breathing Space - fair to all?

At first glance, the introduction of the ‘Breathing Space’ process, which provides protection to individual debtors from enforcement action by their creditors, may appear to have limited impact. However, the lack of financial limit on the size of debts covered and the wide range of the type of debts covered suggests the process could have wider significance. Those matters perhaps explain the popularity of the Breathing Space process since its introduction on 4 May 2021, with 36,931 registrations for Breathing Space at the end of November 2021.

In the current economic climate, the Breathing Space process is likely to have significant use, with many debtors and their creditors being impacted by this process. This article examines the Breathing Space process and considers some potential difficulties for creditors.

The Breathing Space process came into effect on 4 May 2021 by the Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 (the Regulations).

The Regulations introduce two types of Breathing Space:

1.     A Standard Breathing Space;

2.     A Mental Health Crisis Breathing Space.

As both are similar, any reference in this article to ‘Breathing Space’ refers to both, unless stated otherwise in identifying differences between the two.

A Standard Breathing Space is available to individuals seeking professional debt advice, after being assessed as eligible by a debt advice provider. It lasts for 60 days and is designed to give debtors time to receive debt advice and find a solution to their debt problems during that period. That period cannot be extended. Once a debtor receives a Standard Breathing Space, they cannot apply for another one for 12 months after the end of the previous one.

A Standard Breathing Space freezes charges, fees and interest on qualifying debts and means creditors must stop collection and enforcement action against the debtor.

Debt advisers have a central role in the process, being the point of contact for the debtor, their creditors and the Insolvency Service – the government’s delivery provider for the Breathing Space scheme.

The Insolvency Service maintains an electronic system, which debt advisers must use for starting, updating and ending the Breathing Space process.

Individuals are eligible to apply for Breathing Space so long as they owe a qualifying debt and are not already subject to another personal insolvency process or an existing Breathing Space. Regulation 24(3) gives full details of the eligibility criteria.

Once those eligibility criteria are met, the debt adviser must initiate a Breathing Space Moratorium if:

a)     The debtor is unable, or is unlikely to be able, to repay some or all of their debt as it falls due; and

b)     A Breathing Space Moratorium would be appropriate;

All debts will be qualifying debts unless they are ‘non-eligible debts’.

Regulation 5 identifies a long list of non-eligible debts, effectively mirroring those not discharged in bankruptcy (section 281 Insolvency Act 1986) and adding a category described as ‘non-eligible business debt’. An individual’s business debts are not eligible for Breathing Space if the debtor’s business is registered for VAT, or that person is in partnership with anyone else and the debt relates solely to the debtor’s business.

Mental Health Crisis Breathing Space

A debtor must meet the same eligibility criteria and conditions as for a Standard Breathing Space. In addition, a Mental Health Breathing Space can only be accessed once an approved mental health crisis professional has certified the debtor is receiving mental health crisis treatment (defined at Regulation 28).

Unlike a Standard Breathing Space, a debtor entering into a Mental Health Breathing Space is not required to seek debt advice. There is also no limit to how many times a debtor can enter into a Mental Health Breathing Space. 

A Mental Health Breathing Space provides the same protections as a Standard Breathing Space, but lasts for much longer, namely the duration of the mental health crisis treatment plus thirty days, no matter how long that treatment lasts.

The Insolvency Service notifies creditors of the start date for a Breathing Space. Thereafter, for the period of the Breathing Space, a creditor cannot take any action against the debtor to recover or enforce their debt.

The moratorium also prevents a creditor contacting the debtor about enforcement of a Breathing Space debt, save for limited exceptions.

Practical problems for creditors

One striking problem for creditors is the lack of disclosure obligations, either by the debtor or debt adviser, under the Regulations. There is no requirement on the debt adviser to give information or documents to creditors about the decision-making process in granting a breathing space. Instead, the debt adviser is only obliged to notify the Insolvency Service of the initiation of a Breathing Space, in confirming the debtor meets the eligibility criteria and conditions in Regulation 24.

The Insolvency Service enters that Breathing Space on their electronic register, so creditors can be notified. However, that notification is limited to details of the debtor and the qualifying debts. A lack of disclosure is also apparent from any review of a Breathing Space under the Regulations:

A debt adviser must conduct a midway review of a Standard Breathing Space to decide whether that should continue or be cancelled. However, there is no requirement on the debt adviser to provide detailed information to creditors about the basis of any decision to continue the moratorium.

A creditor can request a review, to consider whether the Breathing Space should continue or be cancelled, on grounds that it unfairly prejudices that creditor’s interests, or on the basis of a material irregularity. Regulation 18(4)(a) requires the debt adviser to inform that creditor of the outcome of the review. However, where the outcome is that the moratorium should continue, there is no obvious requirement for the debt adviser to provide any detailed information to creditors about the basis for that decision.

If the moratorium is not cancelled as a result of that creditor requested review, the creditor may apply to court, on one or both of the same grounds, to seek cancellation of the moratorium. However, the above-mentioned absence of disclosure requirements creates a problem for a creditor applying to court: They will have to do so without having been able to see or scrutinise the underlying information relied upon in granting or deciding not to cancel the Breathing Space.

To date, there has been little case law about the Regulations. However, Axnoller Events Limited vBrake & Anor [2021] EWHC 2308 considered a creditor’s application to cancel a Mental Health Crisis Moratorium on the grounds of unfair prejudice.

The High Court refused the application as there was insufficient evidence of unfair prejudice. However, it noted the limited nature of the medical evidence provided by the debt adviser and concluded it did not fulfil the debt adviser’s requirement to act on evidence from an approved medical health professional that the debtor was receiving mental health crisis treatment. Clearly, it will be difficult for the court to assess an application such as this without suitably detailed medical evidence. That topic is likely to be a relevant one for disclosure in any creditor challenge to court.

Any uncertainties about the meaning and effect of the Regulations are unlikely to be resolved soon: a government review of the Regulations is not required to be published before May 2026.

Hopefully, as the Breathing Space process matures, debt advisers will engage with creditors in a constructive way. In addition, as more creditors apply to court to challenge a moratorium, one should see more guidance and interpretation on the meaning and effect of the regulations.

Lee Ranford is a partner at Russell Cooke russell-cooke.co.uk