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Impact on lenders of final proposals for breathing space and statutory repayment plan scheme

  • United Kingdom
  • Financial services disputes and investigations
  • Litigation and dispute management

14-08-2019

Summary:

HM Treasury has announced its final proposals on Breathing Space and Statutory Debt Repayment Plans. The final proposals will go before Parliament for approval by the end of 2019, with the intention of implementation in early 2021.  In this briefing, we examine the key provisions and the impact on lenders.


What are ‘Breathing Space’ and ‘Statutory Debt Repayment Plans’? 

Together referred to as ‘the scheme’, both elements aim to give individuals deemed by a debt advisor to have “problem debt” the opportunity to take control of their finances and place them on a sustainable footing.

The Insolvency Service will administer both Breathing Space and Statutory Debt Repayment Plans, with creditors being notified via an online portal.  A private register will be maintained to track participating individuals.


Breathing Space - Eligibility

Breathing space will give an individual in problem debt the right to legal protection from creditor action for a period of 60 days, while they receive debt advice in order to enter an appropriate debt solution. 

To be eligible for Breathing Space, an individual will need to meet the following criteria:

  • To have accessed debt advice from a FCA regulated debt advice agency (or a FCA exempt body such as a local authority);
  • To have a realistic chance of entering a formal debt solution;
  • They must not have accessed Breathing Space within the last 12 months.


Further an individual may qualify for Breathing Space if they are considered to be receiving mental health crisis care, and are referred by an Approved Mental Health Professional (e.g. a nurse or social worker).  In such cases, there is no 60 day limit and Breathing Space continues for as long as care is required.

Breathing Space Protections

The proposals draw a distinction between ‘ongoing liabilities’ and all other personal debts.  Ongoing liabilities, that include future mortgage repayments falling due, are excluded and must continue to be paid during Breathing Space.  However, and crucially for secured lenders, this does not include any arrears existing at the point of entry into breathing space as they are considered to be debts. For example, where historic arrears exist in respect of mortgage repayments an individual will be able to benefit from the protections afforded by Breathing Space.  If the individual is not maintaining the mortgage repayments (i.e. the ongoing liability) during the Breathing Space, then the individual “should” be removed from the Breath Space protections by their debt adviser unless they are vulnerable. 

The protections afforded to an individual once they have entered Breathing Space require creditors to freeze interest, fees and charges on affected debts.  Further all enforcement must be paused - meaning a possession claim cannot be issued or a possession order enforced (this does not prevent a claim that is already issued from continuing to judgment, but a listed eviction must be cancelled).


Statutory Debt Repayment Plans and Eligibility
 
The Statutory Debt Repayment Plan will enable an individual in problem debt to enter an agreement to repay their debt to a manageable timetable, with legal protections from creditor actions for the duration of the plan.  

The eligibility criteria mirrors that of Breathing Space.  Creditors will have means to object to a plan, but the Insolvency Service will be able to impose a plan where necessary if they deem it to be ‘fair and reasonable’.  Having considered the consultation responses,  the Government has introduced plans for a process allowing creditors to object to an Insolvency Service decision to impose a plan.


Statutory Debt Repayment Plan Protections
 

The Statutory Debt Repayment Plan (‘the Plan’) will afford individuals the same protections as with Breathing Space.  Plans will be expected to span an average period of 7 years but can last up to 10 in exceptional circumstances. The Treasury has tried to recognise the particular difficulties posed by mortgage arrears, and other housing debts, in 2 ways: 

a)    by allowing debt advisers to exclude housing debt from the Plan, or

b)    prioritising payment of housing debt within the plan although there is no detail as to how this will operate.


This will in practice mitigate many of the issues but housing debt can still be captured and if so lenders will need to deal with: 

a)    the fact payments are made net of costs, but the gross payment must be credited to the account;

b)    ensuring that interest and fees on arrears are not accruing;

c)    payments under the Plan may not be consistent with existing payment plans and suspended possession orders,

d)    no provision has been made for term expired accounts where if the full balance is due, all of the mortgage debt could be included in the Plan (effectively extending the term for up to 10 years).

An individual must continue to make payments when engaged in a plan, including monthly mortgage payments as they fall due, or risk being removed from the Plan.


Next steps and comment:
 

Following the publication of the consultation response, Parliament will lay regulations before the end of the year with the intended implementation of the Breathing Space in early 2021.  The scheme will have a significant impact on the way lenders interact with their customers in default and pursue outstanding debts. Lenders should therefore start planning how they will adapt their systems, policies and processes in good time, prior to the proposals being implemented.

 

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