Call for evidence launched in relation to ‘breathing space’ initiative

• United Kingdom

• Financial services - Secured recoveries

06-12-2017

The government has launched a call for evidence relative to ‘problem debt’, in order to progress with the ‘breathing space’ scheme that it has committed to implement.

The breathing space initiative is designed so that someone facing ‘serious problem debt may apply for legal protection from further interest, charges and enforcement action for a period of up to six weeks’. The idea is that a qualifying individual work with their debt adviser to set up a debt repayment scheme that may then be formalised in a statutory repayment plan.

The government identifies ‘problem debt’ as debt and arrears that absorbs ‘an excessive proportion of income’ and that places a ‘heavy burden on individuals and families’. In many cases, this is caused by sudden loss of employment or family breakdown.

Key functions

There is also movement towards improving the provision of debt advice, in order to help those susceptible to problem debt make effective financial decisions throughout their lives. According to government figures, in 2016/17 more than 440,000 free-to-client debt advice sessions were delivered, and the government is aiming to increase these figures.

Accessibility aside, the suggestion is that many shy away from taking debt advice due to lack of incentive. The main incentive of the breathing space scheme is the freezing of interest and charges of debt due for a period of six weeks for those debtors looking to set up a repayment scheme which can then form the basis of a statutory repayment plan. A similar scheme operates in Scotland under the badge Debt Arrangement Scheme and the questions asked within the consultation suggest any new scheme will be modelled on the Scottish experience.

Under the Scottish practice the debt arrangement scheme is encapsulated in a proposal and sent to creditors. Creditors have the opportunity to decline or consent to the proposal, but the debt arrangement plan can be imposed by the scheme administrator even where creditors decline if it is considered fair and reasonable to do so. The presumption is that generally the plan will require the full amount of the debt to be repaid but over an extended period, during which the freeze on interest, charges and enforcement continues. In practice lenders will also face a shortfall, as up to 10% of the repayments are deducted to pay for scheme and payment administration.

Whilst primarily directed at unsecured debts, secured debts are captured. Where the full balance of secured debt is due that full balance may be subject to the debt arrangement plan. If there are arrears of instalments only the arrears will be caught.

Potential impact

There is impetus to launching a scheme. It has cross party support and is the subject of intensive lobbying by the debt advice sector. The main impediment is likely to be the Government’s many other distractions in this parliamentary term.

Accordingly the main opportunity for creditors may be to influence the detail of the scheme based on their experience, good and bad, of the Scottish Debt Arrangement Scheme. For some creditors that scheme creates practical issues which once amplified in volume by application across the UK could present significant organisational challenges.

Other Initiatives

It is clear that the breathing space initiative is not the only form of intervention that the Government is considering in this area. The House of Commons Treasury Committee has launched a new inquiry that will cover: (1) overall savings levels; (2) household lifetime saving and financial planning; and (3) household indebtedness and consumer credit incomes. The inquiry will seek to establish what possible interventions the Government can make in order to protect low income households and gig workers whilst also tackling problematic debt. It also follows hard on the heels of the Pre-Action Protocol for Debt Claims which has formalised the expectations of creditors and debtors prior to the issue of court proceedings.