Chasing Bad Debts after 4 May 2021

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Don’t hold your breath before 4th May: A creditor’s guide to chasing bad debts with Ashtons Legal.

From the 4th May 2021, the Debt Respite Scheme (also known as ‘Breathing Space’) will come into force.  This scheme gives debtors the right to legal protection from their creditors.

What is Breathing Space?

The scheme will give someone with ‘problem debt’ the right to legal protections from creditor action. This means anyone that is having difficulty paying their debts and is in sufficient financial difficulty to have a realistic chance of entering a debt solution such as insolvency or a debt management plan will be protected.

There are two types of breathing space:

  1. Standard breathing space – Available to anyone with a problem debt. The standard breathing space provides the debtor with legal protection from the creditor for up to 60 days. The protection includes pausing most enforcement action and contact from creditors, and freezing most interest and charges on debts.
  2. Mental health breathing space – Available only to someone who is receiving mental health crisis treatment. This can be sought if an Approved Mental Health Professional certifies that you are in mental health crisis treatment.  The mental health breathing space provides greater protection than the standard breathing space, whereby you will have legal protection from creditors for as long as your mental health treatments persists, plus a 30 day window once your mental health treatment has ended.

Impact on creditors

For creditors, this means that after 4th May 2021, if you are informed a debt owed to you is in breathing space, you will need to cease all action in pursuing the debt.  This could be for up to 60 days for a standard breathing space, and longer if it is a mental health breathing space.

  • Creditors will be notified via an electronic service as to which debts are in a breathing space, and the date the breathing space started. The duty will be on the creditor to apply the legal protections from the start date of the breathing space.
  • When a creditor receives notification of breathing space, they must search their records for details of any additional debts that the debtor may have. If the creditor finds an additional debt, they must inform the debt adviser about it as soon as reasonably possible.  The debt adviser will then decide if the additional debt is a qualifying debt, such that it may also qualify for breathing space.
  • In the event that this occurs, the debt adviser will need to update the electronic service system to provide the creditor with formal notification that this debt also qualifies for breathing space. A creditor will not need to apply protections to the additional debt until they receive formal notification that it qualifies for breathing space.

Stopping enforcement action

Generally, during breathing space, a creditor or their agents must not contact the debtor about any collection or enforcement action.  This includes asking the debtor to pay or continuing any legal action.

The debtor must also:

  • Not charge any interest or apply any charges during the breathing space.
  • Must contact any other agents or third parties who may need to be informed of the breathing space, and ensure those agents/third parties also apply the protections afforded to the debtor during the period.
  • Must inform the court or tribunal of the breathing space if proceedings have already started in recovery of the debt.

If the creditor does not comply with the obligations, any actions they do take will be considered null and void and the creditor may be liable for the debtor’s costs.  Repeated breaches may be referred to the regulator.

Receiving payments during a breathing space

A breathing space is not a payment holiday, and whilst a creditor cannot enforce a breathing space debt during the period of the breathing space, or take any enforcement action listed above, the debtor is still legally required to pay their debts and liabilities.

During the breathing space, the debtor should therefore continue to pay any debts and liabilities they owe to the creditor.  However if a payment is missed, the creditor cannot take enforcement action until after the breathing space has ended.

If a payment plan has been agreed, the debtor should continue to make payments under that agreement as they fall due.  Any time limit within the plan will be extended until 8 weeks after the end of the breathing space.  At that point any unpaid instalments may be treated as a breach of the payment plan.

Request a breathing space review

A creditor can make a written request to the debt adviser for the breathing space to be reviewed if the creditor considers:

  • that their interests have been unfairly prejudiced;
  • that the debtor does not meet the eligibility criteria for a breathing space;
  • that any of the debts in the breathing space do not qualify; or
  • that the debtor has sufficient funds to repay their debts.

The creditor must make their request for a review either within 20 days of the breathing space starting, or within 20 days of an additional debt being added to the breathing space.

If, after your request for review, you do not agree with the debt adviser’s decision, you can apply to the court within 50 days of the breathing space starting.

End of the breathing space

The creditor will be notified when the breathing space ends, at which point the creditor can resume interest, charges and communication with the debtor.  But interest and charges cannot be backdated to apply during the breathing space period unless permitted by the court.

Summary

Whilst debtors will still be obliged to pay debts and liabilities during the breathing space, the options available to creditors will become more limited and creditors will be subject to a number of new obligations. The prospect of having to wait longer to recover a debt will no doubt be frustrating to many creditors who have often already had to wait a long time for payments to be made. It is therefore important that creditors obtain legal advice before pursuing debts to ensure they are complying with the Debt Respite Scheme. If you are a landlord and would like to know about how this scheme could affect you in particular, please click here.

How we can help

Our team has extensive experience in this area and are available to assist you if you have a bad debt against a debtor. Please do not hesitate our specialist, Alice Trainor, on 01603 703201 or Alice.Trainor@ashtonslegal.co.uk who would be happy to take some initial details from you.


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