Breathing Space — will it deliver for people in problem debt?

Today, the Government’s Breathing Space scheme (officially the Debt Respite Scheme) opens for business in England and Wales. What does the scheme’s launch mean for the debt advice sector? And, more importantly, will it offer the 2.8 million people currently facing problem debt what they need to become debt free?

MP Kelly Tolhurst first propelled the idea for a Breathing Space scheme into the political arena as a Private Member’s Bill in 2016, following campaigns by Stepchange and The Children’s Society. A lot of ground has been covered since then, and close to five years on, the launch of the scheme today, is a culmination of lots of hard work by Treasury officials and the Insolvency Service to work out how a scheme like this could be put into practice.

How does it work?

A breathing space will give ‘someone in problem debt the right to legal protections from creditor action’. During this 60-day respite period, most creditors cannot take enforcement action or levy interest and changes on a debt owed to them. Meanwhile, the individual works with a debt advisor to establish a long-term solution to their debt problem.

1. Applications for a breathing space must be made by an FCA authorised (or exempt) debt advisor once they have established that the person is unable to repay their debts as they fall due. The advisor enters the person’s details onto the Breathing Space portal, which is managed by the Insolvency Service, and the client’s creditors are notified.
2. All qualifying debts must be included in the breathing space. Some debt types are excluded, such as those incurred because of fraud, fines imposed by a court, social fund loans and advance payments for Universal Credit.
3. Upon receiving notification that a breathing space has been registered, creditors must ‘stop interest, fees and charges for debts in the breathing space, as well as any enforcement or recovery action to recover that debt’. Creditors must also check their records to see if any additional debts are outstanding and these can then be added to the existing breathing space by the debt advisor for the remainder of the 60 days.
4. Creditors can request a review if they think that the person or debt does not meet the eligibility criteria, the breathing space, ‘unfairly prejudices their interests’, or the person has enough funds to repay all their debts. Debt advisors must also conduct a midway review to make sure the breathing space remains appropriate, and that the individual is still engaging with advice.

There is also a version of the Breathing Space scheme for people in mental health crisis care. An Approved Mental Health Professional can make a referral for an indefinite period of breathing space which will end 30 days after the person is discharged from crisis treatment services.

Will it deliver?

The stated aim of the scheme is to give people ‘struggling with problem debt extra help and time to get their finances under control’. The importance of time and space to engage with advice cannot be overstated. The people who contact us at CAP are too often completely overwhelmed and it is not an easy process to face up to the debts you have and what it will mean to complete a debt solution.

‘I had about seven years of paperwork so I had no idea where to start, but CAP helped me to look for everything I needed.’ — Joanna, CAP client and expert by experience

‘Every time a letter came in the post, my heart would race. I was constantly worried, I didn’t have any peace of mind. I wanted to pay, but didn’t know where to start.’ — Gillian, CAP client and expert by experience

Informally, ‘breathing space’ already exists. On the whole, we find creditors are supportive and work with us to give us the time needed to advise clients and help them put a plan in place. In particular, the FCA’s rules require consumer credit lenders to give a ‘reasonable period’ to customers developing a plan to deal with their debts, which is generally 30 days followed by a further 30 days if more time is needed.

However, it is significant that Breathing Space standardises this expectation across a broader range of sectors; this includes debt owed to central and local government — which are generally the most difficult sectors to negotiate with. 37% of CAP clients owe Council Tax arrears and much of this debt is collected by enforcement agents. For those facing eviction proceedings, or the threat of a prepayment meter being installed, a 60-day breathing space also offers much more robust protections than are currently on offer.

But how long does someone need to get their finances under control? The 60-day period has been hotly debated. The #wearedebtadvisors campaign highlighted the need for a longer moratorium period in some circumstances, but it was decided that creditors could not be expected to stop interest and charges for any longer than 60 days.

In the majority of cases CAP clients will begin a debt solution within 60 days of their first appointment, but one in ten (11%) do not have an immediately clear long-term debt solution available to them. In these situations 60 days will only be a starting point, and there is a risk that collections may restart at a counterproductive point, limiting their ability to take actions which will put them in a position to resolve their debts, such as looking for work or putting their house on the market.

Insolvency fees are also a blocker that stop many people from being able to enter a long-term debt solution within 60 days. £680 for a bankruptcy, and even £90 for a Debt Relief Order (DRO), are impossible to save in 60 days for too many people. While these fees can be paid in instalments, no protections are received until the last payment is made. Without action to reduce the upfront costs of insolvency for people on low incomes, as taken in Scotland and recommended in the recent Woolard Review, Breathing Space will be a very brief sticking plaster.

What about the numbers expected to need a breathing space? The Treasury has estimated that1.2 million people will be entered into the scheme in its first year. There is a considerable workload for the sector here, especially for organisations making manual applications on to the Breathing Space portal. In addition, there is the potential for extra reviews and creditor objections to contend with.

Of particular concern for the sector is the option for creditors to bring a court challenge about a breathing space against the debtor and debt advice firm; time will tell how many of these objections we will see. In the meantime, sustainable funding for the debt advice sector, including for IT system changes, is essential to ensure we are able to offer schemes like this, and all they entail, as efficiently as possible and to the numbers expected to need them.

No doubt there will be teething problems as both debt advisors and creditors get to grips with the scheme. One key thing to watch will be how quickly and completely creditors stop collections activity and notify agents, who are acting on their behalf, to do the same.

For the most part we have seen creditors seriously and positively prepare to enact the Breathing Space protections. Where consistent non-compliance persists this can be escalated to creditors’ regulations. However, not all creditors have a regulator, notably the enforcement sector, furthermore, regulators are unsure on what basis they can enforce compliance with Breathing Space regulations as the obligations are set in legislation and not their own rulebooks.

One final key ambiguity is that Breathing Space is not a payment holiday, yet there is an understanding that some people will not be able to afford to make payments during the 60 days. The number of deficit budgets seen by the sector at present means this is likely to be a common, and perhaps underestimated, occurrence.

Breathing Space offers the ability to stop some deductions from benefits (although not from Universal Credit in the first instance or Attachment of Earnings). A recent client we advised had just £13 a month to spend on food and other household goods, largely due to deductions from their benefits. For people in these situations, a 60-day pause on these payments will be significant for their financial and mental wellbeing. But our ability to negotiate the long-term affordability of these payments once they resume remains constrained, and we need a fresh approach to Government debt collection that embraces affordability assessments.

How will it be used?

At CAP, we will begin to make Breathing Space applications from today. While it’s exciting to see the scheme up and running, we see it as another tool in the box for advisors rather than something everyone seeking debt advice will need. Like many in the sector, we’ll be starting small, triaging the clients who stand to gain most from the protections and keeping a careful eye on any unintended consequences that emerge.

In some cases we have existing arrangements which offer the same protections. In other scenarios, by the time we’ve collected the information required to judge whether a breathing space is suitable, we’ll have already been able to get someone on their way with a debt solution. But for a small group, the Breathing Space scheme will be significant, and we look forward to being able to offer 60 days of relief while they face their debts head-on.

If you or someone you know needs help with debt, we’re here to help on 0800 328 006 or capuk.org/debthelp. A full list of free advice services in the UK can also be found on the Money Advice Service website.

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