HM Treasury has recently published the response to its consultation on the breathing space scheme and statutory debt repayment plan.
Both are proposed to give people with problem debt a greater opportunity to resolve their financial difficulty and allow them to take control of their finances moving forward.
Public funding for debt advice has risen to £55.8m in 2019/2020, which will fund over 560,000 debt advice sessions in England.
It will certainly be interesting to see how both policies will impact upon the recoveries made by creditors and the extent of the financial difficulties to which individuals with bad debts are subject to, are resolved.
The breathing space scheme
Overview: Specifically, this scheme will give someone with problem debt a period of time for legal protection to get professional advice. It is intended that the breathing space and the protection offered will last for 60 days.
Aim: The response to the consultation states that research commissioned by the Money and Pensions Service shows that someone who gets debt advice is less likely to fall into problem debt; creditors spend less on recovery costs and achieve higher repayments.
Response outcome: Following consultation feedback, the government has proposed that to enter the scheme, an individual will first have to access FCA-regulated debt advice. A debt advice agency will have to assess the individual as having sufficient prospects of entering a formal debt solution e.g. an Individual Voluntary Arrangement (IVA).
Those who responded to the consultation, notably creditor organisations, have argued that an objection mechanism should be put in place, for creditors to have the ability to object to debtors entering into the scheme. However, the Government has decided not to include such a formal mechanism after questioning its workability in the short time frame for the scheme.
Following a common suggestion from respondents, the Government confirmed that the Insolvency Service will be the central administrator and will operate a central portal which will notify creditors of individual debtors’ status.
- Almost all personal debts, including those owed to the government
- Business debts incurred by small sole traders.
- Debts incurred as a result of fraudulent behaviour
- Fines imposed by a court
- Student loans.
Statutory debt repayment plan
Overview: This plan will provide an alternative method for repaying debts, catering for those who are not suited to existing statutory debt solutions.
Aim: Essentially it will allow for greater flexibility in allowing debts to be paid in full over a realistic period of time. The rationale for this policy is to improve debtors’ finances and to improve returns to creditors.
Response outcome: The Government set out its criteria for eligibility for the plan. Following consultation, it confirmed that to enter the Plan:
- The individual must access debt advice
- The individual must be assessed as able to repay their debts in full over a reasonable timeframe. It was confirmed that the plans will not be able to be proposed for longer than ten years and should only be longer than seven years in exceptional circumstances.
- Creditors must agree to the terms of the plan, or the Insolvency Service must rule that the plan is fair and reasonable, meaning that creditors are obliged to comply with it.
After an individual accesses debt advice, the debt advice agency will complete a ‘Standard Financial Statement’. If the agency is satisfied that the individual is suited to enter a plan, they will put together a proposal which will be provided to creditors via the central portal.
Following consultation feedback, the Government is proposing to allow for an objection mechanism for repayment plan proposals. This mechanism will allow creditors 14 days to register objections and if less than 25% of an individual’s creditors of debt value object to the plan, then the plan will commence accordingly.
- As many types of personal debts as possible
- Business debts for small sole traders
- Almost all personal debts, including those owing to Government.
- Housing debt (i.e. rent payments and mortgage arrears).
Moving forward – timetable
The breathing space scheme is intended to be implemented in early 2021.
The statutory debt repayment plan will be subject to a longer timetable.
Posted on July 26, 2019