Debtors’ breathing spaces – UK reforms

This UK government consultation concerns new arrangements proposed for a 60 day ‘breathing space’ for struggling debtors, and for a separate statutory ‘debt repayment plan’. The proposals focus on debtors not covered by existing bankruptcy and other alternative arrangements in the UK.  Debtors must take advice from registered debt advisers, with insolvency practitioners not necessarily included.

Existing options

As in Australia, the UK has existing solutions available to people who have fallen into problem debt. These include bankruptcy, individual voluntary arrangements (IVAs) and debt relief orders. They are effective for people who are substantially over-indebted and are unable to repay all of their debts in the foreseeable future.

However, many debtors may be unable to meet repayments on their debts in the short term but can do so, in full, over the long-term. These people may have had a short-term ‘income shock’, from which they will recover.

For these people, debt relief through existing statutory solutions may not be appropriate. Alternative non-statutory solutions in the UK include debt management plans (DMPs) which are voluntary agreements between a debtor and some or all of their creditors to repay their debts in an extended time period. These are generally administered by debt advice agencies. Debtors make a single monthly payment to the debt advice agency, which then distributes funds to the individual’s creditors in an agreed proportion. Some similar arrangements apply in Australia: see Turner v MyBudget Pty Limited [2018] FCA 1407. But creditors do not have to agree to the proposed repayments and can continue to take action to recover their money.

Although DMPs are effective in alleviating some individuals’ debt problems, the voluntary nature of the plans can make them less effective for others. And informal debt solutions also do not protect individuals’ assets, including the family home.

Breathing space

Given these limitations with existing arrangements, the breathing space is proposed. It would give someone in problem debt the right to legal protections from creditor action while they receive debt advice and, if appropriate, enter an appropriate debt solution.

While not connected with bankruptcy, it seems similar to the misnamed ‘declaration of intention to present a debtor’s petition’, under s 54A of the Australian Bankruptcy Act, which offers debtors considering their debt options a stay against creditor actions, for 21 days only. These declarations are little used in Australia.

Plan

A plan would enable someone in problem debt to enter a statutory agreement to repay their debts according to a manageable timetable. This would likewise provide legal protections from creditor action for the duration of the plan. Again, this is similar to debt agreements under Part IX of the Bankruptcy Act, the subject of tightened regulation commencing in June and September 2019, though these are more comparable to UK IVAs.

It is proposed that these protections be on a public register.

Advisers need to be registered

Those advising debtors need to be registered by the Financial Conduct Authority (FCA) and meet its requirements for client focused, objective and practical advice.

The need for advisers to be registered is to ensure that debtors are able to obtain objective advice and make informed decisions about the options available to them to deal with their debts.

In practice, this requirement means that organisations from both the free-to-client and commercial debt advice sectors would be able to offer access to breathing space.

Standard Financial Statement

To assess whether an individual is able to enter a breathing space or plan a debt adviser would complete a Standard Financial Statement for the individual. This is an industry-wide method of calculating income and expenditure; it requires debt advisers to complete a detailed budget to calculate an individual’s surplus income, which can then be put towards payments into a debt solution.

Insolvency practitioners do not immediately qualify

Interestingly, insolvency practitioners (IPs) in the UK would only be able to offer such debt advice if they have appropriate FCA permissions to do so. In other words, advising on a person’s debt problems is not necessarily equated with the role and expertise of an IP.

The consultation closes on 29 January 2019.

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