The Breathing Space and Statutory Debt Repayment Plans (together ‘the Scheme’) are at the heart of the government’s proposals to tackle rising problem debt. The final Scheme proposals have been delayed as a result of the general election, but are intended to be implemented in early 2021. Martin Ward and Oliver Grant of Eversheds Sutherland write.
The aim of the Scheme is to give those in problem debt legal protections from creditor action for a period of 60 days, during time which they will receive debt advice and seek an appropriate solution.
The Scheme will enable individuals with problem debt to enter an agreement to repay their debts over the course of a manageable period of up to 10 years, during which they would receive protection from creditor action.
Creditors will be able to object to plans, but the Insolvency Service will be able to bind creditors to a plan if they deem the plan fair and reasonable.
To be eligible for the breathing space, it is proposed that an individual would have to:
- Access debt advice to ensure that debtors are able to make informed decisions about the options available to them;
- Be assessed as being in problem debt by a debt adviser – a debt adviser should retrieve information during a financial assessment indicating that breathing space would be of best help to a debtor, and be able to identify the debtor’s creditors; and
- Not have been in breathing space in the previous 12 months – to prevent potential abuse.
It is likely that the Scheme will have a significant effect on the motor finance industry. There are a number of issues which the government need to address and lenders need to consider prior to its implementation:
1. Depreciating assets The 60 days of protection proposed by the Scheme could result in debtors having to pay more money to creditors following the termination of a motor finance agreement. In such situations, often the best solution is for a debtor to return the vehicle so it can be sold quickly and for a higher price, thereby reducing the shortfall debt owed on the agreement.
The Scheme provides for potential delay whereby the value of the vehicle can depreciate. Where the customer is refusing to return the vehicle following the termination of an agreement, the Scheme is likely to result in higher shortfall. In turn, this increases the likelihood of enforcement action being taken for the shortfall owed.
2. Agreement terms could effectively be extended Where an agreement has not been terminated, the Scheme could have the effect of extending hire purchase agreements for periods of up to seven to 10 years.
Where there are significant arrears owing under the agreement, should such arrears become subject to the Scheme, then the agreement would effectively be extended without the creditor being able to recover the vehicle or charge additional interest or costs. Ongoing liabilities, however, are excluded from the Scheme, and must continue to be paid.
3. Interest and fees on arrears are not accruing Lenders are unable to charge interest and fees on arrears which are subject to the Scheme, providing further uncertainty on live agreements.
Lenders will need to make sure they have systems in place to differentiate between those parts of a single debt which are subject to the Scheme where interest, charges and fees have been frozen and those ongoing liabilities where interest, charges and fees still accrue. For lenders without this systems capability, this is likely to be a significant and costly change.
4. Payments under the Scheme may not be consistent with existing payment plans or suspended return-of-goods orders Debtors under the Scheme are likely to have had previous problems making payments. Any agreements entered into with creditors previously may differ from the terms of the Scheme. This may prove confusing for debtors if they have to make multiple payments to the same creditor each month and in the long term may lead to further indebtedness. The draft regulations are eagerly awaited, and it is hoped that the Treasury will take on board lenders’ and industry bodies’ concerns.
Lenders should start considering now how they adapt their policies, processes and systems to implement the Scheme’s requirements.
by Martin Ward and Oliver Grant