Are you a sole trader with debts that you’re struggling to repay? The Breathing Space Debt Respite Scheme could give you the time you need to seek professional debt management assistance while providing temporary protection from your creditors.
This guide will tell you everything you need to know about the Breathing Space Debt Respite Scheme for sole traders.
What is the Debt Respite Scheme?
The Debt Respite Scheme, also known as the Breathing Space Debt Respite Scheme, was launched by the Government on 4 May 2021. It’s a free scheme that gives private individuals and non-VAT registered sole traders legal protections from the organisations they owe money to for 60 days.
During that time, you will receive professional advice and work towards setting up a solution to deal with your debts. You’ll also be protected from further interest, charges and enforcement action from your creditors.
NB: this scheme is not applicable for limited companies
How Does the Breathing Space Debt Respite Scheme Help?
The Debt Respite Scheme gives people who are struggling to repay their debts 60 days of breathing space. That allows them to set up a debt repayment solution without incurring additional charges or being chased by their creditors. The Debt Respite Scheme is only open to private individuals and sole traders. It does not provide protection from the debts of a partnership or limited company.
If you pass the eligibility checks, then once your details have been added to the Breathing Space Register, your creditor(s) must stop all action relating to the debts included in the scheme. That includes:
- Applying penalty charges, interest charges and other fees
- Contacting you in any way
- Taking enforcement action against you (enforcing judgements, commencing proceedings, applying for a judgment in default or serving notice to take possession of a property).
While the scheme is in place, you will receive free debt advice from an adviser authorised by the Financial Conduct Authority (FCA). They will help you put a suitable debt repayment plan in place. You must not take out any new borrowing over £500 during the 60-day period or the breathing space will be cancelled.
Importantly, the Breathing Space Scheme is not a payment holiday. Debtors must continue to make debt repayments and meet their ongoing liabilities.
What Debts Can be Included in the Debt Respite Scheme?
Most personal debts are likely to qualify for the scheme, although there are a few exceptions. Breathing space cannot be granted for student loans, child maintenance payments, court fines or universal credit advance payments. Secured debts such as car finance deals and mortgages will not be covered unless you are in arrears.
Debts that can be included in the Debt Respite Scheme include:
- Business debts owed by sole traders who are not VAT registered
- Business rates if all instalments for that financial year have not been paid
- Joint debts – even if only one debtor applies
- Any debt that you have been served with a ‘further notice’ for
- Guarantor loans – the protections do not extend to the guarantor unless they are also eligible for the scheme
- Tax debts
- Credit card debts
- Personal loans
- Utility bills
- Mortgage and rent arrears
As you can see, some business debts qualify for breathing space. However, business debts only qualify if they also relate to the debtor personally.
Who is Eligible for the Debt Respite Scheme?
The first step in obtaining breathing space from your debts is to find out whether you are eligible for the scheme. To be eligible, you must:
- Live in England or Wales – In Scotland, the Moratorium Period is a similar scheme
- Owe at least one qualifying debt to a creditor and cannot or are unlikely to be able to pay the debt(s)
- Be an individual or sole trader i.e. not a limited company
- Not have an ongoing individual voluntary arrangement (IVA), debt relief order (DRO), or interim order at the time you apply
- Not be an undischarged bankrupt at the time you apply
- Not have already had breathing space in the last 12 months
Once you contact a debt adviser, they will confirm whether or not you are eligible for the scheme. If you are, then you can start the process.
How Does the Debt Respite Scheme Work?
All applicants for the Debt Respite Scheme must be made through a debt adviser. Even if you’re eligible, your adviser may decide that breathing space is not the right solution for you. That could be the case if you have non-essential assets that could be sold to repay the debt or you can access additional funds or income. Alternatively, if you can enter a debt repayment solution such as an IVA immediately without requiring the additional 60-day protection, that may be more appropriate.
If you are eligible for the scheme and would like to apply, the timeline of the process is as follows:
- Apply – You can only apply for breathing space by seeking debt advice from a debt advisor who is authorised by the Financial Conduct Authority. You will have to provide information to the advisor, including:
- Full name
- Residential address
- Trading name and business address (for business debts)
- Details of the debts you owe
- Name and contact details of your creditor(s)
Your completed application will be submitted to the Insolvency Service, which administers the scheme.
- Breathing Space Begins – If your application is accepted, then your breathing space will begin the day after your details have been added to the breathing space register. This usually takes two working days. Your creditor(s) will be notified of your breathing space start date and the qualifying debt. From this point, your creditors must stop all action relating to the debts.
- Creditors’ Right to Challenge – During the first 20 days of breathing space, your creditor(s) can challenge your application to the Debt Respite Scheme and ask for it to be reviewed. They may do this if they feel that the scheme unfairly ignores their interests.
- Further Debts can Be Added to the Scheme – After the breathing space has begun, further debts can be added as long as they existed before the breathing space began. The protections will apply to that debt for the remainder of the 60 days. For example, if a further debt is added after 20 days, it would be protected for the remaining 40 days.
- The Scheme is Reviewed – After 30 days, the Debt Repayment Scheme will be reviewed. Usually, the scheme will continue for the remaining 30 days. However, in certain circumstances, specific debts could be removed or the breathing space could be cancelled entirely.
- The Breathing Space Ends – Once the 60-day breathing space period ends, creditors can apply interest and fees to the debt and take enforcement action against you. However, they cannot do so if you have a formal debt solution such as an IVA, debt relief order or bankruptcy order in place.
When Does the Debt Respite Scheme End?
The scheme typically lasts for 60 days and gives you the time to work with your debt advisor to put a long-term debt solution in place. At that point, the Insolvency Service will automatically update the register and send notification to the creditors that the scheme has ended.
The scheme can also end before reaching the full 60-day term. That can occur when:
- The debtor does not continue to make their ongoing payments
- A creditor asks for a review of the scheme which is upheld
- The adviser decides to end the scheme after the mid-stage review
- The debtor enters into a debt solution before the 60 days is over
What is the Effect on Creditors of the Debt Respite Scheme?
As soon as creditors receive notification that the breathing space period has begun, they must adhere to the protections the scheme offers. There’s a long list of actions creditors CANNOT take during this period. That includes:
- Applying interest, fees, charges or penalties to the debt
- Trying to collect a debt
- Calling in security on a debt
- Trying to enforce a court judgment
- Obtaining a writ or warrant
- Selling or taking possession of the debtor’s goods or property
- Obtaining a liability order
- Continuing with legal action against the debtor
- Seeking to disconnect utilities from the debtor’s premises
- Serving a notice of possession
- Contacting the debtor in any way
Although there’s very little that creditors can do during this period, the Breathing Space Debt Respite Scheme is not a payment holiday. That means that creditors should continue to receive scheduled repayments from their debtors. Ongoing liabilities such as mortgage/rent and bills must also be paid. If the debtor’s ongoing obligations are not met, the breathing space period will be brought to an end.
What Happens if a Creditor Objects to Breathing Space?
Creditors can ask for a debt adviser to review the breathing space within the first 20 days of the scheme starting or a particular debt being added. They can ask for a review if they believe that:
- The debtor is not eligible for the scheme
- The breathing space unfairly prejudices their interests
- Any of the debts included in the scheme do not qualify
- The debtor has the funds to make the repayments
If a creditor objects to the breathing space, your debt adviser will review the scheme. They will get in touch if they need any more information from you or if the Debt Respite Scheme is going to be impacted in any way. As a debtor, you must provide as much information as you can about each debt when you submit your application. That will help to prevent creditor objections from being made.
As well as asking for your debt adviser to review the scheme, creditors can also appeal to the court. If they feel that their debt has been included in the scheme unfairly, they can ask for interest and fees to be applied during the breathing space period and even apply to take enforcement action.
What Happens When the Debt Respite Scheme Ends?
Once your period of breathing space ends, your creditors will be able to contact you, add interest to your debts and take enforcement action to collect unpaid debts. However, by this point, the aim is to have an affordable debt solution, such as an IVA, in place. Once an IVA has been agreed by your creditors, they will not be able to add interest and charges to your debts or take enforcement action against you
Can I Make a Joint Application for the Debt Respite Scheme?
You cannot make a joint application for breathing space. It is for individuals and sole traders (non-VAT registered) only. However, if a joint debt is included in your breathing space application, the protections will apply to both parties. Alternatively, if you live with a partner who also has debt issues, you can both apply for breathing space independently.
Can I Get Breathing Space for Business Debts?
Yes. As long as you operate as a sole trader and are not registered for VAT, you can include business debts in the Debt Respite Scheme. That includes business rates, tax debts, overdrafts and credit card debts. You cannot get breathing space for business debts if you run a partnership with someone else or operate a limited company.
How Long Does it Take to Apply for Breathing Space?
The whole process is extremely quick. The application is simple and straightforward and will be submitted to the Insolvency Service by your adviser. Your details will then be added to a private register in just one working day. Your 60-day breathing space period will start the day after this.
How Does the Debt Respite Scheme Support those Undergoing Mental Health Treatment?
Given the proven link between debt issues and mental health, there’s also an alternative version of the scheme to support debtors who are in the midst of a mental health crisis.
To be eligible for the Mental Health Crisis Breathing Space Scheme, you must meet the same criteria and conditions required for the standard Debt Respite Scheme, but also be receiving mental health crisis treatment. To verify this, a mental health professional involved in your care will certify that you are receiving treatment and pass the application onto a debt adviser on your behalf.
The Mental Health Crisis Breathing Space Scheme is extended to account for the debtor’s crisis treatment. It also provides an extra 30 days of breathing space, in addition to the standard 60-day period, once the treatment is over. There’s no limit on the number of times a debtor can enter the Mental Health Breathing Space Scheme.