How Breathing Space Regulations Can Adversely Affect Lenders

Throughout the COVID-19 crisis, tenants and mortgage payers were afforded additional protection from the potential consequences of temporary financial turbulence. Where individuals, families, or businesses were unable to meet their repayment obligations through no fault of their own, they were governed by emergency government legislation. At least, to such an extent as to give the person time to get their affairs in order and to get back on top of their financial commitments.

Recently, figures published by the Ministry of Justice suggest that things are returning to normal. In terms of the basic numbers, warrants and repossession orders are once again back to levels similar to those recorded prior to the pandemic. A significant rise in the number of repossessions commenced or carried out in March was recorded (compared to the same quarter last year), and the ASTL has reported a 31.5% increase in the value of loans in default.

Contrary to popular belief, lenders always approach repossession as a last resort option. Repossession is a costly, complex, and time-consuming process, which ultimately leaves all parties involved out of pocket. Even so, it is a necessary mechanism to enable lenders to safeguard themselves from heavy losses.

The debt respite scheme

Following the withdrawal of COVID-related protections from repossession and eviction, the government introduced the Debt Respite Scheme, also referred to as Breathing Space; the policy came into force on May 4, 2021.

According to the government, the new regulations were introduced to give individuals the time they need to enter sustainable debt solutions and to encourage people to seek advice on their debts and outgoings.

In short, the policy provides those who qualify under its terms and conditions a period of 60 days of ‘breathing space’. During this time, their creditors (and the collection agents representing them) cannot issue any demands or progress with enforcement. However, all interest, fees, and penalties that apply during this 60-day suspension period still apply.

But what seems to have been overlooked by those who drafted the legislation is how a 60-day ‘breathing space’ period can be somewhat disproportionate, from one loan type to the next. The same 60 days apply (if the borrower qualifies), irrespective of whether they are repaying a 30-year mortgage or a six-month short-term loan. In the case of the latter, 60 days would be a full 30% of the entire repayment period—the equivalent of a ten-year hiatus on a 30-year mortgage.

Either way, the latest figures published by the Insolvency Service suggest that the vast majority of those registering under the Breathing Space are perhaps not using the facility in the way it was intended to be used. Of the 49,017 cases accepted during the programme’s first year, 96% of those taking advantage of the scheme ran out of time within the 60-day allotted period. Just 668 entered into a viable debt management solution, while only 222 came up with ways to repay their debts within 60 days.

All of this has prompted calls for the terms and conditions of the policy to be revisited to protect lenders from potential losses. Breathing Space is used most broadly as a way to forestall repossession or eviction, as opposed to its intended purpose of a sustainable debt solution. Lenders have the option of launching counter-challenges against breathing space cases, but the process is long-winded, complicated, and costly.

There is no argument or contention among lenders that well-intentioned debtors should be given the support they need to weather turbulent financial times. The issue is that with policies like Breathing Space, the programme is wide open to abuse and exploitation.