Bankruptcy, the family home and mental health

30 June 2023

It will come as no surprise that there is a direct correlation between mental health disorders such as depression and anxiety and bankruptcy; the stress and emotional strain associated with financial difficulties naturally contribute to mental health risks.

In this article, trainee solicitor, Chloe Shilton, explores the breathing space moratoriums available to debtors with mental health issues and how this impacts bankruptcy proceedings.

Latest insolvency statistics

In March 2023, there were 8,282 breathing space registrations, which saw a 32% increase in the number of registrations from the previous year. Of the 8,282 registrations, 172 were mental health crisis breathing space registrations.

Whilst 172 registrations may appear modest, it is important to appreciate that this monthly figure highlights an overall increase of 41% compared to the previous year.

The Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium)(England and Wales) Regulations 2020

There are two types of breathing space applications, but this article focuses on the mental health crisis breathing space, which allows for an extended period of creditor protection if the recipient is receiving mental health crisis treatment and lasts as long as the treatment does, plus 30 days.

The Debt Respite Scheme was introduced to alleviate creditor pressure and allow debtors to receive effective mental health crisis treatment before any debt enforcement action can be taken. The Government committed to developing an alternative route to access protections for people receiving mental health crisis treatment so they do not have to access debt advice first. If an Approved Mental Health Professional (AMHP) certifies that a person is receiving mental health crisis treatment, the AMHP’s evidence can be used by a debtor to start the breathing space.

This could have significant implications in the context of bankruptcy, where certain remedies available to a trustee in bankruptcy may be subject to a period of limitation which does not survive the breathing space moratorium.

How does this affect a trustee in bankruptcy’s limitation period for claiming an interest in the bankrupt’s home?

Whilst the mental health crisis breathing space sets clear parameters concerning the length of protection afforded to individuals, it poses the question of whether the trustee in bankruptcy’s limitation period to enforce the “use it or lose it” provision according to Section 283A of the Insolvency Act 1986 is frustrated.

For most, the family home is the asset that holds the most value and will always be a desirable realisation for a trustee in bankruptcy. However, the question posed by most is; at what point does the trustee’s awareness of the bankrupt’s interest in the property start the three-year countdown?

This discrete legal question has recently been clarified in the case of Re Scherzade Khilji (in bankruptcy); Mehers v Khilji and another [2023] EWHC 298 (Ch), [2023] All ER (D) 59 Feb. It was revealed that the bankrupt had asserted their beneficial interest sometime after the commencement of bankruptcy, meaning there had been no automatic re-vesting.

Ordinarily, if the trustee is aware of a proprietary interest, they have three years to obtain an order for possession and sale of the property. However, if the order is not sought within the limitation period, the legal and beneficial title to the property automatically re-vests in the bankrupt and will fall outside of the bankrupt’s estate.

This case has provided welcome guidance on the level of knowledge required of the trustee to ‘start the clock’ on the three-year period, as it now clarifies that the limitation period can only begin to run when the trustee has reasonable awareness of such an interest.

It is simply not sufficient to infer that the trustee is aware of an interest; instead, sufficient disclosure from the bankrupt is required. However, the above case does little to clarify whether the limitation period is frozen by virtue of the mental health crisis breathing space, where the trustee is aware of an interest in a property.

Due to the infancy of the Debt Respite Scheme, there needs to be more substantive case law that covers this situation. Instead, we are only able at this point to provide a speculative but reasoned conclusion on whether this affects bankruptcy proceedings.

The mental health crisis breathing space specifically relates to qualifying debts. Therefore, we cannot see that a trustee in bankruptcy’s application for an order for possession and sale of a bankrupt’s family home would be impacted by a breathing space moratorium as the trustee’s proceedings relate to bankruptcy debts, not moratorium debts. As a result, the trustee would not be hindered by Regulation 7 of the Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 (SI 2020/1311) (Regulations), nor Regulation 10 of the Regulations. 

That said, as a relatively new debt relief mechanism, case law on breathing space moratoriums is limited. The stark increase in mental health crisis figures across the UK highlights the importance of increasing awareness and how poor mental health can affect debt management. 

It would be remiss to negate the effect of mental health and how this may impact proper communications between a trustee and a bankrupt. Accordingly, it will be interesting to see whether the Debt Respite Scheme will extend to bankruptcy.

The Insolvency Service guidance

The Insolvency Service has published guidance on when debt advisers should consider taking additional steps to confirm a debtor’s eligibility for a mental health crisis moratorium under the Debt Respite Scheme.

The guidance was produced in light of recent cases concerning the regulations, in particular, the decision of the High Court in Kaye v Lees [2023] EWHC 152 (KB).

The guidance recommends that debt advisors seek clarification, further information or confirmation from a debtor’s approved mental health professional or nominated point of contact if they doubt that the criteria for starting (or continuing) a mental health crisis moratorium are met. 

In particular, if a mental health crisis moratorium is based on regulation 28(2)(e) because the debtor is receiving “crisis, emergency or acute care or treatment in a hospital or the community from a specialist mental health service concerning a mental disorder of a serious nature”, the guidance provides that the approved mental health professional must be satisfied that the debtor is being treated for a mental health disorder of comparable severity to that caught by the preceding regulations 28(2)(a) to (d).

The guidance will be welcomed by debt advice providers, especially the confirmation that they are not required to assess a debtor’s mental health. However, it might frustrate access for individuals to mental health crisis moratoriums, except in the most extreme circumstances.

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