The New Debt Recovery Mental Health Moratorium in Scotland

The Bankruptcy and Diligence (Scotland) Act 2024 (the Act) was given Royal Assent on 15 July 2024 but isn’t in force yet. As part of the Act, the Scottish Ministers have the power to create a Mental Health Moratorium (MHM). 

The Act doesn’t give any detail on the MHM and this will instead be brought in under the Debt Recovery (Mental Health Moratorium (Scotland) Regulations 2024 (the Regulations). The draft regulations have now been published and are subject to a full public consultation (which is expected to begin soon). This article is based on the current draft of the Regulations which may change following the consultation. The early indication is that the Regulations will come into force in April 2026.

The Mental Health Moratorium

The MHM will apply to someone living in Scotland who meets the debt and mental health criteria. If that person is already in a statutory debt solution (such as protected trust deed or a debt payment programme) then they won’t be able to apply for a MHM.

In order for an individual to make an application, a mental health professional must have confirmed the mental health and debt criteria have been met.  The mental health criteria are that someone is receiving compulsory hospital treatment under the mental health legislation or similar treatment on a voluntary basis in the community. The debt criteria are that the person has a problem with debt which is impacting on their mental illness and due to their mental illness, the individual is unable to deal with their debt (or it is preventing their recovery).

Only debts owed by the individual when the MHM is granted will be included as ‘moratorium debts’. The regulations set out the types of debt covered (this includes debts under a court order, rent arrears and mortgage arrears) and not all debts are included as qualifying debts. Unlike the existing statutory debt moratorium, the MHM only applies to moratorium debts. If the individual then incurs further debts, a creditor could carry out enforcement action on these.

The Accountant in Bankruptcy (AiB) will be responsible for administering the MHM. The application is made to the AiB and can only be made by a money advisor. It remains to be seen whether this will be limited to specialist money or debt advice organisations.

There will also be a Mental Health Moratorium Register which the AiB will add the name of the individual and the start date of the MHM to. The Register won’t be publicly available (unlike the DAS Register or the Register of Insolvencies). Relevant creditors will have access to the Register but only to limited information and won’t be able to check for other creditors or debts.

A MHM can, in theory, last for an indefinite period. However, if the individual stops meeting the criteria then the MHM ends 6 months later. An MHM will come to an end if the individual enters into a trust deed, a debt payment programme or is sequestrated. The death of the individual also ends the MHM.

Obligations on creditors

The draft regulations propose creditors will be advised by the AiB that a MHM is in place. The creditor then needs to carry out a search of their records to find the debt owed by the individual and notify the AiB. This must be done by the creditor as soon as “reasonably practicable”.

If the debt has been assigned, then the creditor must notify the creditor by assignation and provide the contact details for the creditor by assignation to the AiB.

Failure to notify the AiB or the creditor by assignation could result in the creditor being liable for losses or expenses.

Restrictions on creditors

Whilst an MHM is in place, a creditor can’t take enforcement action, apply interest fees, penalties or charges to the moratorium debt or instruct an agent to do either of these things.

The types of enforcement action are set out in the Regulations (they include, for example, serving a charge for payment or contacting the debtor to discuss enforcement action). However, as the Regulations stand, they don’t prevent the creditor from carrying out evictions or serving calling up notices.

Any prohibited action taken against an individual will be null and void. A creditor who knowingly takes action will be liable for any losses or expenses incurred by the individual. 

A creditor can contact an individual’s money advisor to discuss the debt or a debt solution. The Regulations also set out certain circumstances where a creditor can contact the individual.

Objections to a MHM

It is possible for a creditor to ask the AiB to review a decision to grant a MHM. This is on one, or both, of two grounds:

1. the moratorium unfairly prejudices the interest of the creditor (for example because the individual has sufficient funds to discharge their debts as they fall due); and /or

2. there has been some material irregularity in relation to the application process (for example, the individual did not meet the mental health criteria or the debt criteria when the application was made).  

The request must be made in writing within 14 days from the MHM starting or the creditor becoming aware of any new material information.

It is possible for the individual or any affected creditor to appeal, to the Sheriff, a decision to cancel a MHM.

An individual can ask the AiB to review a decision and also has a right of appeal to the Sheriff.

What this means for you 

Creditors will need to have in place systems to check for moratorium debts if they are notified by the AiB and be ready to respond quickly to the AiB with the required information. They will also need to be able to check if a debt has been assigned and have systems in place to notify the creditor by assignation.  

Creditors will also need to be aware of the restrictions that apply where a MHM is in place and will need to have processes to ensure that none of the prohibited actions are taken.

There are aspects of the draft regulations that remain unclear, such as how a third-party (often a bank) holding funds that have been arrested (frozen) by a creditor will know that a MHM is in place and that those funds should not be released. The consultation process that is due to commence will hopefully provide clarity on these issues.

Co-author: Lucy Harington

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at November 2024. Specific advice should be sought for specific cases. For more information see our terms & conditions.