The Oireachtas Joint Committee on Justice, Defence and Equality had extended its deadline for submissions on the proposal to reduce the discharge period for bankruptcy to just one year to June 26.
The proposal to once again reduce the automatic discharge period for bankruptcy from three years to one year is unnecessary and may lead to dysfunctional behaviours and outcomes from a debtor perspective. Furthermore, it is unfair to creditors.
The decision in 2014 to reduce the period of discharge from 12 years to 3 years was correct. In the context of encouraging entrepreneurs who suffer business failure, excluding their participation in the economy for this period was excessive. The new proposal, however, tilts the balance too far in favour of the debtor and diminishes the legitimate punitive sanction of bankruptcy. It also may have a dysfunctional effect of making bankruptcy appear to be a relatively attractive option and obscuring the very significant restrictions placed on the bankrupted individual.
From a creditor perspective, consider the situation in the UK where a bankrupt is automatically discharged 12 months after the date of the bankruptcy order even where no payments have been made to creditors. After discharge, the bankrupt is released from all bankruptcy debts and any property he or she acquires after discharge is the erstwhile debtor’s property. The official receiver (or trustee in bankruptcy) cannot lay claim to these assets as only the property comprised in the debtor’s estate at the time of the bankruptcy order remains under the control of the official receiver to be sold for the benefit of the creditors.
While the 12 month discharge in the UK was designed originally to encourage entrepreneurs who had experienced business failure to get back in to business, unhindered by the earlier failure, the reality is that 80% - 90% of bankrupts are consumers who quite simply lived beyond their means and their bankruptcy has nothing to do with business debts or anything remotely connected to enterprise.
Regardless of whether the bankrupt is a consumer who lived beyond their means, or a failed entrepreneur, a 12-month discharge period is insufficient to retain a prospect for the creditor to secure an acceptable outcome. The reduced time period of 12 months makes it too easy for the bankrupt to defer asset/income acquisition until after that date expiry, thereby denying creditors a legitimate share of the debtor’s subsequent wealth creation.
Bankruptcy has far-reaching (and potentially ruinous) consequences for creditors and diluting the sanction of bankruptcy encourages reckless and unscrupulous behaviour.
From a debtor perspective, while a reduction of the bankruptcy discharge term to one year might seem attractive, bankruptcy discharge term to one year might seem attractive, bankruptcy retains some very severe disadvantages and restrictions and is not to be entered into lightly.
- Proponents of a reduced discharge period cite the increased probability of the bankrupted retaining the family home but this files against the facts: some 75% of bankrupts end up losing the home.
- The bankrupt is persona non grata with banks; will lose his or her bank account and credit cards; is disbarred from seeking credit in excess of €600
- The bankrupt’s credit rating is effectively destroyed
- The bankrupt may lose his or her job due to bankruptcy status and may well be disbarred from seeking certain forms of employment
- The bankrupt may not become a company director for the period of bankruptcy
Reducing the period of bankruptcy discharge also distorts the balance of attractiveness with alternatives such as a Debt Settlement Arrangement (DSA) or Personal Insolvency Arrangement (PIA). DSAs and PIAs are long term commitments, lasting 5 or possibly 6 years, which is already a much longer time frame than bankruptcy. If debtors going bankrupt will be discharged after just 12 months and only have to pay contributions for 3 years, how seriously are they going to consider the alternatives, which by comparison will seem like a real endurance test?
According to Mitchell O’Brien of Insolvency Resolution Service, the vast majority of personal bankruptcies since Nov’13 fall into two groups. The first are “social welfare cases”, individuals who have no capacity in bankruptcy, a DSA or PIA to make a contribution to previous debts/creditors. The second group are those that do have a capacity but their creditors have acted irrationally [or have indicated they would act irrationally] in the context of a DSA/PIA.
For those in group one, the term of bankruptcy won’t really make any difference. They have nothing, so they’ll pay nothing.
The debtors in group two find themselves in a different situation. There have been multiple instances where backs have vetoed insolvency deals and ended up taking far less under the inevitable bankruptcy.
The reason to propose the reduction in the terms of bankruptcy is to get creditors to act rationally. If the PIA mechanism was working as it was intended, the bankruptcy term would not even be on the agenda, according to Mr O’Brien.
“The reduction in the terms of bankruptcy was Labour’s suggested solution. Fine Gael favour ‘limiting the creditor veto in PIAs/DSAs’ as the appropriate fix. Now we are playing politics.”
Some form of compromise is likely, possibly a two year bankruptcy and a three year payment order, along with the creditor veto being limited as announced by Government last month.