Ireland and its citizens have a rich history of looking to the UK for a solution to legislative shortcomings at home. Where once it was the plight of teenage mothers-to-be on the B&I ferry, now it is the ex-billionaire business class looking to bankrupt themselves in an altogether more favourable environment.
Unfortunately, we have a tendency to dither and delay until the problem looms directly in our faces and the insolvency regime in this country is no exception. It has taken a financial catastrophe and the direct edict of the EC-EU-IMF troika to result finally in action.
The bailout terms were clear: by end March, according to the text, “Government will introduce legislation to reform the personal debt regime to the Houses are the Oireachtas with the objective of lowering the cost and to increase the speed and efficiency of proceedings while at the same time mitigating moral hazard and maintaining credit discipline.”
Now, having secured a one-month extension from the troika (legislation will be published end-April), the Minister for Justice and Equality, Alan Shatter, has secured approval from the Government for his draft Personal Insolvency Bill.
The Bill has been one of the most eagerly-awaited pieces of legislation of recent years and takes up many of the recommendations of the Law Reform Commission’s (LRC) report Personal Debt Management and Debt Enforcement, published in December 2010.
The proposals for the reform of personal insolvency law will involve the introduction of three new non-judicial debt settlement systems (subject to relevant conditions in each case):
· A Debt Relief Certificate to allow for the full write-off of qualifying unsecured debt up to €20,000
· A Debt Settlement Arrangement for the agreed settlement of unsecured debt of €20,001 and over;
· A Personal Insolvency Arrangement for the agreed settlement of both secured and unsecured debt of €20,001 and over.
In addition, the proposed legislation will continue the reform of the Bankruptcy Act 1988, begun in the Civil Law (Miscellaneous Provisions) Act 2011. Most significantly, this will include the introduction of automatic discharge from bankruptcy, subject to certain conditions, after 3 years in place of the current 12 years.
Minister Shatter had previously indicated the introduction of Debt Relief Orders (DRO), which effectively are certified by issuance of a Debt Relief Certificate. A DRO allows persons with "no assets and no income" to write off unsecured debt such as a credit card or personal loan within a short period (in this case the Certificate will be issued after 12 months). During this time, those whose application for a DRO is approved will get a moratorium where debts are frozen and where creditors may not pursue the debtor for the outstanding debt. If at the end of the period the debtor still cannot pay the debts back at an agreed reasonable amount each month, they will be written off. A DRO would be publicly registered on an insolvency register.
But the DRO/DRC regime is not perfect and may have appeal to the unscrupulous. It raises many questions: Should such a person be entitled to avail of a DRO more than once? Does it incentivise fraudulent disclosure? Could it result in non-take up of employment? Would it encourage involvement in the black economy?
Bankruptcy and debt relief is at one end of the insolvency spectrum but the vast majority of individuals affected will seek a settlement.
The new non-judicial debt settlement arrangement (DSA) is similar to the UK’s Individual Voluntary Arrangement (IVA) scheme that involves a legal agreement between a debtor and two or more creditors to repay an agreed amount of debt over a set period of time. At the satisfactory conclusion of the agreement, normally after five years, all debts covered by the DSA are discharged.
But the LRC proposed – like the UK – that the DSA would apply only to unsecured credit, so car loans, student loans and – critically – mortgage debt, would not be covered.
In the Irish context this is unrealistic and, in spite of public professions to the contrary, it was widely reported that differences arose between Minister Shatter – who favours the inclusion of mortgage debt – and the Department of Finance, which opposes it, presumably for the debilitating effect such a regime might have on the capital levels of the banking system.
It is a simple fact that in very many instances high levels of secured, preferential debt such as mortgage repayments, leaves little or nothing for unsecured creditors – hence a DSA is unrealistic.
Minister Shatter was well aware of the issue: “I am concerned that if we are to introduce a DSA scheme that does not include dealing with secured credit in some way, it may overly incline either debtors or creditors towards bankruptcy as the most practical application for a full resolution of their position. Deputies may wish to note that in Australia, which has very developed non-judicial debt settlement systems, bankruptcy is the option of choice in 70% approx of insolvency cases.”
The compromise was the Personal Insolvency Arrangement “for the agreed settlement of both secured and unsecured debt of €20,001 and over”: this means that mortgage debts are included up to a value of €3 million according to the draft Bill.
When the new system comes into effect, expect an avalanche of applicants – there are thousands of individuals who have been waiting for several years for this legislation to come.
The Money Advice and Budgeting Service (MABS), the body that the LRC expects will become the processor of such applications, is already straining under current demand.
At the end of June 2011, the average national waiting time from first point of contact to first appointment with a MABS money adviser was five to six weeks. Some 17,536 new clients presented themselves to MABS in the year to September 2011. This is just a 3 percent increase on the number of new clients presenting in the same period in 2010 (16,969) and a 19 percent increase on 2009 (14,704) but it is the absolute number of individuals/families involved that is the frightening aspect here.
And it is more than likely that this is just the calm before the storm. Until now, the banks have delayed wrestling with the debt legacy issue because they have simply not been forced to confront the issue. The new insolvency regime is likely to the the point when they are finally forced to confront reality, something that will probably be prompted by the ECB as it seeks to cut back on supplying low-cost emergency liquidity.
This marks the end of the phoney war between banks and their debtors. 2012 is the year when debtors and creditors alike will finally confront reality.