Explosion of bankruptcies are on the way for Ireland
Sunday Business Post
14 April 2013
Written by James Treacy, Managing Director of StubbsGazette
Earlier this year StubbsGazette, in association with RedC, published the first research into the likely take-up of new Personal Insolvency schemes that will be on offer as soon as this month. The results showed a country with massive pent-up demand for debt relief – even though the vast majority of individuals surveyed were completely unaware that help was just around the corner.
Based on the survey, we estimate that a staggering quarter of a million households will qualify for one of the three schemes on offer with just under 25,000 applying in the first year.
But perhaps the biggest surprise from our research was our predicted level of bankruptcies under the new bankruptcy rules that come into force simultaneously with the schemes. At 6,900 for year one, this rate is well ahead of rates in England & Wales and Northern Ireland. And by historical levels it will be nothing short of an explosion.
So what are the factors in support of our view?
First is that anecdotal evidence (and indeed our own experience as a debt collection agency) indicates that many individuals, particularly in the DE socio-economic group, will simply have no disposable income in excess of the minimum subsistence income levels with which to make a meaningful payment on their debts through the new insolvency schemes such as the Debt Settlement Arrangement or Personal Insolvency Arrangement.
Higher income groups also have for the past five years had their disposable income slashed through salary and bonus reductions compounded by rising direct and indirect taxes. For many, there is simply nothing left to give.
Then there are the changes to the rules themselves.
Until now, Irish bankruptcy legislation was among most punitive and archaic in the world, effectively condemning the bankrupt to a lifetime of virtual penury and economic paralysis.
The Irish bankrupt could look forward to a miserable existence where he or she could retain the tools of their trade and very little else. Any prospective earnings were subject to attachments on the part of their creditors giving little incentive to the bankrupt to trade his or her way out of their predicament. It made it impossible to plan for the future and the original debt was often sustained by the requirement to reimburse the petitioner’s legal costs.
Our Victorian approach, inherited from the UK, insisted on a 12-year discharge period. Under the new rules, discharge becomes automatic at the end of year 3 of the process.
The draconian nature of the Irish laws meant that Ireland traditionally had minimal levels of bankruptcies. That will now change dramatically and is to be welcomed.
Recent high profile bankruptcy applications in foreign jurisdictions such as the US and UK have done little to endear the state of bankruptcy to the general public. In particular, there is a perfectly reasonable construction being put on these events to the effect that the deeper in debt and the more reckless the behavior, the greater seems the capacity of the bankrupt to avail of the softer terms on offer elsewhere.
The contrast between the fortunes of, for example, the high profile developer bankrupt and the individual who overpaid for a family home before losing their livelihood could not be starker.
But these emotive circumstances and manifest unfairness should not obscure the absolute necessity of an effective domestic bankruptcy regime and how it contributes to the working of the economy.
The most important objective of bankruptcy law is to promote sufficient repayment from debtors so that lenders will be willing to continue lending to other borrowers. Without the sanction of bankruptcy, the incentive for banks to lend is diminished and everybody suffers. Consumption becomes entirely linked to income, with nothing to smooth out the curve during times of economic downturn.
So it’s critical that a balance is struck between the interests of the creditor while at the same time leaving the bankrupt sufficient motivation. In this respect the American ethos meets the requirement extremely well, whereby the bankrupt sacrifices their unprotected assets but future earnings are protected, meaning bankrupts have a fresh start and are heavily incentivized to work hard and earn.
But there are other important objectives in any bankruptcy law.
Creditors must be prevented from seriously harming debtors and other creditors by aggressively positioning themselves to be the first to collect, once it has become clear that a debtor is in serious financial distress. Certain creditor actions can lead to the debtor being unable to make the best use of assets, for example:
- Repossessing equipment that might affect the debtor’s potential earnings
- Consolidating loans and converting them from unsecured to secured debts
- Seizing a disproportionate amount of any income/assets, thereby damaging the interests of other creditors. This is happening today with unsecured creditors seeking to collect to the detriment of secured creditors.
At this stage of the financial crisis, we all have experience of the terrible distress being inflicted in individuals. The final objective of a bankruptcy regime is to prevent long-term damage both personal and economic. For example it is in nobody’s interests to have medical conditions going untreated and premature death, or even perhaps children having to come out of school. It makes no sense for creditors to insist on measures that might likely impact on their future earnings potential. Bankruptcy measures should seek to avoid anything that might create a downward spiral.
There is nothing entirely new behind these basic concepts: they were applied by other jurisdictions many years ago when they legislated to simplify bankruptcy law – for example when the UK reduced the period for bankruptcy discharge from 3 years to 1 year in 2004 and a decade or two earlier when it was reduced from 10 to 3 years.
The big difference is that other jurisdictions made the changes because they believed it was the right thing to do to promote economic growth whereas, regrettably, Ireland has had the changes forced upon us by the Troika. This has meant that some of the underlying reasons for making the changes have been lost in the noise.
Here at StubbsGazette we believe that the new rules largely meet these requirements. Indeed, we’re getting behind the entire Personal Insolvency regime by our support of PIPx – an integrated platform for Personal Insolvency Practitioners (PIPS) – that will promote transparency, efficiency and also reinforce the fundamental principles of renewal, support for lending, fairness and breaking the cycle of indebtedness that will be an essential part of the nation’s recovery over the next few years.