How much is reasonable?
The insolvency Service of Ireland’s newly-published Guidelines on reasonable expenses are already proving controversial in a world where one man’s necessity is another’s luxury.
With most of the details of the new personal insolvency regime now in the public domain, feelings are running high in a number of areas. And of all the aspects of the regime to stir the blood, perhaps none is as contentious as the Insolvency Service of Ireland’s (ISI) “Guidelines on a reasonable standard of living and reasonable expenses”.
The ISI’s “reasonable expenses” represent that sum which a debtor will be allowed to spend each month before the remainder of the household income is allocated to settling outstanding debts as per a particular scheme of arrangement.
The sums allowed depend on the household situation – one or two adult household, number of children etc. They are not intended to be unduly harsh but do not leave much in the way of life’s little luxuries. This is as it should be: creditors will expect errant debtors to feel some pain commensurate in some way with their own.
Under the ISI model, a ‘reasonable standard of living’ does not mean that a person should live at a luxury level but neither does it mean that a person should only live at subsistence level. A debtor should be able to participate in the life of the community, as other citizens do. It should be possible for the debtor ‘to eat nutritious food ..., to have clothes for different weather and situations, to keep the home clean and tidy, to have furniture and equipment at home for rest and recreation, to be able to devote some time to leisure activities, and to read books, newspapers and watch television’. It follows that ‘reasonable living expenses’ are the expenses a person will necessarily incur in achieving a reasonable standard of living which fulfils these criteria.
The leaking of the guidelines prior to publication was presumably intended to test the water. As a PR tactic, this was a failure with almost universal negative reaction. As a means of testing the water, however, it was perhaps an acceptable price to pay.
In fact if one examines the guidelines published much of the criticism appears to have been based on misunderstanding (assuming the guidelines were not retrospectively modified post-leak, pre-publication). One particularly controversial and dysfunctional measure leaked – one that effectively forced women to give up work where net income from that work is less than the cost of childcare – is nowhere to be seen in the final document. The expenses deemed as “reasonable” are, in fact, reasonable (under the circumstances).
What has irritated people most was the prescriptive and granular nature of the proposals (as portrayed by the media) but in reality there is considerable latitude within the Guidelines.
There is something intrinsically irritating about the idea of a faceless governmental body dictating that an individual shall spend no more than €125.97 per month on “Social Inclusion and Participation” or €33.40 per month on Personal Care. Surely it would be far better for the ISI to indicate an overall number to which the debtor must adhere?
But that is precisely what the ISI does in its published Guidelines – the category breakdown is there simply to provide a rationale for the monthly limit – and there is flexibility between categories. As the Guidelines state: “So long as an applicant for one of the three new personal insolvency processes under the Act comes within the overall headline figure for reasonable living expenses, the ISI will not be prescriptive in terms of what the applicant can or cannot spend their money on.”Reasonable Expenses: Single Adult Household with Vehicle
Source : ISI
Ironically, excessive latitude over the Guidelines may prove to be a future difficulty for the new regime.
The ISI Guidelines are admirably transparent but will their application be consistent and universal? More pointedly, should their application be consistent and universal?
Certainly, there is ample room for variation, as the Guidelines themselves set out:
Where either a DSA or a PIA is proposed, the decision on the reasonableness or otherwise of living expenses will be a matter for the creditors to determine on a case-by-case basis with the PIP acting to facilitate debtors and creditors in working out an arrangement acceptable to both.
In other words, if your PIP can prevail on creditors to accept higher living expenses than those recommended by the ISI, then that is perfectly fine with the ISI.
It is hard to see this becoming the norm for the vast majority of successful scheme applicants as the creditor veto will apply but there may well be a significant minority who manage to get better terms than most.
These individuals are likely to be at the upper end of the pyramid. Just as the most seriously indebted developers managed to negotiate sizeable salaries from NAMA in respect of the workout of their assets, so those with greater capacity to improve their circumstances in the short-term (and thereby increase the creditor dividend over the life of the scheme) may get some indulgence on their daily standard of living.
There has been some compelling radio since the Guidelines were published. One notable contributor went into great detail on the sheer effort and time commitment required in chasing deals to keep household expenditure down to prescribed levels. One question banks will advisedly ask themselves is whether a debtor’s time is best spent in such pursuits.
As the guidelines state: “Reasonable living standards may be higher than these guidelines propose where acceptable to creditors. This may occur where creditors can see value for themselves in incentivising the debtor.”
While those further down the chain are unlikely to see as much indulgence, it makes sense the same incentivising principles should apply – and the Guidelines are clear on this: “It is important that individuals in financial difficulty, who are also in employment, be given some incentive to continue working. A reduction to the income level which that individual would have if he or she were to be unemployed and in receipt of social welfare could take away the incentive to go to work. In the context of working debtors entering into DSAs and PIAs, such individuals should be able to retain some of the money they are earning before the balance of their income goes to discharge their debt.”
Perhaps the most welcome aspect of the new insolvency measures is that it finally gives the possibility of an exit to the debtor. This makes sense not just in economic terms but on humane grounds. The new schemes must not simply be a five-year sentence of blanket austerity: by incentivising the debtor to improve their circumstances everybody – including creditors – wins.