The Science of Set Costs
One of the virtues of the personal Insolvency regime is that when it comes to setting Reasonable Living Expenses (RLE) for those availing of the schemes everybody is, apparently, equal. This is particularly the case with the Set Costs element of the RLE, that part that relates to typical expenditure outside of childcare, housing and special circumstances costs.
But while the Set Costs allowed are transparent, one of the features of the personal insolvency regime since it came into existence has been a strong body of opinion on the part of creditors that the amounts allowed by the Insolvency Service of Ireland (ISI) in respect of Set Costs are in fact too generous.
Officers of the credit union movement in particular, a group that finds itself well down the list when it comes to dividend payouts under the schemes, are generally unhappy about the amounts allowed. Some have pointed out that many of their members, whom they have happily loaned money in the past, would often exist on less than the recommended guidelines.
The existence of the Set Cost tables, backed as they are by statutory force, has major implications for unsecured lenders. First, the greater the RLE figure allowed, the less available for unsecured creditors under the terms of any insolvency scheme. Second, any lender who has extended funds to an individual whom they knew (or who they failed to inform themselves) was living on less than the appropriate RLE figure, is standing on very precarious ground when it comes to default.
The fairness or otherwise of the statutory RLE is a matter of debate but it is fair to say that the Set Costs figures that comprise the large majority of the RLE figure, were not picked out of the proverbial nether regions as per ex-Anglo boss David Drumm.
The ISI used as its model a modified version of the consensual budgeting model originally developed in Ireland by the Vincentian Partnership for Social Justice (VPSJ). The ISI defends this on the following grounds: “One of the greatest strengths of using consensual budget standards is the level of transparency it affords. Each category of expenditure is supported by detailed lists of items within each category which are individually priced. Different people will naturally have different opinions on what is meant by reasonable living expenses but the level of transparency offered by this method should help inform any discussion.”
Behind the science is an objective that the figures arrived at allow for “reasonable standard of living”. This, according to the ISI, 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’.”
But while the overall level allowed is, while open to debate, at least prescribed and transparent, the experience of Personal Insolvency Practitioners (PIPs) gives grounds for believing that there are discrepancies between the treatment of different household types.
This is highlighted by an examination of, say, a single individual and, say a family comprising a couple and three children of pre-school, primary and secondary ages. Under the tables, the aggregate amount allowed to the individual (as detailed below) is €938 per month. The equivalent sum for our model family is €2,492.
But the allowances seem to discriminate against single individuals in so far as they do not seem to recognise the economies of scale that arise where the household is comprised of more than one individual, in particular a family as set out above.
For example, taking food into account, the single person struggles to avail of the kind of volume discounts available to family units with more mouths to fees.
The area of Household Goods (furniture, appliances, cleaning goods etc.) appears to be particularly discriminatory. Perhaps this is a function of the assumptions behind the figures allowed, as disclosed in a note published by the ISI: “Single adults of a working age living in an urban area are assumed to be living in a rented furnished studio apartment.” That is a fairly bald assumption and not necessarily reflective of reality but, be that as it may, the figure allowed for our single adult appears miserly in comparison with the family. Electricity and Home Heating likewise seem less-than-generous in relative terms.
The ISI has pledged to review these figures on an annual basis – it will be interesting to see just what the experience of PIPs has been as the first cases reach their first cases reached their anniversary and whether the amounts are revised.