Jill Kerby

NEW INSOLVENCY, BANKRUPTCY PROPOSALS WILL GIVE HOPE TO THOUSANDS ...BUT WILL THEY BE ENACTED?

It’s still a big ‘if’, but if last week’s report by the Law Commission on Personal Debt Management and Debt Enforcement is actually adopted by the new government and its proposals turned into law, then it could mean that there will be some genuine hope for many thousands of Ireland people whose finances have been devastated by this great recession.

With at least 200,000 mortgage holders in negative equity, and at least 70,000 (at the end of September) either in arrears or having made refinancing provisions with their lender, mortgage debt is by far the most serious issue.

The 400 page Law Commission report, with its 200 plus recommendations, addresses non-secured personal debt in particular, but mortgage debt (which is secured) is also dealt with by two of the three insolvency/bankruptcy proposals at the heart of their findings.

First – an outline of the non-judicial reform proposals:

At present in Ireland aside from formal High Court bankruptcy proceedings which are seldom invoked because the law is so inflexible – it takes 12 years to be discharged -  the terms so onerous and the cost so high - there is an unofficial, form of dealing with serious personal debt that often involves MABS, the Money Advice and Budgeting Service, the Free Legal Aid Centres and the debtor’s creditors, mainly the banks, but often also utility providers and retailers.

Creditors are called together and if a majority are willing to cooperate, and the debtor is also willing and able, a new debt repayment arrangement is made which usually also includes the writing off of a certain amount of the debt.  The debtor is left with a seriously impaired credit record.

Under the aegis of a new Debt Enforcement Office, the likes of MABS or FLAC may also have a role, but a new, licensed, Personal Insolvency Trustee will be appointed to the debtor with relatively modest personal debt, or with small business related debt. (Neither amounts are quantified in the Report.)

The individual’s insolvency can then be subject to either a Debt Arrangement Settlement of a Debt Relief Order.

In a case where the debtor, who has fully disclosed their position and acts in good faith is in a position to realistically pay some portion of their debt, they will be subject to a Debt Arrangement Settlement.

This involves at least 60% of their creditors agreeing to participate in this non-judicial, but legally binding (on both parties) process in order to try and redeem at least some of what they are owed.   At the end of the agreed term of up to five years, all going well, the agreed debt would then be seen to be paid in full and the debtor can make “a fresh start” with no damage to their credit rating.

Mortgage debt can be included in the Debt Arrangement Settlement if the bank/lender is willing to convert it to a non-secured category of loan, says the Commission, though that is more likely to happen where the outstanding mortgage balance is relatively modest.

Where it is obvious to everyone that the debtor has no chance of repaying any of their debt, say perhaps they have no income or assets, then a Debt Relief Order would be issued in which the debtor is discharged from all their debt.  Such a person, however, will be left with an impaired credit record and will find it difficult to secure new credit.

Finally the Commission addresses the reform of our bankruptcy laws.  It suggests that bankruptcy continue to be a judicial, High Court process involving larger and more complex amounts – at least €50,000 worth – but once a settlement is reached with creditors, that the period of discharge be reduced from 12 years to three to five years. The Report covers many other related issues and recommends that the jailing of debtors be abolished in all cases and that a new licensing system be introduced for the purpose of regulating the debt collection industry.

When combined with the provisions of the new Mortgage Arrears and Personal Debt protocol introduced by the Financial Regulator, this report could be the base for a very good new body of law, if it is enacted. 

Too bad it wasn’t introduced sooner. The fear now is that widespread debt forgiveness or bankruptcy, could negatively impact on the efforts being made to recapitalise the fragile Irish banks.

Who, in the end, would ultimately pay for the surge in the banks’ domestic mortgage and personal debt liabilities?

You guessed it – all of us.  Again.