The Personal Insolvency Bill aims to deal with personal debt and help those in unsustainable mortgages make deals with their banks and get on with their lives.
Unfortunately the details of the bill as disclosed by the media will fail to allow the individuals in most need of bankruptcy reform to avail of it. It also fails to reduce the time scales involved in going bankrupt in Ireland, which in the present proposals can extend to 8 years. While shorter than the current 12 year horizon for current bankrupts, it doesn’t go far enough. So for all those out there thinking that this is going to solve their problem, I think you need to lobby your minister for further change.
There appear to 4 scenarios to the proposals as outlined:
1. The first scheme is for people with no assets and no income. Their unsecured debts (usually credit card bills / some personal loans etc.) of €20,000 or less can be written off by decision of the Insolvency Agency after one year. The creditors will have no power of veto.
2. The second scheme provides for a ‘Debt Settlement Agreement’ (DSA) for unsecured debt greater than €20,000. The DSA requires the agreement of 65 per cent of creditors by value. The borrower will have to pay an agreed amount over a period of up to five years, after which the balance of the debt will be written off.
3. The third scheme applies where there is secured debt. For most people this means mortgages. Under a ‘Personal Insolvency Agreement’ (PIA) a borrower can propose to hand back their property and any balance left from the sale of the property would be dealt with by monthly payments over a period of up to six years, after which the remainder would be written off. The deal depends on the agreement of the creditors. Creditors can simply refuse to accept the deal and demand full payment according to the terms of the loan.
4. There is the bankruptcy route. This envisages the individual will be discharged from his / her debts after 3 years. This is not the end of the issue though as after the 3 years the court can force the debtor to continue to pay his past creditors for a further 5 years leaving the debtor with just reasonable living expenses. So as mentioned above the real timescale for new bankruptcy law is 8 years.
So why would anyone do the above? Some may benefit from the write down of unsecured debt where they have no income. But this is happening anyway at present through organisations such as Money Advice and Budgeting Service www.mabs.ie.
No one else would really consider the new proposals. The reasons are that you could engage advisors to do a lot of work and then the creditor just says no anyway and you are back to square one! That is why only 28 bankruptcies were granted by the courts in 2010. While the number will probably rise for 2011 where (mainly foreign) banks have pushed for bankruptcy proceedings, I cannot see the new proposals changing the number significantly.
The individual trying to deal with large unsustainable personal debt will deem the bankruptcy scenario too painful to proceed with and try to keep paying something to the banks to keep them happy. Being effectively banned from business for 8 or 12 years does not allow those who made mistakes in the past a proper second chance at life, which is what should be the basis for this legislation.
No one wants to see a write down of debt for those who were greedy and enjoyed all the spoils of the celtic tiger era and do not take responsibility for their actions. But life does go on and if we don’t deal with this properly in Ireland then many people will continue to make certain payments to banks for assets that will never achieve the value they paid for them.
Giving people a second chance can divert the money away from being used to keep a banks capital intact to providing for their families and it will keep money circulating in the economy.
Therefore who will the new laws help exactly? No one in reality, the status quo will continue and as time goes on England might look more appealing for those in unsustainable mortgages.