Alan Shatter seemed very pleased with himself yesterday morning?
Why wouldn’t he be – after all the Minister for Justice was only announcing the “most radical reform of insolvency law since the foundation of the State”.
Sounds exciting. What’s it all about?
When the Personal Insolvency Bill becomes law later this year, it should help people navigate their way out of the debt in which they are immersed. Of course, while Mr Shatter and Minister for Finance Michael Noonan were congratulating themselves for bringing the Bill out, they really had no choice as it was a condition imposed by the EU and the IMF as part of the bailout package.
Give me the highlights?
The Bill proposes the appointment of a State-run insolvency service to help people manage their debt. It cuts the bankruptcy period from 12 to three years and introduces three voluntary debt-settlement systems, which will offer people ways to sort out their finances outside of formal court insolvency.
What are the voluntary debt-settlement systems?
The first one covers people with less than €60 disposable income a month and no assets, who owe up to €20,000 in unsecured loans, typically personal loans and credit-card debt. They apply to the insolvency service for a debt relief certificate, and if they get it, their debt is frozen for a year, after which it is written off as long as their financial circumstances have not changed.
But surely a person who has recklessly borrowed can apply for a cert, have their debt written off and then run up their debt again before repeating the process immediately?
No, a person will only ever be allowed to make two applications for a debt relief cert, and there will have to be a six-year gap between applications. If you have been granted a cert you will also be restricted from applying for more credit.
What if I have debts I can’t pay but have more than €60 a month in disposable income?
People who have income, assets and debts above the €20,000 ceiling of the cert can seek to enter a debt settlement arrangement (DSA). This arrangement runs for a period of five years and, with the involvement of a personal insolvency trustee appointed by the State, it should allow people to restructure their debts. They will have to pay an “amount of unsecured debt over a set period”. The amount will be worked out on a case-by-case basis.
What is a personal insolvency trustee?
These trustees will form a soon-to-be-drafted army of debt specialists to both assess the finances of people coming into the debt relief system and (hopefully) play hardball with banks to ensure people are not burdened with unsustainable repayment programmes forever.
And what about the personal insolvency arrangement?
This is a much bigger deal than the other two measures and will have major implications for many thousands of distressed people who have been burdened with unsustainable mortgages through a combination of reckless lending and reckless borrowing. It could also have a big impact on our banks.
A PIA covers both unsecured debt and secured (or mortgage) debt starting at €20,001 with a maximum ceiling of €3 million. A person will be able to apply for a PIA only once in their lifetime and only if they can prove they are unable to pay their debts as they fall due and if it is unforeseeable that they are likely to become solvent. A PIA will run for six years, with a trustee proposing a deal to creditors and overseeing the repayment plan for the duration.
Is that debt forgiveness?
Yes – and no. Banks will not have to automatically forgive any debt and there is unlikely to be any blanket forgiveness
And it’s voluntary?
Yes.
So the banks can just give the measures or proposals the two fingers?
They can, but they would be stupid to do so. As Mr Shatter said, it will be in their best interests to reach agreements with those with mortgages they can no longer afford. This is because the Government has developed quite a smart system that puts it up to the banks to cut deals with distressed borrowers.
Lets say someone has a mortgage of €500,000 on a house worth just €300,000 and can only afford to pay a maximum mortgage of €400,000. The borrower and their trustee might propose a debt reduction of €100,000 and then the bank will have two choices. Accept the deal and get some money back or push people into bankruptcy.
The bankruptcy could see foreclosures on a family home and leave the bank holding a house they cant sell. Then there are the legal costs.
If the bankrupty option is pursued, the debtor will have to be bankrupt for only three years, after which they are free of all debt. They will have lost their home, but they have no debt and can, as Mr Shatter said, have “a fresh start”.
How have the banks reacted?
The Irish Banking Federation said little more than that it had “noted” the publication of the Bill.
