THE GOVERNMENT yesterday announced a series of measures aimed at helping people struggling with unsustainable debts to reach settlements with their creditors without recourse to formal insolvency procedures.
The Personal Insolvency Bill 2012 outlines three specific mechanisms that will help mortgage-holders and people with other forms of unsustainable debt to reach agreements with their creditors, which in some instances will include writedowns of their debts.
In addition, the legislation includes major reform to Ireland’s bankruptcy and insolvency regime – most significantly, a reduction in the bankruptcy term from 12 years to three years.
The Government intends that the Bill will be passed into law in the autumn.
The legislation allows for the establishment of a new Insolvency Service, a State agency that will be funded by the exchequer and that will oversee the new arrangements.
Minister for Justice Alan Shatter said yesterday he expected the agency to employ between 50 and 70 people. Recruitment for some positions had already begun.
At the core of the Government’s proposals are three new non-judicial debt resolution processes.
These include a debt relief notice (DRN), which will allow for the write-off of unsecured debts of less than €20,000. Unsecured debts can include credit card bills, utility or telephone bills and overdrafts. Qualifying people must have assets of less than €400 (including property) and a net disposable income of €60 or less a month. A debtor must be unable to pay their debts in full or as they fall due.
In DRN cases, debtors will process their application through an authorised debt adviser known as an “approved intermediary”, which is likely to be Mabs (Money Advice and Budgeting Service).
The second process, called a debt settlement arrangement (DSA), also applies to unsecured debts. It is aimed at debtors who are unable to pay their unsecured debts, but have sufficient income to propose a reasonable level of repayment to creditors.
A DSA is subject to the agreement of 65 per cent of creditors, who will meet at a creditors’ meeting.
Qualifying debtors must be insolvent and must be able to show there is no likelihood of them becoming solvent within a five-year period. Following the drawing up of a scheme of arrangement or repayment proposal with creditors, any outstanding debt is written off at the end of the five-year period.
The third process is known as a personal insolvency arrangement (PIA). It involves the agreed settlement of secured debts, including mortgages, of up to €3 million (though this cap can be increased if all creditors consent), as well as unsecured debt. The settlement would take place over a six-year period.
No specific resolutions are put forward in the Bill – PIA agreements between debtor and creditor will be drawn up having regard to individual circumstances.
Among the settlement agreements that may be offered are a split-term mortgage, which involves splitting a distressed mortgage into an affordable mortgage and warehousing the balance, or a trade-down mortgage, which allows homeowners to move to a lower value house and carry any negative equity with them.
Under a PIA, debtors will not be required to dispose of or cease to occupy their principal private residence, though its sale may form part of specific PIAs. In addition, a creditor may be entitled to “claw back” money owed in the event of a subsequent sale of a mortgaged property that has already been written down.
Unlike DRNs, debt settlement arrangements and personal insolvency arrangements will be managed by a personal insolvency practitioner, likely to be an accountant or legal practitioner, to be appointed by the debtor.
Details on how these practitioners will be regulated is not included in the Bill, but is expected to be covered in the legislative process at a later stage.
The payment of personal insolvency practitioners is likely to be agreed by the debtor and creditor at the creditors’ meeting when the repayment arrangement is being devised.
Yesterday, Mr Shatter said remuneration would be based on a fee-based model, noting the fee for similar work in the UK was between €3,000 and €3,500 per case.
Creditors have the right to appeal to the Circuit Court in all three instances.
The Bill provides for a number of amendments to the Bankruptcy Act 1988. As well as allowing for an automatic discharge from bankruptcy after three years rather than 12, the Bill has increased the minimum amount at which a creditor can petition a debtor for bankruptcy, from €1,900 to €20,000.
The Bill also states 14 days’ notice much be provided to ensure a bankruptcy summons is not brought prematurely by a creditor.
When a debtor applies for bankruptcy themselves, they must swear an affidavit that they have made reasonable efforts to pursue alternatives to bankruptcy and must show their debts exceed their assets by more than €20,000.
