Experiencing the Penalty of Personal debt

Capital punishment for even the most heinous criminal offenses has long been abolished in many western democracies with a few important exceptions like the USA. In regard to debt however, the USA has a most benign range of laws and regulations dealing with insolvency both personal and corporate. Contrasting significantly in both of these matters is the Republic of Ireland. The death penalty has been long eliminated in Ireland but the personal insolvency regime there has been explained by numerous august specialists as unrealistic, rarely used, excessively expensive and way too penal.
In reality Ireland is not only out of sync with the USA. Its bankruptcy laws compare unfavorably with most European nations and in particular with its twenty six partner member states of the European Union. The outstanding hallmark of American insolvency law is the notion of a fresh beginning, debt forgiveness and encouragement of an enterprise culture. It really is like gaining a ‘badge of honour’ to have been declared insolvent in the USA and to have been made bankrupt several times doesn’t preclude the chance of bouncing back and making an effort all over again. Ireland conversely is still embedded in a way of thinking of penalties and deterrence if you’re judged to have transgressed financially.

The popular Fine Gael led government currently has the opportunity to alter all of that. Fine Gael’s pre-election policy document on consumer debt declared that it proposed to change Irish bankruptcy laws and to create new legal solutions to cope with individual and business over-indebtednessthat would allow people to avoid the bankruptcy process in the first instance. It planned to introduce a flexible bankruptcy system just like Northern Ireland’s system that would allow the courts to set bankruptcy terms based on each individual’s circumstances. It would give consideration to whether there had been any fraud or excessive recklessness by the insolvent person or whether the insolvency came about basically on account of unavoidable changes in the debtor’s circumstances. Where it was established that the borrower had engaged in reckless or fraudulent ventures, a restriction order could be issued in conjunction with a longer bankruptcy time period so as to penalize the debtor and to deter against such behaviour in the future.

Fine Gael planned to develop an out of court debt settlement system similar to the present system in Northern Ireland that would provide a route for small businesses which are owed money to demand payment using an officer of the courts to force a settlement and that would result in no ramifications for the borrower if settlement were made. It also offered to create an Individual Voluntary Debt Plan (IVDP) similar to the UK’s Individual Voluntary Arrangement (IVA) which would be a brand new legally binding arrangement. Under the IVDP an indebted individual and his or her lenders would agree to getting a schedule drawn up by a certified insolvency professional or practitioner to restructure the individual’s due liabilities. The IVDP would be voted on by creditors and would shield the individual from interest charges and the threat of enforcement while outstanding liabilities would be restructured and worked out.

With regard to small companies encountering debt problems, Fine Gael offered to introduce what it termed as a Commercial Voluntary Debt Plan (CVDP) which would be similar to the Company Voluntary Arrangement (CVA) in the UK. The new system would assist small companies battling in the downturn to restructure their debt and business enterprise with the aid of professional insolvency practitioners while under the protection of the State, thus steering clear of the excessive cost of the examinership process.
It now falls to the new coalition government of Fine Gael and Labour to enact suitable new personal insolvency laws in Ireland according to its policies. Much of the heavy lifting was performed by the Law Reform Commission (LRC) which completed its proposals for change to the insolvency laws when it released its final report on Personal Debt Management and Debt Enforcement in December 2010. The LRC went a step further when it included as an appendix to that report a Draft Insolvency Bill 2010. Much credit must go to the Green Party which unfortunately lost all of its seats in the general election in February 2010. After pressing for change in the area of personal insolvency laws it found itself out of office before it could introduce or enact new legislation. The financial tsunami currently engulfing Ireland at a sovereign level has obviously diverted the focus of government from the travails of the personally insolvent citizen. However, the IMF, ECB and EU troika have demanded the reformation of Irish personal insolvency law and have set a deadline of March 2012 for implementation.

The proposals contained in the LRC’s draft bill are quite significant. They say, for example, that debtors should not be jailed for non-payment of debt even in situations where the debtor can afford to pay but refuses to do so. The proposed sanction is community service and not jail time.

This is not the only radical proposal. The draft bill provides for what is basically debt forgiveness although it is obvious that the use of the phrase ‘debt forgiveness’ is studiously avoided. In fact in the 440 pages report the word ‘forgiveness’ appears only three times and two of those appearances are quotations from other sources. It seems that the report adheres to the letter of the words of the former and now-retired Fianna Fail Minister of Justice Minister Dermot Ahern when he ruled out ‘debt forgiveness’ for ordinary people in May 2009 when the LRCs interim report was launched.

In spite of the heavy hand of such political direction, the LRC has displayed considerable courage and enlightenment in ensuring that the character of its final report and the draft bill incorporate generous provisions for what is debt forgiveness in all but name. In particular the proposals for insolvent borrowers with no earnings and no assets (NINA) provide for what are defined as Debt Relief Orders. In effect qualifying debtors would be able to have their unguaranteed debts completely written off within a twelve months period so that they could start afresh. It is likely that there would be a upper limit on the total quantum of liabilities. Above that limit a Debt Relief Order would not be attainable for the insolvent borrower but the ceiling has not been specified as yet. In the UK the debt limit is £15,000.

The most important provision recommended by the LRC was the setting up of a Debt Settlement Arrangement (DSA) structure whereby insolvent borrowers could pay what they could afford for a interval not surpassing five years, after which the unpaid balances of their liabilities would be cleared in their entirety. Under this plan at least 60% of voting creditors as measured by the value of unsecured liabilities would have to agree to the DSA for it to be approved and binding on all unsecured creditors, including those who chose not to vote on the proposal.

Other provisions recommended by the LRC included establishing a Debt Enforcement Office (DEO) to arrange non-judicial settlement of debts; setting up a Debt Settlement Office (DSO) as an integral part of the DEO to license and watch over insolvency practitioners, to be known as Personal Insolvency Trustees and creating a regulatory regime to control debt collection and debt advice bodies.

Even though the LRC itself originally omitted in depth consideration of and recommendations for amending Irish Bankruptcy law (or formulating new law) from its scope and terms of reference, it has in fact and in spite of itself, made thirteen very specific recommendations (provisions) relating to bankruptcy in an appendix to the report – on top of its clear declaration picking out the necessity to reform the Bankruptcy Act 1988. A footnote to that appendix makes intriguing and fairly incredulous reading: ‘The commission has not included these provisions in the draft Personal Insolvency Bill in Appendix A as it understands that a new legislative framework to reform the Bankruptcy Act 1988 is currently (December 2010) under consideration’.

It seems obvious that the LRC was particularly disappointed with the lack of political progress in taking steps to address the reform of bankruptcy law, an enormous undertaking which could take many more years to carry out, even if the entire resources of the LRC were assigned to it. Can the vision, energy and commitment of a new government shorten that timescale? It would be astonishing and indeed unacceptable if Ireland’s draconian bankruptcy law, though seldom employed, could continue being the law of the land for another half decade or more. The IMF, ECB and the European Commission were able to descend on Dublin at short notice and in a matter of weeks agree steps to tackle the insolvency problems of the Irish banks and of the sovereign state itself. The competence, urgency and energy displayed so far by the new Fine Gael and Labour coalition government gives some hope for optimism. For the hard pressed insolvent Irish consumer the hope is that the penalty for debt is neither capital punishment nor a life sentence.

About Paddy Byrne

I work at National Debt Relief; a well established debt help company. I have had various roles throughout the company which has allowed me to enhance and develop my knowledge on Debt Solutions, legislation and other areas of the Financial Industry in both the UK and Ireland. I currently write for the National Debt Relief website, as well as other websites. I have written 100's of articles relating to different topics on debt.
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