During this year the Irish government is expected to pass new personal insolvency legislation. The final draft of a Personal Insolvency Bill is expected to be published by the end of April 2012, a month later than the EU, ECB and IMF had originally demanded, as a condition of Ireland’s bailout. A first draft of the bill was published at the end of January and a process of consultation is now underway with interested parties. The stakes are high and many people are worried that there may be a lack of balance in the measures that are finally enacted if lenders in particular have too big a say in finalizing the legislation. The draft legislation is being compared to current EU law and practice and there are many obvious differences from mainstream insolvency legislation in the UK and in the rest of the EU.
The draft bill includes four main personal insolvency solutions. The government’s approach appears to be that personal indebtedness should be categorized according to the amount of the liabilities; the nature of the indebtedness i.e. secured or unsecured debt; the size of the debtor’s income, the value of the debtor’s assets and the prognosis for the debtor becoming solvent over a foreseeable period of time. The first three solutions are totally new in Ireland and the fourth solution consists of just some minor amendments to the existing bankruptcy legislation. Here is a summary of the four draft proposals as they stand at present and a brief description of a fifth means of dealing with debt problems is also given at the end, albeit it is not included in the measures being proposed under the current draft legislation.
Debt Relief Certificate
The Debt Relief Certificate is very similar to the Debt Relief Order (DRO) in the UK and applies to persons whose income is low, who have virtually no assets and whose personal debts are at a quite modest level. Provided debts do not exceed €20,000, the value of assets do not exceed €400 (apart from a car of maximum value €1,200) and monthly disposable income does not exceed €60, then the debtor may be eligible for a Debt Relief Certificate for which they can apply with the help of an approved intermediary. The total cost of applying for a Debt Relief Certificate is €90. If an applicant meets the required criteria for the Debt Relief Certificate they will see all of their debts frozen for one year. If the applicant’s circumstances have not materially changed and he or she is still unable to pay their debts after one year, debts that qualify are totally written off. At least six years must elapse before a debtor is allowed to apply for a second Debt Relief Certificate and debtors are allowed only two Debt Relief Certificates in their lifetime. This solution will not be available to homeowners.
Debt Settlement Arrangement
The Debt Settlement Arrangement is very similar to the IVA in the UK. Application for a Debt Settlement Arrangement can be made by an insolvent debtor who has total unsecured debts of over €20,000. With the assistance of a personal insolvency trustee, the debtor can apply for a protective certificate while the Debt Settlement Arrangement is being prepared. This prevents creditors from taking any action for the recovery of debts for thirty working days. Under this scheme creditors are sent a Debt Settlement Arrangement proposal providing for payments to be made by the debtor for a period of five years. Creditors may agree to extend this period for a further year. This payment will only be a percentage of what is actually owed. For the Debt Settlement Arrangement to be accepted, at least 65% of voting creditors must support it. Creditors are accorded voting rights strictly in accordance with the amount of their debts. All creditors are bound by the decision of those creditors who choose to exercise their vote.
Personal Insolvency Arrangement
There is no debt solution in the UK that is really similar to the Personal Insolvency Arrangement. This is because the Personal Insolvency Arrangement deals with secured debt as well as unsecured debt in an innovative and groundbreaking way. This solution applies to insolvent debtors whose combined secured and unsecured debts total more than €20,000 and less than €3million. With the assistance of a personal insolvency trustee, the debtor can apply for a protective certificate while the Debt Settlement Arrangement is being prepared. This prevents creditors from taking any action for the recovery of debts for sixty days. Unsecured creditors are offered an agreed percentage of what they are owed and an offer to pay this over a set period is made. If the debtor is in negative equity in regard to one or more secured properties such as a mortgaged home, the proposal may include provisions for writing down a proportion of the mortgage, and for reducing mortgage payments by extending the repayment period for a number of additional years. For the Personal Insolvency Arrangement to be accepted, the applicant must have the support of at least 65% of all voting creditors both secured and unsecured. In addition at least 75% of secured creditors who choose to vote and at least 55% of unsecured creditors who choose to vote must vote in favour of the Personal Insolvency Arrangement proposal. The Personal Insolvency Arrangement will normally run for a term of six years but it may be extended by an additional year. A debtor may enter into a Personal Insolvency Arrangement only once in his or her lifetime unless exceptional or other external factors caused the debtor’s insolvency.
Amendments to the old Bankruptcy Laws are the final changes proposed to be made in the new Personal Insolvency Bill. One consequence of these changes is that, if an insolvent debtor owes less than €20,000, a creditor will not in future be able to petition a court for bankruptcy although such insolvent debtors may themselves petition for bankruptcy. If a bankruptcy order is made, all of the assets of the applicant will fall under the control of an Official Assignee and the debtor may have to make payments from their surplus income to the Official Assignee for between three and eight years. Regardless of how long the payments from income go on for, automatic discharge from bankruptcy can take place after three years. This is considerably less than the minimum of twelve years that it currently takes for discharge from bankruptcy in Ireland.
Debt Management Plan
The draft bill recently published by the Irish Government contains no legislative proposals relating to informal debt management. This is somewhat surprising since the most common personal debt solution currently available in Ireland is the Debt Management Plan. A Debt Management Plan is an informal but flexible debt solution whereby the debtor offers to pay creditors what they can afford. The affordable payment is what is left from income after all living costs are considered. Living costs are determined by agreement between lenders and debtors in accordance with standards and guidelines largely developed by the lenders. The term of a Debt Management Plan can be quite long but because it is informal, the debtor or any creditor can decide to opt out at any stage. While creditors often agree to freeze interest and penalties while the Debt Management Plan is running, this is not guaranteed. Even when such a freeze is agreed, if the Debt Management Plan ceases to run, creditors will normally and routinely re-impose penalties and charges on any remaining unpaid balances of monies due to them. Paddy Byrne 10/02/2012