The Green Party, who are in coalition government with Fianna Fail, are obviously keen to leave a legacy of getting significant insolvency legislation enacted before they depart government, now projected to be early in 2011. The Law Reform Commission (LRC) has not let the Greens down insofar as they presented their final report on new proposed insolvency legislation last week. The report is entitled Personal Debt Management and Debt Enforcement.
Not only that but they have incorporated, as an appendix to the report, a Draft Personal Insolvency Bill 2010, incorporating all their recommended provisions for dealing with personal debt in the Republic of Ireland. This was no mean feat, given the antipathy that Fianna Fail – the Green Party’s coalition partners and the majority partner in coalition – displayed and articulated in relation to the issues of personal debt. Will the Greens get their way and persuade Fianna Fail to legislate in this matter during the January (and maybe February) window of opportunity in 2011, when the Dail seeks to enact the Finance Bill and other ancillary pieces of legislation required to give effect to Budget 2011, recently passed by the Dail? Let’s hope they prevail so as to give some hope of resolution to the thousands of impoverished citizens who are laden down with the growing burden of personal debt that they cannot hope to repay in their lifetimes.
Many of the proposed provisions are quite radical and in their own right have significant merits. However, it must be borne in mind that the failure to amend the Bankruptcy Act 1988 may cause the new Personal Insolvency Bill 2011 to be still-born. Why should that be? For the very simple reason that there is little incentive for creditors to approve a Debt Settlement Arrangement (DSA) proposed by an insolvent debtor. In the UK, a debtor may propose an Individual Voluntary Arrangement (IVA) and can persuade creditors to accept it by comparing and contrasting the IVA proposal and the likely effects of its implementation, in terms of the dividend to be repaid to creditors, to the likely effects of personal bankruptcy. Almost invariably, creditors in the UK stand to realize a significantly greater dividend from a debtor’s IVA than they can expect to realize if the debtor was to declare bankruptcy. This is in spite of the fact that the bankruptcy process in the UK is one of the most enlightened and citizen friendly processes for dealing with personal insolvency in the western world.
In Ireland on the other hand, the bankruptcy process is so inaccessible, expensive, unwieldy, draconian and punitive for the debtor that there might as well be no bankruptcy process at all. For creditors then the choice in Ireland will be between accepting the debtor’s proposal for a DSA (in which creditors can expect to have between 20% and 40% of the debts repaid) and continuing to string the debtor along, pressurizing him or her to repay debts. ‘Stringing along’ with no end in sight, would be likely to give creditors a better return than agreeing to a DSA and of course the bad debt provisions needed to be crystallized would increase substantially if there was a significant growth in numbers of DSAs agreed. From the debtor’s point of view, ‘stringing along’ could simply mean a lifetime of debt re-payment with no prospect of ever clearing the debt, even if interest and penalties were to be frozen.
Of course the LRC recognized this ‘Catch 22’ and flagged the issue repeatedly, starting with its statement in its original consultation paper published in September 2009, that the consideration of reform of the Bankruptcy Act 1988, was outside the scope of the remit of the LRC when considering the issue of personal debt. The LRC has repeated the need for such reform again and again and has actually made a few suggestions for some changes to the Bankruptcy Act 1988. One such proposed minor change is to reduce the discharge period for bankruptcy in Ireland from twelve years to six and in this final report it suggest that it be reduced to just three years. This is still a far cry from the UK regime where the discharge period is just one year. Such a suggestion is little more than superficial tinkering with the edges of the current bad legislation. The LRC also suggest that there be a debt threshold of a minimum of Euro 50,000 before bankruptcy can be imposed on an insolvent debtor via a creditor’s petition.
In the case of a debtor’s petition for bankruptcy, the LRC suggests that there be no debt threshold as such. Rather, there should be a provision in the reform of the bankruptcy legislation to the effect that the value of the debtor’s assets available for distribution to the creditors should be considered by the court when assessing whether it may be appropriate to stay proceedings for the purposes of allowing the debtor to attempt a Debt Settlement Arrangement.
With the Irish Government under enormous political and financial pressure due to the economic crisis, the bank crisis, the arrival of the IMF and soaring unemployment, little has been done to alleviate the suffering of people with personal debt. The builders, the banks and the politicians have hogged the limelight each seeking solutions to enable them to rise from the ashes of a crumbling uncompetitive economy. Many observers predict a coming tsunami of personal debt. Can the Greens provide a beacon of hope by forcing the legislation through or will the incoming government – likely to be a Fine Gael & Labour coalition – steal their thunder by taking all the plaudits for action rather than aspiration?