The Insolvency Service of Ireland or ISI have published guidelines in regard to reasonable living expenses which people who cannot pay their debts, will be allowed if they wish to sort out their debt problems by using of one of the three new insolvency solutions which will become available in the next few months in Ireland under the Insolvency Act 2012.
ISI provide a wide range of examples to illustrate how to calculate what will be allowed in various different scenarios depending on the insolvent debtor’s personal circumstances. In previous articles we looked at some examples of a single adult living alone without children. First we looked at Paddy, a single PAYE worker renting a modest apartment and living alone and he did not have a car but used public transport for his commuting needs. Then we looked at Mary who lives in circumstances very similar to Paddy’s except that Mary owns a car which she needs for commuting to work and for her private use. We assumed that both Paddy and Mary complied with all the other eligibility criteria for availing of the debt solution each of them was considering choosing and we looked solely at the reasonable living expenses each of them would be allowed were they to be eligible for a Debt Relief Notice (DRN) or a Debt Settlement Arrangement (DSA). We will look at what those other eligibility criteria are in a future article.
In this article we will look at an insolvent couple who are co-habiting and have no children. Let’s call them John and Kathleen. They live and work in an urban area and do not have a car. They rely almost totally on public transport for getting to work and for their other travelling needs. Their jobs are very different but their take home pay is very similar. They have a mortgage on their house which they own jointly having paid the original deposit equally together about ten years ago and the monthly mortgage payments since then on a 50/50 basis. They have managed to keep up the monthly mortgage payments. The house is worth about €180,000 but the mortgage still outstanding would take €250,000 to clear so they are currently in negative equity of about €70,000.
John and Kathleen have built up a high level of unsecured debt mainly due to the fact that they have been living beyond their means over the last five years or so. They enjoyed holidaying together and separately with friends both in Ireland and abroad. Indeed they would normally take at least two foreign holidays every year. John and Kathleen also tended to eat out a lot at the best restaurants and they both enjoyed playing golf, drinking and socialising with friends. In the last five years John and Kathleen both suffered substantial reductions in their incomes due to reductions in their salaries, cutbacks in their working hours by their employers and the loss of overtime opportunities, mostly attributable to the recession and the loss of business suffered by their employers. They found it difficult to pare back on the lifestyle they had become accustomed to enjoying. To make up for the shortfall in income, they both took out large personal loans on a joint basis from two different lending institutions and they also had a large joint overdraft at their bank. They both had a number of store cards and credit cards and they had allowed the balances owing on these to build up to the extent that even making the minimum payments each month was proving impossible. They were beginning to miss making even the minimum payments as well, resulting in the balances becoming even more swollen from the heavy interest and penalty charges they were incurring.
Realising that their finances were getting out of control, John and Kathleen sat down and took stock. They checked the balances on their overdraft and the most recent balances on their store cards and credit cards and added in another few miscellaneous debts they owed for services and utilities as well as some outstanding bills, including their golf club memberships which were now overdue. John and Kathleen were alarmed to discover that their unsecured debts including the miscellaneous unpaid bills already amounted to over €60,000 and it was increasing month by month.
Because their debts were much greater than the limit of €20,000 which they knew was the upper limit allowed in a Debt Relief Notice (DRN), John and Kathleen wondered if they might be eligible for a Debt Settlement Arrangement (DSA). The first thing they decided to do was to check how much they would be allowed to live on if they were to look for a DSA. They made an appointment to discuss their finances with a local financial adviser who they hoped would be familiar with the new Irish insolvency legislation. The adviser informed them that the various solutions were being rolled out in the next few months but it would be no harm to check what John and Kathleen would be allowed as reasonable living expenses.
Their monthly joint food allowance would be €364 and they would be allowed €273 for public transport expenses. They could keep €231 for social inclusion and participation and spend €86 on home heating and €59 on electricity. They could put €65 aside for savings and contingencies and spend a further €65 on communications. They would be allowed €68 for clothing, €65 for personal care and €50 for health expenses. They would also jointly be allowed to spend €32 on household goods and €29 on household services leaving them with €51 to spend on such expenses as home insurance, education and personal costs.
Their total joint allowances on reasonable living expenses therefore come to €1,438, (called total set costs) not including their mortgage which, if deemed reasonable by their creditors and the Personal Insolvency Practitioner they would have to use, would be fully allowable in a DSA. Of course John and Kathleen don’t have to spend the exact amounts allowed on each of the various expense items listed. Provided their total living expenses, other than their mortgage, come to no more than €1,438 per month, they are allowed the flexibility to spend on their living expenses themselves as they see fit and ISI have no problem with this. To understand what the various categories of expenditure include and indeed exclude, see our separate article entitled ‘Debt Solutions & Living Expenses in Ireland’
If we assume John and Kathleen’s monthly mortgage payment is €800 then their total living expenses come to €2,238 per month. If we further assume that their net joint incomes total €2,850, then the amount of disposable income they would have available to pay into a DSA would be €612 i.e. €2,850 – €2,238. If their DSA lasted for five years or sixty months they would pay in €36,720 in total. Assuming the costs of the DSA over the five years including the PIP’s fees came to €5,000, then there would be €31,720 available to distribute amongst the unsecured creditors, to whom John and Kathleen owed €60,000, if you remember.
Thus creditors would be repaid almost 53% of their debts or 52.9 cent in the €. The rest of John and Kathleen’s unsecured debts would be written off, they would not lose their house and they would continue to pay off their mortgage as if the DSA never happened.
The above example assumes a childless couple without a car. The allowable expenses are much the same if the childless couple have a car in so far as the savings made by not using public transport are largely used up in running a car. In fact the total set costs allowed in such a case are €1,432 per month, a difference of only €6.
In our next few articles we will look at various scenarios where there are children in the household and either one or two insolvent adults, either with or without a car.
If you would like to talk to us about your debts, then do not hesitate to get in touch. All advice is free and confidential.
Written by Paddy Byrne 22 / 07 / 2013