Legal opinion: ‘Lump-sum’ provision offers options for those at debt’s door
Legislation allows debtors to conclude arrangements over a relatively short period of time by way of a lump-sum
Option may come at a cost to both the debtor and creditors involved.
There has been a lot written in recent months about the main debt resolution mechanisms available under the Personal Insolvency Act 2012. However, much of what was reported focuses on the restrictive regime resulting from guidelines on reasonable living expenses which can last for anything up to six years. Recently, there has been coverage of instances where debtors may be too “broke” to avail of any of the newly-reformed insolvency regimes.
Regrettably, insufficient attention has been given to the provisions within the legislation which allow debtors to successfully conclude certain arrangements over a relatively short period of time by way of a lump-sum payment. Knowledge of such provisions may prove useful in allowing debtors, who find themselves “at debt’s door”, and creditors, such as banks who are owed money by an insolvent debtor, to fully appreciate the intricacies of the new legislation.
The new legislation significantly changes Ireland’s personal insolvency laws. The 2012 Act provides for the introduction of three new debt resolution processes, which, though requiring approval by the court, are essentially non-judicial in nature.
An interesting aspect of the two new statutory arrangements – Debt Settlement Arrangement (DSA) and Personal Insolvency Arrangement (PIA) – is that both allow for the conclusion of the arrangement in a short time frame by means of a lump-sum payment. In general circumstances, the new legislation provides for a maximum duration of five years for a DSA and a maximum duration of six years for a PIA. Both arrangements can be extended by one year by party agreement.
However, provisions within the new legislation allow both arrangements to be for a shorter period of several months and can be concluded by a lump-sum payment to creditors. These arrangements must be accepted by a vote of creditors and gain court approval for certain thresholds of debt.
As a result of these provisions, debtors who find themselves in suitable circumstances and with no capacity to repay may be allowed, with agreement of their creditors, to dispose of their secured debt (up to €3 million) and unlimited unsecured debts by way of a lump sum, short time-frame arrangement. A review of the scenarios provided by the Insolvency Service of Ireland’s (ISI) website indicates that such arrangements could be terminated after four months.
As a result, debtors will not necessarily be required to make periodic payments for a duration lasting up to six years where they have no future capacity to repay. In such circumstances, a financially independent spouse or family member may be in a position to provide the lump sum. This is obviously a very attractive option for certain debtors, but it may come at a cost to both the debtor and creditors involved.
In terms of fees, in general circumstances the fees for the Personal Insolvency Practitioner (PIP) are expected to be deducted from the periodic payments made by the debtor. In proposing a fee, the PIP may suggest a staggered drawdown of the fee to reflect the upfront work associated with making an application and a proposal, as well as their other statutory duties during the lifetime of the arrangement.
However, where an arrangement is a lump sum, short-term arrangement, terminating after say four months and where no periodic payments will be made, an alternative approach is permitted and the PIP may invoice the debtor separately from the arrangement. Furthermore, as part of developing an arrangement, the PIP can seek to agree fees with the creditors, such as the banks. Fees will vary in accordance with the complexity of a case and what is acceptable to the creditors.
Now that the ISI has opened its doors for business, it is anticipated that insolvency lawyers will experience a surge in enquiries from clients – debtors seeking a remedy for their financial woes and creditors, such as banks, seeking advice regarding debtors who enter personal insolvency.
Much has been publicised about the Personal Insolvency Guidelines (PIG), particularly in relation to reasonable living expenses, with citizens moving from “being on the pig’s back” to “having the pig on their back” for anything up to six years. However, with a greater understanding of the provisions allowed for in the new legislation, insolvency lawyers may now be able to explain to their clients the full breadth of options open to PIPs in resolving personal insolvency.
As a result, debtors may be encouraged to engage with the new regime knowing that there are possible short time-frame arrangements available to them and creditors may be open to accepting a lump-sum payment from a third party in full and final settlement of the debt.
Alec Flood is a barrister who specialises in commercial and insolvency law