Insolvency service is huge step in economic recovery
Bad debts are a collective woe that riddles our fragile commerce but we can now tackle such debts head on
“The Personal Insolvency Act will not create bad debts for creditors – the bad debts already exist. But it will tackle them head on.” Photograph: Gunnar Pippel/Getty Images
The most recent mortgage arrears statistics published by the Central Bank last month remind us of the scale of the problem of over-indebtedness in this country. I don’t believe it’s any exaggeration to describe personal over-indebtedness and mortgage arrears as one of the most critical problems we face. And what these cold statistics fail to convey is the anxiety, stress and fear of people who find themselves overburdened with debt, unsure of the future and – until today – with no clear path out of the mire.
Today, the Insolvency Service of Ireland opens its doors to applications from people who are insolvent. These people can now avail of one of three debt relief solutions introduced by the Personal Insolvency Act 2012. These solutions are an important stepping stone in Ireland’s journey to economic recovery. More importantly, the solutions will give people who are insolvent the second chance they deserve.
Much has been said about the potential for moral hazard. The reality is that the majority of the people who will find themselves availing of these solutions never expected to be in this situation. I can understand that someone who exercised caution and restraint during the credit bubble might feel hard done by seeing others, whom they may view as less prudent, having their debts restructured and sometimes partially written off. This view is likely compounded by the fact some of the write-offs will involve banks that received large amounts of bailout money and are, as a result, owned in full or in part by the State.
A second chance
But against these arguments we need to consider the effects of leaving large numbers of people cryogenically frozen in debt, unable to fully participate in economic activity and the associated drag effect this has on economic recovery. The new debt solutions are based on approaches that have worked in other countries for decades and, in my mind, address the issue of moral hazard by striking an appropriate balance between offering an important second chance to insolvent borrowers while ensuring as much debt as possible is repaid.
I have heard too the polarised debate on strategic default. Yes, I can understand the reservation expressed that some actual strategic defaulters might benefit from the debt solutions – people who are capable of paying their debts but who seek to take advantage by not doing so. Those arguing the other side make the point that the majority who urgently need help should not be precluded from it by the fear that a small number might take advantage. I am aware of all of these arguments but I’m not enormously concerned by them.
Applicants for one of the new measures will have to pass a “triple check”. They will first need to convince a personal insolvency practitioner of their bona fides. Their application will then be scrutinised by the ISI. Finally the court will examine it to see if it should be approved. It is worth pointing out also that the ISI has been granted considerable powers to look into applications and we will work together with Revenue and the Department of Social Protection to identify and prevent anyone seeking to take wrongful advantage of the misfortune of others. For my part, I’m determined that the credibility of the system will not be undermined by bogus applications.