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 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.
Many commentators have already doomed the insolvency service to failure because of the perceived power of the banks. What they fail to recognise is that the Personal Insolvency Act is a “game-changer”. Where previously banks may have been slow to respond to the financial troubles of debtors, safe in the knowledge that borrowers had no other viable options, they now need to be aware that an insolvent person can consult an ISI-authorised personal insolvency practitioner.
A solution can be formulated where the bank may have only limited control over the shaping of the outcome. And if a bank opts to vote down a reasonable proposal, the likely next step for the debtor is to declare bankruptcy. Previously, with a term of 12 years, a suggestion of bankruptcy would have been perceived as an idle threat. Now, with an automatic discharge of three years, this is a very real option for people in debt.
These new debt-relief solutions are not an appeal to anyone’s better nature. Commercial realities should see sensible proposals accepted. Success rates on individual voluntary arrangements in the UK, based on creditors voting on arrangements similar to those being introduced here, are in excess of 90 per cent.
The Personal Insolvency Act will not create bad debts for creditors – the bad debts already exist. But it will tackle them head on. I believe these new solutions will be effective. I take confidence from the international precedents which show that solutions similar in many respects to our own have proven highly successful over many years.
I firmly believe these new debt solutions are not just good for debtors but are also in the interest of creditors by offering an efficient and fair means to tackle what is a very large problem for everyone concerned. Ultimately, it is in all of our interests to return an insolvent debtor to solvency, to ensure their wellbeing and give them the second chance that they deserve.
Lorcan O’Connor is director of the Insolvency Service of Ireland. Further details of the new debt solutions are available from the ISI’s website (isi.gov.ie) and information line 076-1064200)