Machinery of debt deals will work if most creditors agree
ANALYSIS:THE PERSONAL Insolvency Bill will establish new machinery that will take most debt settlement out of the courts and enable debtors to emerge eventually from debt. But this machinery will only work if a majority of creditors agree.
The Bill contains no enforcement mechanism to force recalcitrant creditors to engage with debtors, and no appeals procedure for a debtor who is not happy with the creditors’ response.
Yet there are incentives to encourage creditors to engage with debtors, as the alternative to the new non-judicial route to debt resolution is a bankruptcy petition, which could well leave the creditor in a worse position.
There are two main elements in the proposed debt settlement machinery: an insolvency service, to be set up by the Government on a statutory basis, and a new professional practitioner called a personal insolvency practitioner (PIP), who will play a major role in acting on behalf of debtors in relation to both the insolvency service and creditors.
The Bill does not spell out what qualifications such people will have, though they are likely to include accountants and lawyers, and they will be required to have professional indemnity insurance.
It is not clear whether others working in this area at the moment – for example those running debt management businesses or mortgage brokers – will be eligible to act as PIPs.
Three types of settlement are provided for: debt relief notices (DRNs) for those with debts under €20,000 and virtually no assets; debt settlement arrangements (DSAs) for those with unsecured debts who may also have a mortgage on a family home; and personal insolvency arrangements (PIAs) for secured debts of up to €3 million, which can include mortgages.
The insolvency service will be empowered to issue certificates protecting people who enter any of these arrangements from being pursued for the debt in the courts. It will also approve the arrangements or any alteration to them, and maintain a register of arrangements.
The poorest category of debtor will be dealt with by an “approved intermediary”, almost certainly an independent money advisory body such as the Money Advice and Budgeting Service (Mabs).
However, those seeking to enter a debt settlement arrangement or a personal insolvency arrangement must engage a personal insolvency practitioner, who will advise them on the best route to take in their particular circumstances and will put together proposals to be put to a meeting of creditors.
This should include reasonable provision for the living expenses of the debtor and his or her dependants, but this is not defined and it is not clear how it will be calculated.
A debt settlement arrangement is a scheme where a person’s unsecured debts (credit card, utilities, bank loans, etc) are aggregated and an arrangement come to where a portion of them will be paid off over a period of five years, at the end of which the debtor is debt-free.
The personal insolvency practitioner is mandated to attempt to ensure the debtor is not forced to sell or dispose of his or her interest in the family home, though a mortgage does not come under this form of settlement. This implies that a separate, voluntary arrangement is being or has been negotiated with the mortgage provider.
However, if the personal insolvency practitioner presents proposals to a meeting of creditors and they do not accept them, there is no provision for the personal insolvency practitioner to appeal to a court or other forum on behalf of the debtor.
A creditor can appeal to a court against a protection notice being issued by the insolvency service preventing them for pursuing their debt.
This allows for a situation where the creditors could attempt to force a better offer from the PIP on behalf of the debtor, who would otherwise have no alternative but to petition for bankruptcy on his or her own behalf.
A personal insolvency arrangement has the potential to become very complicated, as it can involve both unsecured and secured debts, and debts secured against both the family home and business investments, and it provides for the sale of property as part of the settlement, though the family home is to be protected if at all possible.
The proposals from the personal insolvency practitioner must have the support of a majority of both secured and unsecured creditors, and of 65 per cent of the total, so a major creditor could veto the arrangement. Again, there is no possibility of appeal.
Much in the Bill remains undefined and the Minister for Justice said it was open to amendment.
However, only time will tell whether the machinery in it will be availed of by significant numbers of those struggling with debt and whether creditors will embrace it wholeheartedly or continue to seek to extract their pound of flesh.