Reform assists the indebted and blows the dust off antiquated bankruptcy law
Analysis:Minister for Justice Alan Shatter has described the Personal Insolvency Bill as the “most radical reform [in this area] since the foundation of the State”. Politicians are prone to exaggeration but he is not far off the mark.
The legislation runs to 145 sections and there were well over 200 amendments debated before it passed the final hurdle in the Oireachtas last night.
It has been three years in the making and Shatter is confident it will be up and running by March 1st.
The new law replaces Ireland’s antiquated and inflexible bankruptcy law with a court-backed system of mechanisms designed to help individuals who find themselves hopelessly in debt.
It deals with sums ranging from less than €20,000 to debts totalling €3 million. Given the scale of the property crash and the crisis, there are plenty of such individuals. And for many, their family home – especially if in negative equity – has become an albatross.
Shatter told The Irish Times yesterday his aim was to ensure that people were not forced to vacate their homes because they were in mortgage debt. The solutions all involve a “degree of forbearance over a period of time” to debtors, he said. In reality, that will mean debt write-off.
The mechanisms are detailed but the principles are pretty straightforward.
“This is not a magical mystery tour,” is how Shatter puts it. At its essence, a portion of the debt is written off. If that fails, there is the nuclear option of bankruptcy. That too, however, has changed, reduced from a punitive 12 years to a more manageable three, even though that period can be extended to up to eight years.
Shatter argues that three years is close to the EU norm, although not as facilitative as the UK, where it is one year.
Opposition parties and interest groups have expressed some deep and fundamental concerns. Most of the critical focus has been on a claimed concession to financial institutions and an assertion that banks can exercise a veto on any proposal. Those critics say that the banks will not accede to proposals involving debt-forgiveness. Shatter has argued that they will.
The scheme involves the setting up of a new body, the Insolvency Service of Ireland, which will manage the scheme.
There are three different arrangements. The first is a personal insolvency arrangement (PIA), mainly aimed at those with secured assets including mortgage debt. They must have debts over €20,000 and up to €3 million and must be in a position where there is no possibility of full repayment.
The application must be made and approved by the Circuit Court (eight specialist judges will be assigned), while a “personal insolvency practitioner” will try to broker an agreement between debtor and institution.
Families will be allowed to live in their home unless it is disproportionately expensive compared to their means.
A combination of lenders with 65 per cent of the debt must agree to the PIA, which lasts about six years, by which stage non-mortgage debt is discharged.
The scheme for a debt-settlement arrangement is broadly the same, but it deals with amounts of more than €20,000 in unsecured debt.
The third solution is a debt- relief notice which deals with debt less than €20,000, where people have low disposable incomes and few assets and have no prospect of paying the debts.
If a person opts for bankruptcy, the period has been reduced from 12 years to three. One of the upshots is that those who have been bankrupted under the old legislation, including businessman Seán Quinn, will be in a position to discharge their debts after three years.
However, the legislation has been harshly criticised.
Hypothetical and untested
David Hall of the Irish Mortgage Holders Organisation says it is hypothetical and untested and reliant on the banks to co-operate – he insists they won’t.
“The Minister wants to say this piece of legislation will have a hypnotic effect on the bank. It won’t,” says Hall. “Any process that is controlled by the lender can only fail.”
Independent TD Stephen Donnelly said he would vote against the Bill “with reluctance” because of the inclusion of provision of a bankruptcy payment order, which he said had the effect of extending the bankruptcy from three to eight years.
“The Bill introduces a credible threat for the borrower to say that if the lender did not compromise in a reasonable manner, the lender would declare himself bankrupt.”
Ross Maguire SC, a founder of New Beginning, said he broadly welcomed the legislation. “It is very innovative but it does take the banks to co-operate. If banks co-operate, it will be a huge success. If they don’t, they will break it.”