Since the onset of the financial crisis, a striking feature has been the slowness of creditors and debtors to resolve their debt difficulties. Banks have been reluctant to write down their loans losses despite having the capital – supplied by the taxpayer – to do so. And many mortgage holders who are in financial distress have remained in a state of denial. They are unwilling to engage with the banks and to explore some form of debt restructuring. And legislation to facilitate debt settlements, whether reform of the bankruptcy laws or a personal insolvency regime, has taken too long to be drafted and debated by the Oireachtas before becoming fully operational. But there are now grounds for greater optimism about more rapid progress in debt resolution.
The first settlement was reached last week under the terms of the new insolvency law, when a Donegal civil servant agreed an arrangement, involving a substantial debt write-off with his six creditors, which included three banks. Evidence that the insolvency regime is seen to work, both for debtors and creditors alike, should now encourage more distressed debtors to use it as a way out of their financial difficulties. The regime brings a degree of realism and balance into debt resolution. As Vincent P Martin, one of the co-founders of New Beginning, the debtor advocacy group, has noted: “Debtors are obliged to repay as much as is feasible,” while creditors equally must accept that “saddling people with debts they can never realistically replay is not in anyone’s best interests”.
There are also some encouraging signs that the main banks are now ready to deal more realistically with some legacy debt in the small and medium enterprise (SME) sector. A business debt protocol recently agreed by these banks should help those SMEs which have loans from a number of bank lenders – but are in arrears on their various repayments – to resolve their debt difficulties on a collective basis by communicating with all the banks rather than on a bilateral basis with each lender.