Going for bankruptcy is not an option for most
PERSONAL FINANCE:IN 2008 THERE were only eight bankruptcies declared in Ireland and, despite a huge rise in indebtedness, this only rose to 17 in 2009. Many myths, anecdotes and half-truths about bankruptcy persist. On the one hand, the term conjures up images of Victorian debtors’ prisons. On the other, we imagine fat-cats being allowed to walk away from their vast debts with impunity.
“I think bankruptcy information in the public imagination is very often of the Hollywood variety or the UK variety,” says Michael Culloty from the Money Advice and Budgeting Service (Mabs). “That’s what people base their general understanding on. Bankruptcy is not the same everywhere. You can be free from bankruptcy within a year in the UK, but with the law in Ireland the terms and conditions attached are much more onerous. We advise people we deal with not to consider bankruptcy at all. It’s just not suitable.”
In Ireland either a debtor or a creditor can start bankruptcy proceedings. They need to lodge €650 with the official signee, and must have, in addition, a realisable estate worth at least €1,900. As Culloty notes, this rules out the majority of those in personal debt. Once so adjudicated, “the bankrupt” (a horribly Victorian sounding word) may make an “offer of composition”. They hold a creditors’ meeting and make an offer (25 cents in the euro of their debts, for example) and if three-fifths of their creditors agree to this, the debtor can be released from bankruptcy.
If they do not agree, then the debtor could be stuck in the process for a very long time.
Being declared bankrupt essentially means that their life is no longer their own. A signee controls all remaining assets. They need to notify them of travel, business or work plans. They cannot hold elected office or directorships, must declare their bankrupt status before receiving loans of more than €650, and are only discharged from the process after a minimum of 12 years, once all property has been fully realised, and with the consent of the creditors. An accountant tells me of a man still bankrupt after 29 years.
Essentially, the bankruptcy process in this country is too expensive to enter, too restrictive to live within, and too difficult to leave. Furthermore, without access to user-friendly bankruptcy or debt management legislation, many face a never-ending mountain of debt. Which is why the Law Reform Commission is soon to report with a series of recommendations for changing the law (it released an interim report in May), although most people in the field admit that it’s coming very late.
“In the 1980s the Irish State owed a lot of money,” explains Patricia Rickard Clarke, commissioner at the Law Reform Commission. “But it was public debt. There was a very low level of personal debt. In the 1990s, in a lot of other jurisdictions, laws were updated to take account of a consumer credit society, but because we never had a credit bubble we didn’t do that. That’s one of the reasons why now we find ourselves in great difficulty.”
Essentially, the current laws misunderstand the nature of debt in this country. They’re designed to protect the general public from Dickensian villains who won’t pay their debts, not designed to facilitate the desperate thousands who can’t.
“The bankruptcy legislation is a legacy from a time when creditors had to be protected from reckless business people,” explains chartered acccountant Jim Stafford. “It was a case of saying ‘listen let’s make him bankrupt and don’t let him into business so others don’t lose money’. But 90 per cent of those in trouble are honest decent people who lost money through no fault of their own. You could say they lost because the Financial Regulator failed them.”
Paul Joyce from the Free Legal Advice Centre (FLAC) wrote a paper in 2003 highlighting the shortcomings of the existing system, the high levels of indebtedness, and advocating changes in approach.
“We don’t actually regard bankruptcy as being of benefit to society,” he says. “We just regard it as a sad inevitability when you have a consumer credit market. Loss of employment, illness, family separation, business failure, these are all events outside of people’s control that can trigger a drastic reduction of income and leave people in a house-of-cards situation with arrears on a range of credit agreements. In Ireland we have a situation where technically a person can be pursued individually by each creditor and a judgement sought on each amount owed. It can seem never ending.”
He knows what he would prefer to see. “It would be better to look at the debts in their entirety, to look at their financial circumstances and to enter into a repayment regime over a defined period of time, allowing the debtor to maintain a minimum income to live. Right across Europe you have a variety of debt settlement or debt adjustment regimes. What they have in common is the recognition that sometimes a person just becomes over-indebted beyond their capacity to pay and society needs to respond to that by calling a halt to a person being sued over a long period of time.”
This is among the issues being considered by the Law Reform Commission. As well as reforming the 1988 bankruptcy legislation to, among other things, reduce the terms of bankruptcy from 12 to six years or less, and which would allow prospective bankrupts to prepare a standard financial statement with Mabs before appearing in court, the commission also suggests enshrining into law a non-judicial debt settlement scheme.
This would be preferable to bankruptcy for most of those in personal debt, according to Joyce. It would be like the agreements between debtors and creditors which are currently organised on a voluntary, non-statutory basis by Mabs, but with the added benefit of having a legal foot to stand on. This process would take place outside the expensive environs of the court and might even, after a fixed period of repayment, involve a measure of debt forgiveness.
Whereas American-style bankruptcy proceedings arguably offer people a “fresh start”, this is what Patricia Rickard Clarke calls “an earned start”. Of course, anything that smacks of debt-forgiveness is going to be controversial, and she notes that this might have wider consequences. “Obviously if people are entering into debt and taking out loans and not repaying them, that has repercussions on the ability of financial institutions to give credit. Lending is a much higher risk if people can eventually cancel their debt and be forgiven.” So any such changes, she says, need to be seen in the context of wider regulatory reform.
However, Paul Joyce maintains that the alternative is scarier: a generation of hopelessly indebted people taken forever out of the mainstream of financial life.
“I hate the term ‘debt-forgiveness’,” he says, “It’s really ‘debt settlement’ or ‘debt adjustment’. When institutions lend money they make a profit on it and they charge sizeable interest. It’s risk-based lending and a lot of people do comply and continue paying. There’s no benefit to creditors or society in general if people are pursued for a lengthy period of time when they are over indebted beyond a capacity to pay. At the end of the day that’s just cruel.”