Bankruptcy expert calls for legislation on debt forgiveness

BANKS THAT claim debt forgiveness could jeopardise our already fragile banking system are “scaremongering,” a leading US insolvency academic has said.

Prof Jason Kilborn of John Marshall Law School, Chicago, was speaking before last week’s Free Legal Advice Centre conference on personal insolvency legislation.

Prof Kilborn, whose research has compared bankruptcy and insolvency systems worldwide, said “the Irish economy is already fragile, and pretending that thousands of consumers who are unable to pay their debts will miraculously be placed in a position where they can pay their debts and [that] banks will recoup what are already realistically losses, is a fantasy.”

While AIB chief executive David Duffy has in recent weeks ruled out debt forgiveness as an option for the vast majority of the bank’s struggling mortgage customers, saying the bank would work on “creative and individually tailored solutions” to keep its borrowers in homes, Kilborn disagreed with such with approach.

He favours enforceable debt forgiveness legislation.

“Experience in continental Europe, and even more so in the US, clearly indicates when you leave these negotiations to case-by-case creditor discretion, nothing happens.

“This issue is not about bilateral relationships or one-on-one negotiations between creditor and debtor, it’s about the multilateral relationships of these debtors and creditors within broader society,” he said.

Describing a “web of effects that emanate when a creditor keeps a debtor under its thumb”, he said “no one [could] move forward until this was resolved”.

Kilborn said Irish legislators could learn from the pitfalls of a US administration which had “kindly asked, then really, really encouraged, and then begged” its banking system to write off uncollectible mortgage debts.

He said the problem in the US was that it was “not willing to do what it takes to force the banks to acknowledge the exact value of mortgage receivables”. Banks that value their mortgage receivables “at a mild discount” and assumed people’s circumstances would improve were misguided.

“What’s happened is a structural shift in housing stock and housing valuation. We need to come to terms with the value of this housing stock and the ability of these homeowners to repay their mortgages. We can’t continue to lie to ourselves.”

Asked if banks should be forced to comply with debt forgiveness measures, he said “absolutely”. However, he said care needed to be taken in deciding what reliefs various debtors should be entitled to. Referring to Ireland’s forthcoming personal insolvency Bill, he said it relied heavily on the experience of England and Wales, and could be improved by looking to other models. “I’m afraid that if the Bill in its current form is adopted, Ireland kind of hasn’t gotten the message yet.”

Speaking about new Greek debt adjustment legislation, Athens-based consumer lawyer Melina Mouzouraki said 12,000 cases had already been dealt with in the two years since its introduction.

Under the scheme, individuals have to prove in court that their income is not sufficient to continue paying their debts. Setting aside living expenses, equal repayments are made to both secured and unsecured creditors from remaining funds over four years. After that, debts are written off.

She said Greek banks resisted the legislation at first and initial attempts to agree settlements before resorting to the court process were “a complete failure”.

She said a personal insolvency law in Ireland would mean people would keep up their payments.

“If there is no legal tool to combat the situation, people can’t psychologically cope with the stress and they will abandon payments.”