THE GOVERNMENT has made a virtue out of necessity in producing a comprehensive set of proposals for what is a long overdue reform of the State’s insolvency law. The terms of the EU-IMF-ECB loan agreement required it to do so. In outlining its plans, the Government has managed to offer debtors and creditors alike some hope and more certainty, without tilting the balance too far in either direction.
The Personal Insolvency Bill, which is expected to pass into law later this year, gives borrowers in financial difficulty some new options in managing their bad-debt difficulties, where up to now they had few. At present those declared bankrupt must wait for 12 years before they can be discharged from bankruptcy. In the draft Bill, the Government proposes to reduce the bankruptcy period to three years and bring Ireland more into line with the UK, where a one-year term applies.
The Bill represents an honest attempt to introduce a sensible and flexible arrangement to the complex area of debt management. It does so by offering different options for dealing with bad debts. To those overwhelmed by debt, such as mortgage holders in negative equity who are also in substantial arrears on their loan repayments, the measure provides a clear path out of that debt trap. For this group, it holds out the prospect of a resumption of normal life after their borrowings have been restructured over a number of years, via a personal insolvency arrangement (PSA). While to those with smaller unsecured debts – such as from credit card or car loans – of less than €20,000, but with few assets of value and a low net monthly disposable income – less than €60 – a complete debt write-off may be possible.
The challenge in drafting such complex and detailed legislation is to ensure that those who can repay outstanding debt do so, while those who cannot, and who have unsustainable levels of debt, are helped to overcome their difficulties. That will involve the creation of a State-run insolvency service to facilitate the operation of the various voluntary debt settlement systems. Larger debtors, unable to pay their debts as they arise and who are unlikely to become solvent, can hope to benefit from a personal insolvency arrangement, where a maximum debt ceiling of €3 million applies. However, to secure that facility may not be easy. To qualify for a PSA,debtors will need the agreement of 75 per cent of their creditors.
The PSA approach favoured by the Government is designed to give borrowers with unsustainable levels of debt a means of tackling their financial problem, while also encouraging banks and other financial institutions to be more flexible in their dealings with debtors, and more willing to agree non-judicial out-of-court settlements. The attraction for both banks and debtors in reaching an agreement to write off debt is clear.
As Minister for Justice, Alan Shatter, said: “It will ensure that the banks may recover more money than may be the case and will allow individuals to retain their homes”. If that goal can be realised, it will be a major achievement for the Government.