22 January 2014
    
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Personal Insolvency
Can the New Personal Insolvency legislation be a safety net for those in debt?
by Mark Ryan, PIP
 

Since the economic collapse in 2008 a lot of people have found themselves living under the burden of unsustainable debt. A debate has raged over the last number of years on the lack of a ‘safety net’ for those individuals who for one reason or another have found themselves in the position that they cannot repay their debt as they fall due.

As well as dealing with the pressure being applied by their creditors there is also the stigma of the term bankruptcy or insolvency. Our attitude to debt is the complete opposite of America and the UK where there is a more pragmatic approach to insolvency and bankruptcy.  I attended a seminar recently given by a UK Insolvency Practitioner who compared our current personal insolvency/bankruptcy systems to what was 1st introduced in the UK 20 years ago.

In Ireland prior to the introduction of the new personal insolvency legislation, the bankruptcy laws were very draconian and they were effectively a life sentence (12 years) for the debtor. 

The new personal insolvency legislation commenced on the 1st July 2013 under the authority of the Insolvency Service of Ireland (ISI). It has introduced a number of amendments to the bankruptcy laws and it has also created a buffer zone between an insolvent individual and their creditors.

The options for those in financial difficulty to consider would include the following:

1.       Debt resolution – this is an informal process whereby the debtor and/or their advisor would negotiate  with their creditors to restructure or write down some or all of their debts,

2.       Personal Insolvency Legislation – this is a scheme of arrangement which involves the write-down of secured and unsecured debts which can be over a 5/6 year period. There are 3 separate schemes to consider:

a)      Debt Relief Notice (DRN) – this involves unsecured debts up to a total value of € 20,000. This scheme would be dealt with by an (AI) Approved Intermediary (MABS/FLAC). A DRN will normally last for 3 years

b)      Debt Settlement Arrangement (DSA) - this involves unsecured debts and there is no limit to the value of the total debts. This scheme is for 5 years (or 6 years in some cases) and it would be administered by a Personal Insolvency Practitioner (PIP).

c)       Personal Insolvency Arrangement (PIA) - this involves unsecured debts (no limit in value) and secured debts up to € 3m. This scheme is for 6 years (or 7 years in some cases) and it would be administered by a Personal Insolvency Practitioner (PIP).

The 1st DSA case was approved in November 2013 and it involved the write down of 70% of the debtor’s unsecured debts. The balance of the debts (30%) will be repaid by a monthly contribution from the debtor over 5 years. Once the 5 year term has been completed and all the conditions of the original arrangement have been complied with, the 70% debt will be written off by the creditors and the debtor would then be deemed solvent. In all cases a majority of the creditors (65%) must approve any proposal from the PIP/debtor by voting at the creditors meeting.

 3.       Bankruptcy in Ireland – There have been a number of amendments to the previous bankruptcy legislation mainly the reduction in the bankruptcy term from 12 years to 3 years. There is the option of a further 5 year extension for a payment order. A
payments order is effectively a charge on the debtor’s income which will be used to make contributions to their creditors.

In bankruptcy the Official Assignee takes possession of all assets of the bankrupt individual and clears debts in order of their priority. This would include their interest in the family home or portion of the interest that the bankrupt holds. Included in the new bankruptcy legislation is a condition that the debtor must have sought the advice of a PIP to ascertain whether or not a DSA or PIA scheme would be appropriate before they make an application for bankruptcy.

4.       UK Bankruptcy – also known as ‘Bankruptcy tourism’ from an Irish perspective; this would involve a debtor moving to the UK/Northern Ireland to reside and work permanently for a period of 18 to 24 months. This is being cracked down on in recent years by the UK legislative authorities to ensure that the system isn’t abused.

5.       Do nothing – This would be considered the wait and see approach. Given that the current crisis has been ongoing for the last 5 years it is likely that most avenues have been exhausted at this stage i.e. interest only, reduced payments, payments holidays, split mortgages etc.  The new debt resolution targets being issued by the Central Bank will put pressure on the banks and their customers to resolve their debt issues.

Unfortunately we are finding that some individuals do not meet the criteria for any of the new insolvency (DSA/PIA) schemes for a number of reasons. This will leave those in debt in ‘no mans land’ until such time as the new legislative system can be amended to include them.

Although it is far from a perfect system the new personal insolvency legislation is a good starting point to deal with the current personal debt crisis but it will need to be amended and improved over the next few years. I would not consider the new insolvency and bankruptcy regulations as a ‘safety net’ for debtors but they are definitely an improvement on the old regime.

A lot of the people I would meet and talk to are doing the best they can to resolve the issues with their creditors but after a 5 year battle they are now looking to use the new legislation to help them get back on their feet.

I would hope that the next 18-24 months would allow those in debt to finally see some light at the end of the tunnel and that it will give them some certainty as to their financial future. This will hopefully have a knock-on effect for the domestic economy which would be of great benefit to all of us.

Mark Ryan CPA PIP,

Director - Quintas

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