What to expect from the New Personal Insolvency Act
Following a series of statutory instruments the new Personal Insolvency Act is now finally up and running.
The Act’s intention, according to Alan Shatter, is to modernise Ireland’s Dickensian personal insolvency laws and provide a process “which addresses the obligations of debtors and the rights of creditors in a proportionate and balanced way having regard to the financial reality of an individual’s true circumstances.”
Previous legislation meant that bankruptcy was the only real formal option available to debtors and creditors when a person became insolvent. Despite the lack of alternatives and the huge numbers of people who are insolvent, it was barely used. Last year there were only 35 bankruptcies in Ireland. This compares to 110,000 people who went through some form of insolvency process in England & Wales in 2012.
The reason bankruptcy was ignored as an option by debtors was that they saw the 12 year period in which a person was kept in bankruptcy, with its stigma and restrictions, as deeply unappealing. Meanwhile, many creditors saw the high costs required to have someone declared bankrupt as throwing good money after bad.
The Act seeks to address this firstly by providing 3 new out of court debt settlement solutions as alternatives to bankruptcy and secondly by making bankruptcy itself a more palatable option for people who are unable to avail of these solutions. These solutions are Debt Relief Notices (DRNs), Debt Settlement Arrangements (DSAs) and Personal Insolvency Arrangements (PIAs), and, together with bankruptcy, fall under the supervision of the newly created Insolvency Service of Ireland (ISI).
Debt Relief Notices
DRNs allow people who are insolvent to write-off their unsecured debts, such as credit card balances, overdrafts and utility bills, up to a limit of €20,000. It is aimed at people with minimal income or assets. In order to qualify, a person must have less than €60 net disposable income per month and total assets of less than €400. A person can apply for a DRN via the newly created position of Approved Intermediary. So far 20 Approved Intermediaries have been authorised by the ISI, most of them being Money Advice & Budgeting Services (MABS) offices around the country. DRNs are very similar to the UK’s Debt Relief Orders which they introduced in 2009 and are now running at 30,000 a year.
Debt Settlement Arrangements
For an insolvent individual to qualify for a DSA they must have unsecured debts of more than €20,000 (no upper limit). The DSA involves a proposal being put to the person’s creditors which offers to pay them a portion of their debts over a period of up to five years, with an option to extend the period for a further year. To avail of this the person must engage a Personal Insolvency Practitioner (PIP) who will be responsible for assisting them through the process. To date 77 PIPs have been authorised by the ISI.
For the DSA to become binding on all parties at least 65% of creditors, by value, must vote in favour of the proposal. If successful, the person will be discharged from their debts upon making all the agreed payments. If they subsequently default on these payments, then the DSA can be terminated.
Again, DSAs are broadly similar to the UK based Individual Voluntary Arrangements. These have proved to be very popular and are currently running at over 50,000 a year.
Personal Insolvency Arrangements
PIAs are designed to accommodate insolvent individuals whose debts include secured/ mortgage debt. To qualify the person’s secured debts must be more than €20,000 but less than €3 million and can also include unsecured debt. Like DSAs, a PIP will assist with the process and, as part of this, will put forward a proposal to the person’s creditors, offering to pay them a portion of their debts. Again, at least 65% of all creditors must vote in favour for it to be binding and, if successful, the person will be discharged from his debts upon making all the agreed payments.
Where it differs from a DSA is that the payments can last up to 6 years (with an option to extend it for a further year). Additionally, within the 65% approval requirement, if there are unsecured creditors, as well as secured creditors, included the PIA, then the debtor must also obtain the approval of 50% from both groups for the proposal to be approved.
Bankruptcy still remains an option for debtors and creditors, but in a major change to the 1988 Bankruptcy Act, the period that a person remains in bankruptcy, before being automatically discharged, has been reduced from 12 to 3 years. This change applies to people already in bankruptcy when the law changed.
How the new legislation is likely to work in practice
Take up of these new debt settlement solutions has been remarkably slow since they became available in September. This is primarily due to the large amount of uncertainty that still surrounds how DSAs & PIAs will actually work in practice. People still do not know how creditors will vote and what type of proposal is likely to be acceptable to them.
This lack of clarity is particularly acute in relation to PIAs where the proposals are likely to include write downs of secured debt. The banks, as the main secured lenders, have expressed concerns about this. They are worried that widespread mortgage debt forgiveness could result in potentially huge losses. The ratings agency, Moodys, has pointed out the potential knock on effects this could have on the country’s financial position. This argument is countered by many consumer advocacy groups who are concerned that the banks effectively hold the power to veto any PIAs that they do not support on the basis of their voting rights.
Hopefully a middle ground will emerge where PIAs and DSAs are implemented in such a way that both the debtors and the creditors benefit. However this will require a spirit of co-operation between debtors and creditors, as well as careful management from PIPs, the ISI and ultimately the Government.