There has been extensive coverage of the proposed Personal Insolvency Bill which will go before Oireachtas in April. If passed it will fundamentally change the way that debt law in this country operates, we’ll fast-forward out of the dark ages into a fully modernised system.
But are there concerns about it?
What if it results in people orchestrating their own financial demise in order to obtain preferential terms with creditors? Does allowing banks to have the power to hold sway over certain aspects of the negotiation process mean that we still won’t be fixing the massive mortgage problem which is well in excess of 100,000 accounts?
For every solution there is often a new problem that walks hand in hand with it….
Today we’d like to hear your thoughts on the matter, and as always, we give you a chance to cast your vote…
This weeks poll….
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The proposed Personal Insolvency bill is 135 heads (or sections) long and covers 164 pages. It is a behemoth of new legislation, which will fundamentally change the vista of Irish debt and debt recovery when it comes into force.
There are four general solutions:
- Debt Relief Certificate: For unsecured debts below €20,000
- Debt Settlement Arrangement: For debts over €20,000, this may or may not involve mortgages – lenders rights on mortgage debt are not affected but they can facilitate or allow this scheme with their consent.
- Personal Insolvency: For debts greater than €20,000 but less than €3,000,000
- Bankruptcy: This has been modernized so that the discharge time is now three years automatically rather than 12 (at a minimum) as before.
The full bill is available here, but what we want to focus on today are some small points in the legislation that raise questions.
One question is ‘who will regulate Personal Insolvency practitioners’? In the UK it is a regulated activity, but in Ireland there is no implicit remit of the Central Bank to be the enforcer of standards – debt management is an unregulated activity.
To become a Personal Insolvency Trustee you will have to obtain authorisation but in an ongoing sense who will oversee the people doing this?
How will the Keane Report solutions for distressed mortgages come into play? In Head 97 of the proposed act you won’t have to give up your primary residence unless you agree to it or opt to; however, that might still lead to you not being the ‘owner’ – instead you might become a tenant, is that the best way of doing this?
In the USA under Chapter 13 (Title 11) – also known as ‘waged examinership’ you can stay in a primary home and stop foreclosure under certain conditions but the inclusion of the homeloan is not implicit in the ‘new deal’. In this respect Ireland has taken a giant leap forward, this is something to be pleased about (unless it gets abused somehow).
The protection under these schemes is dependent upon certain ‘performance’ by the borrower, that they don’t go into arrears under the new plan (whatever it may be after negotiations finalise); does that mean (eg: head 78(1)(g)) that if you redefault because you went from under-employed to unemployed that you may be waiving protection? There are provisions for extreme circumstance but no precedence or test cases.
As an industry ‘Personal Insolvency’ in Ireland is not yet born and there are going to be teething problems, lots of them, expect regular news-flashes talking the process up or down, complaints will probably be high in the first two years which, due to pent up demand, will be a slaughterhouse.
One thing banks are likely peeved about is the idea that some aspects of personal liablity guarantees may be undone for entrepreneurs – because debts incurred in the pursuit of a trade or profession can be factored in. Will that count if the trade was via a limited liability company where a personal liability guarantee was signed or does the company have to be pursued first? That is an example of ‘testing’ this legislation will get early on.
There may also be a knock on effect for Landlords. Head 22 (3)(iii) states that ‘qualifying debts’ will include rents, utilities and telephone. If a tenant goes bang in this respect then there will be no point in getting a PRTB ruling (which are functionally worthless anyway) in your favour. What happens in a situation where a person stops paying rent for a long time before going for a debt arrangement and there is a build up which creates the qualifying debt amount? (this is an example of ‘gaming the system’).
Oddly, a retired person who has a large pension pot might be ‘wealthy & poor’ all at once because this lump sum will be viewed for its income potential rather than its capital value (head 23(4)(b)(v)).
At the lower end of the scale you need to prove you have €60 or less after bills and debt payments, and assets of less than €400 – ensuring a person is over the edge in advance makes it harder to come back (good for preventing moral hazard, maybe not so good for economic dynamism).
And of course, a vehicle with a value of over €1,200 can be taken as an asset in a Debt Relief Certificate case but you may lose the ability to find work for that reason!
The cost of unsecured credit will likely go up now that the risk profile has changed (people actually have new empowering rights once this comes in).
We also don’t know who pays the independent debt manager? Will there be standardised fees?
So while we are huge proponents of this legislation and totally in favour of it, we also see early on that there are going to be implementation issues. Hopefully they are outweighed by the societal benefit to finding a course of action that allows people to fail financially in a humane manner.