The publication of the proposals last week of the draft Personal Insolvency Bill is the beginning of the introduction of what will hopefully become a properly functioning, fair and compassionate bankruptcy system.
It is decades overdue, and the lack of a proper, regulated, judicial and non-judicial system for people to be discharged of the debts they cannot pay, has caused enormous hardship and injustice here, especially in the last four years.
A light has finally gone off at the end of what must seem like a very dark tunnel indeed for thousands of individuals and families.
However it will be at least another year before the complicated legislation, the Insolvency Agency that will oversee it, and the army of personal insolvency trustees are recruited, trained and regulated.
This will result in a significant cost to the state that has not been determined and did not feature in the 2012 Budget, and depending how many debtors rush to apply and how much mortgage debt is likely to be written off by state owned banks (the biggest creditors), there could be very significant financial consequences for our still fragile banks.
It is this concern – about the hit the banks will take on secured mortgage debt - that is likely to result in a lot more negotiation and the further delay in the publication of the Bill, now expected at the end of April (instead of the end of March) and its passing into law later this summer or in the autumn.
That said, a proper, fit-for-purpose, judicial bankruptcy law and out of court or non-judicial personal insolvency system in a year’s time is better than what we have now, which in regard to full bankruptcy is completely unfit for purpose: a 12 year or longer ‘sentence’ of penury that is harsher, time-wise, than the sentences handed down to most people found guilty here of armed robbery, rape or manslaughter.
But this draft needs a lot of tweaking, adjusting and modifying and unless the period of “discharge” is not also reconsidered for three of the four options, it may not be as successful as its authors expect.
The first, non-judicial option, the issuing of a Debt Relief Certificate (DRC) to people with no or insignificant income, no substantial assets (they can’t be a homeowner) and unsecured debts of less than €20,000 (like overdrafts, credit cards, personal loans, HP agreements, unpaid utilities) is a good one.
The DRC process, mainly organised with the help of MABS, is completed in one “moratorium” year. It should help many young people in particular who have lost their jobs, are now living on benefits perhaps and are in a debt straitjacket. Giving them a second chance is good for everyone.
However, the DRC has some absurd conditions attached, such as being limited to people who have no more than €60 left to live on a month after all “reasonable” personal expenditure is met (why not €75?); who do not own any good that is individually worth more than €400 (what about a family heirloom?) or a car worth more than €1,200. (So much for road safety.)
The arbitrariness of what is “reasonable” value or income will clearly have to be reconsidered.
But it is the power that the creditors have that the draft bill’s critics say is worrying.
Up to 65%-75% of creditor approval is required before the debt relief application will proceed in the case of the non judicial Debt Settlement and Personal Insolvency Arrangements (DSA and PIA), even if the debt repayment or write-down plan is considered suitable and workable by the personal insolvency trustee.
This veto is not fair, say New Beginnings, the mortgage debt lobby group that has succeeded in stopping many home repossessions over the last year. While welcoming the proposals generally, they suggest that it is the financial position of the banks, not debtors, that is being given too much weight in this draft Bill.
Critics are also questioning some of onerous conditions and especially the length of period before the debts of the participants in the two non-judicial insolvency arrangements and bankruptcy option are discharged: five years, six years and three years, respectively.
In the UK and the North, a bankrupt can be discharged in a year or so, not three years. Their Individual Voluntary Insolvency (IVA) system, which only involves unsecured debt (not mortgages) is quite straightforward and ends after five years.
Here, the DSA and PIA are hybrids of the IVA in that it includes secure debt like mortgages. (People with huge mortgage debt go bankrupt in the UK).
And while the final Bill needs to be fair to all parties, some financial advisors I have spoken to believe that some PIA candidates could be better off becoming bankrupt rather than spending six years under a trusteeship that could be hugely discouraging. Even the three year discharge associated with the full bankruptcy arrangement, they say, is two years too long for people who have already been struggling desperately for the past two or three years.
Until the new Bill is ready, if your debts are becoming overwhelming, engage quickly with your bank or creditors to see if you can come to a voluntary debt reschedule or settlement.
Contact your local MABS office for help and protection against legal action under the Consumer Code on Mortgage Arrears and Debt.
Where the situation is deemed hopeless and your debts are unsustainable, speak to a good accountant and solicitor about bankruptcy prospects in the UK, where the light at the end of the tunnel might just be a year away.