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Debt writedown key to successful insolvency process

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The semi-moratorium on house repossessions isn’t going to last forever. The risk is growing that thousands of people will lose their homes.

A debt conference hosted by FLAC, the Free Legal Aid Centre last week explored how insolvency and bankruptcy is handled in other countries – their mistakes and successes – and a number of expert speakers proposed how we could learn from these experiences and make appropriate changes to it now, before our new legislation is introduced.

Approached properly, the experts from the US, Norway and Greece said we might be able to achieve the real the purpose of a statutory insolvency/bankruptcy process: not to punish debtors for their foolishness (or even their greed), but to rehabilitate them so that they become productive members of society again. This is especially the case in Ireland, the conference was told, where uniquely, the most productive workers/entrepreneurs and potential entrepreneurs in our society – people in their 30s and 40s – are the most insolvent and therefore socially constrained due to their unsustainable mortgage debt in particular.

A vindictive, punitive, overly complicated and lengthy insolvency or bankruptcy process – which pretty much describes the draft bill – will only add to the overall cost of the indebtedness to the borrower, creditor, and the state, Professor Jason Kilborn of the John Marshall Law School in Chicago and a contributor to a World Bank study of other insolvency regimes told the FLAC conference.

He and Egil Rokhaug, a Norwegian lawyer and senior government advisor on debt settlement both emphasised the importance of substantial debt write-down, of not permitting creditors to have final vetoes on independently determined debt settlements and to not overcomplicate the entire process, which only discourages debtors from participating.

Countries that allowed some or all of the above in the early days of their debt settlement process experienced high rates of failure and were compelled to introduce reforms. In France, the Bank of France itself became the final arbiter, said Professor Kilborn and debtor/creditor settlements now occur much more quickly and efficiently since creditors no longer have to power to reject or delay – knowing the B of F is watching from the sidelines.

Punitive income schedules that are imposed on the debtor during the insolvency/bankruptcy discharge don’t work either, said Professor Kilborn and the Greek lawyer, Melina Mouzouraki. In Greece the amount people are left with to live on as part of their insolvency period is dictated too arbitrarily by Greek judges, she said, (insolvency is mostly a court process there) who are not well versed, it seems, on the true cost of living for ordinary people.

Forgiveness and generosity (of spirit, if not of actual cash) are keystones to orderly, fair and workable insolvency regimes, the conference was told.

In Norway, where a serious credit/property boom and bust occurred in the early 1990s legislation was introduced that would certainly be the favoured model of the people at last week’s conference who work with debtors.

In Norway, explained Mr Rokhaug, the debt problem was first and foremost seen as a national, social crisis. Rather than force conventional insolvency and bankruptcy upon thousands of its citizens, who might then be homeless, the Norwegian Debt Reorganisation Act 1993 allows for a voluntary agreement or a court based one for debtor who are permanently unable to meet all their obligations. In some cases the family home does have to be sold to meet debts, but only where a satisfactory sale price allows for the purchase of an alternative, affordable one for the debtor and their family.

Otherwise, and in most cases, the aim is to keep the person in their home. An independent enforcement officer determines the market value of the person’s property plus 10% as the starting figure for the debt settlement.

For five years the debtor pays interest only on this ‘secured’ amount after which the remaining unsecured portion of the original mortgage is written off, regardless of whether the property value has increased over the five years. The debtor then resumes paying capital and interest and where negative equity is not an issue, benefit from the growth in the equity value of the property over the five years. Access to new credit is very difficult during this period. Meanwhile, other outstanding unsecured debts are also written off at the end of the insolvency process and may include any car loans, credit card and student debt, said Mr Rokhaug.

Suffice to say that prosperous, Lutheran Norway has both a greater tradition of social solidarity that Celtic, Catholic Ireland, where it tends to carry more weight in good economic times and boom years than it does during deep financial recession.

The generous Norwegian system that forgives all unsecured debt and allows the discharged debtor to remain in the family home does not take into account the begrudgery that can emerge here, or the reality that the Irish banks and exchequer simply do not have the money to write-off the billions involved.

How likely would our EU/ECB/IMF paymasters pick up this bill and then throw away the IOU, since we already have more debt from them than we can afford to repay? Slim to never is probably the answer.

Professor Kilborn was spot on during this very useful conference when he said the proposed new insolvency and bankruptcy bill was a huge improvement over the existing situation. The legislative draftsmen, he said, need to come up to speed on the more workable solutions that other countries have adopted in recent years and then keep an open mind about making amendments once the law is passed.

Great progress can happen, he said, if everyone lets go of the moral hazard argument and stops trying to “squeeze the last drop of blood out of the stone”.

Unfortunately, the terms and conditions are not entirely ours to make. A generation of Irish property owners needs billions of debt forgiveness and they need it fast.

To make our system work, as defined by the FLAC conference experts, we are probably going to need to rely again on the kindness of strangers - German and French ones in particular – for this bailout.

 

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