The EU ECB IMF troika set out the end of March 2012 as the deadline for the Irish government to publish its final proposals for updating the personal insolvency legislation. The government failed to adhere to that deadline and got an arrangement to put it off until the end of April 2012. Once again the government failed to comply with the drawn out deadline. The latest deadline is end of June 2012. What are the odds that this will deliver the final draft of a Personal Insolvency Bill? Chances are not very good. The typical 'civil-service-speak' defense is that it is more important to get it correct than it is to get it quickly. Yes, minister. But does the government get it? The infamous bank guarantee took all of one night at the end of September 2008 yet nearly four years later ordinary insolvent individuals have no real legal protection from their lenders or any practical remedies for their indebtedness. The Law Reform Commission (LRT) launched its superb proposals for legislative reform of this crucial matter at the end of 2010 but the dithering goes on.
What are the honest factors behind delay apart from government incompetence? It's difficult to tell. People believe that the banks in particular are dragging their heels in agreeing the third strand of the government's proposals. This is the so-called Personal Insolvency Arrangement or PIA in short. The challenge for the banks is that this specific piece of legislation will need banks to write down negative equity. Yet the legislation lacks compellability. It will need 75% of secured lenders to agree to a debtor's proposition for a PIA before it is accepted. There isn't any tool for negotiation when lenders reject a debtor's genuine best endeavours to deal with their insolvency via a PIA. Without having the compellability of binding arbitration there is no good reason that lenders might voluntarily agree to any asset write downs. At this juncture, it seems that the PIA as a solution for personal insolvency where there is negative equity in an asset looks to be dead in the water.
The government appeals to the common sense of creditors to consent to such write downs when it's apparent that the borrower cannot service the pertinent mortgage and can't sell the property that is in significant negative equity. But now the draft legislation is out there and it will be interesting to see if this specific strand of the new bill is withdrawn by the government, with creditors being their most significant cheerleaders. Politically it would be a calamity for the government to withdraw the PIA strand, having pledged to mortgage holders that relief was coming. But why on earth did the government offer this to begin with, given that there was no such advice in the LRT's final report in 2010 and nothing remotely like it. In fact, there is no similar solution in any jurisdiction in the world.
The first and second strands of the proposed new Personal Insolvency Bill are fairly uncomplicated. The first strand is the Debt Relief Certificate (DRC) which is almost the same as the Debt Relief Order (DRO) in the UK. The DRC will accommodate insolvent individuals who have no more than 20,000 of personal unsecured debt, who do not own a house, whose assets do not exceed 400 (apart from a low value car) and whose disposable income is no greater than 60 per month. Debts are frozen for twelve months and if there is no significant change in the debtor's circumstances in that period, the debts are written off completely. The first draft of the legislation included an anomaly concerning the treatment of a HP Agreement in a DRC but presumably this will be corrected before the final draft is published.
The second strand of the proposed new Personal Insolvency Bill is also uncomplicated. It is called a Debt Settlement Arrangement (DSA) and it is almost the same as the Individual Voluntary Arrangement (IVA) in the UK. It is intended for insolvent individuals with unsecured debts in excess of 20,000. The person in debt would have to make monthly contributions from their disposable income for perhaps five years or donate a lump sum from the realization of assets or donate third party funds to the DSA all for the benefit of their unsecured lenders. Unsecured lenders could of course reject the debtor's proposals and in fact it would need 65% by value of voting creditors to accept the DSA. The issue with this strand is the lack of clarity as to how the family home will be treated, in the case of a person in debt who solely or jointly owns such a property, whether in negative equity or not.
The draft bill also includes some proposed changes to the arcane bankruptcy laws but many insolvency experts consider these changes to be too little if not also too late. Why they should be intentionally and noticeably different to UK legislation is baffling. It is almost as if the government wishes to encourage its insolvent citizens to file for bankruptcy in other jurisdictions under the COMI regulations, as promulgated by the EU. Perhaps that is the thinking - export the problem! Surely not! And yet, why build in such clear differences, particularly in relation to the discharge period of three years in comparison with one year in the UK and Northern Ireland? Was there no real thought given to harmonizing the laws in our neighbouring countries?
Roll on, end of June 2012! Apart from the actual final text of the new bill, it remains to be seen how the government is going to design a new insolvency service, how it proposes to licence insolvency practitioners and how it plans to regulate the insolvency sector. If it continues to re-invent the wheel, it's hard not to predict more legislative accidents.
What are the honest factors behind delay apart from government incompetence? It's difficult to tell. People believe that the banks in particular are dragging their heels in agreeing the third strand of the government's proposals. This is the so-called Personal Insolvency Arrangement or PIA in short. The challenge for the banks is that this specific piece of legislation will need banks to write down negative equity. Yet the legislation lacks compellability. It will need 75% of secured lenders to agree to a debtor's proposition for a PIA before it is accepted. There isn't any tool for negotiation when lenders reject a debtor's genuine best endeavours to deal with their insolvency via a PIA. Without having the compellability of binding arbitration there is no good reason that lenders might voluntarily agree to any asset write downs. At this juncture, it seems that the PIA as a solution for personal insolvency where there is negative equity in an asset looks to be dead in the water.
The government appeals to the common sense of creditors to consent to such write downs when it's apparent that the borrower cannot service the pertinent mortgage and can't sell the property that is in significant negative equity. But now the draft legislation is out there and it will be interesting to see if this specific strand of the new bill is withdrawn by the government, with creditors being their most significant cheerleaders. Politically it would be a calamity for the government to withdraw the PIA strand, having pledged to mortgage holders that relief was coming. But why on earth did the government offer this to begin with, given that there was no such advice in the LRT's final report in 2010 and nothing remotely like it. In fact, there is no similar solution in any jurisdiction in the world.
The first and second strands of the proposed new Personal Insolvency Bill are fairly uncomplicated. The first strand is the Debt Relief Certificate (DRC) which is almost the same as the Debt Relief Order (DRO) in the UK. The DRC will accommodate insolvent individuals who have no more than 20,000 of personal unsecured debt, who do not own a house, whose assets do not exceed 400 (apart from a low value car) and whose disposable income is no greater than 60 per month. Debts are frozen for twelve months and if there is no significant change in the debtor's circumstances in that period, the debts are written off completely. The first draft of the legislation included an anomaly concerning the treatment of a HP Agreement in a DRC but presumably this will be corrected before the final draft is published.
The second strand of the proposed new Personal Insolvency Bill is also uncomplicated. It is called a Debt Settlement Arrangement (DSA) and it is almost the same as the Individual Voluntary Arrangement (IVA) in the UK. It is intended for insolvent individuals with unsecured debts in excess of 20,000. The person in debt would have to make monthly contributions from their disposable income for perhaps five years or donate a lump sum from the realization of assets or donate third party funds to the DSA all for the benefit of their unsecured lenders. Unsecured lenders could of course reject the debtor's proposals and in fact it would need 65% by value of voting creditors to accept the DSA. The issue with this strand is the lack of clarity as to how the family home will be treated, in the case of a person in debt who solely or jointly owns such a property, whether in negative equity or not.
The draft bill also includes some proposed changes to the arcane bankruptcy laws but many insolvency experts consider these changes to be too little if not also too late. Why they should be intentionally and noticeably different to UK legislation is baffling. It is almost as if the government wishes to encourage its insolvent citizens to file for bankruptcy in other jurisdictions under the COMI regulations, as promulgated by the EU. Perhaps that is the thinking - export the problem! Surely not! And yet, why build in such clear differences, particularly in relation to the discharge period of three years in comparison with one year in the UK and Northern Ireland? Was there no real thought given to harmonizing the laws in our neighbouring countries?
Roll on, end of June 2012! Apart from the actual final text of the new bill, it remains to be seen how the government is going to design a new insolvency service, how it proposes to licence insolvency practitioners and how it plans to regulate the insolvency sector. If it continues to re-invent the wheel, it's hard not to predict more legislative accidents.
About the Author:
McCambridge Duffy Ireland is involved in the financial industry for over 80 years. They are a respected accounting firm together with a firm of Insolvency Experts. With the changes going on with Insolvency in Ireland, it's easy to get baffled as to what to do about your debt. Get in touch with McCambridge Duffy to determine your options.
