The Personal Insolvency Bill
The two main aims of modern bankruptcy law are to return funds to creditors and to rehabilitate the debtor. In Ireland, bankruptcy remains a punitive regime from which it is almost impossible to recover and to resume a normal career or business life, according to Séan Kelly, RSM Farrell Grant Sparks.
The new Personal Insolvency Bill is a, radical and innovative development for dealing with Personal Insolvency and Bankruptcy in Ireland. It has novel and unexpected aspects which will have considerable implications for the economic life of the country. In particular it aims at providing a rebalancing of interests between lenders and borrowers.
One of core principles of a modern insolvency law is that it balances fairly the interests of creditors and debtors. However, traditionally the Irish Bankruptcy regime has tilted the balance heavily in favour of the creditor and it constitutes a harsh, stark and punitive regime for the debtor with a twelve year economic life sentence and with no realistic mechanism in place to enable the debtor to enter into a work-out relationship with his creditors. By contrast, the UK has embraced a modern liberal bankruptcy regime with a potential exit after one year and a simple, speedy and flexible individual voluntary arrangement system which can be used as an alternative to bankruptcy.
The major proposed changes to the Irish Legislation are as follows:
The Bankruptcy Act 1988 will be changed to allow a bankrupt to be automatically discharged after three years;
The introduction of a number of arrangements to provide for a realistic alternative to bankruptcy in appropriate circumstances.
Personal Insolvency Arrangement
The most controversial aspect of the new relief concepts is the Personal Insolvency Arrangement (PIA) which is tailored particularly for mortgage holders with substantial arrears on their loans and who are in negative equity. The PIA approach is designed to give borrowers with unsustainable levels of debt a means of tackling their financial difficulties, whilst also encouraging banks to be more flexible in their dealings with debtors and more willing to agree to non-judicial out of court settlements.
A number of significant issues need to be considered in relation to the Personal Insolvency Arrangement before the Legislation is enacted.
The introduction of the PIA will bring banks and the Irish legal system into unchartered waters as it will result in the rights of secured creditors being eroded. However, the current reality is that the public interest now demands that this be done. In addition, the banks will in effect, have a right of veto over the arrangement as the debtor will need 75% of his creditors to agree to the arrangement. The PIA could conceivably, however, enable a bank to recover a significant portion of the debt over time without having to repossess the home or go through the costly bankruptcy process.
Many would claim that the proposed PIA merely constitutes the legal enforcement of existing individual private agreements which are being made between mortgage holders and their banks and which are being encouraged by the Central Bank. Therefore why force the individual into a lengthy six year legal arrangement. The six year period seems unduly protracted and offers little incentive for the borrower to go for a lengthy period of economic hardship particularly as the twelve year term of bankruptcy has been reduced to three.
The legislation needs to address the moral hazard issue by devising a mechanism to distinguish between those who cannot pay and those who will not pay before any write-downs can be considered.
We believe that there is a case to be made for the appointment of an independent mediator/arbitrator who could adjudicate on the fairness or otherwise of the proposed arrangement between the borrower and the bank both in relation to the proposed repayment schedule and how the shortfall would be dealt with. The adjudication of the arbitrator would be binding.
The Bill establishes a new State funded independent body to be known as The Insolvency Service which will oversee, and give determinations on, the non-judicial settlement procedures such as the PIA. The Bill also provides for the appointment of Personal Insolvency Trustees to investigate the debtor’s financial affairs, formulate proposals, summon creditors meetings and oversee the individual arrangement. However, the Bill makes no reference as to the licencing and regulating of such Trustees. It will be necessary to ensure that experienced and well qualified professionals only are authorised to act as Personal Insolvency Trustees.
The Government appears to believe that there is a strong desire amongst a majority of insolvent homeowners to keep their homes regardless of their financial circumstances. However, this may not necessarily be the case as a result of increasing taxation and costs, reduced services and the rise in negative equity. In these circumstances it is likely that a substantial number of borrowers actually wish to lose their homes and the accompanying mortgages. Many borrowers may prefer to use their income to rent alternative property rather than to put it into a six year long scheme of arrangement.
We do not expect the proposed legislation to result in widespread debt forgiveness. The borrower’s ability to repay debts will be the key factor in the lenders decisions and not the negative equity in the property.
In conclusion, Séan Kelly, RSM Farrell Grant Sparks believe that the proposed new Personal Insolvency Arrangement provides the outlines of a potential solution to the huge problem of personal mortgage debt by creating an environment in which deals can be done and bankruptcy avoided, but considerable
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