As Ireland’s new personal insolvency laws passed an important milestone this week, with Monaghan Circuit Court granting the first protective certificate to a Donegal Man, there will be much relief in the 26 counties that the country’s new personal insolvency solutions are beginning to come online.
However, such optimism may still be short-lived, judging from the recent comments of some of Ireland’s top bankers, with Richie Boucher, CEO of the Bank of Ireland stating recently, “…Every forbearance costs us money. We look to maximise recovery” and that debt forgiveness was not a “policy of the bank”.
The fact debt forgiveness is not a “policy of” one of the major banks in the Republic is not a promising sign for two of the three new personal insolvency arrangements being made available, as both Debt Settlement Agreements and Personal Insolvency Agreements require the qualified consent of all creditors.
It would appear, however, that Ireland’s parliamentarians have suffered from the same dilemma many parliamentarians do when creating a modern personal insolvency system. That is the fear and general unease that they are creating a “cheat’s charter”.
In any modern credit based society, however, there is a need to ensure that those who become over indebted, either through misfortune or poor decisions are not left buried under a mountain of debt and financially excluded from society for any unduly length of time. There are little benefits for anyone in allowing such a situation to exist.
Equally there is also a need to build risks into the system to ensure that those that make lending decisions act prudently and don’t pose an unacceptable risk to the wider economy, which arguably was what did happen in Ireland during the Celtic Tiger boom years.
These dilemmas are the same ones other Governments, including the Scottish Government have struggled with for years. The need to create an effective system of debt relief and balancing this with the need to avoid the moral hazards of creating a can pay, won’t pay culture; or an environment that encourages what the Allied Irish Bank recently called “strategic defaulters”.
The difficulties of introducing Ireland’s new schemes, however, has also been compounded with adverse publicity that the schemes will only be available to the well off and will be of little benefit for those on low incomes; coupled with accusations that the banks have had too much influence in drafting the new legislation.
There does appear to be some merit to such accusations and it is hard to believe that it will be possible for Ireland to realise the 15-20,000 cases per year that the new Insolvency Service believe desirable until there are further legislative reforms or a sea change in the attitudes of creditors.
Two of the new schemes, Debt Settlement Agreements (DSAs) and Personal Insolvency Agreements (PIAs) require 65% of lenders to accept some form of debt relief or write down before a case can become approved. This isn’t unlike schemes that exist in UK legal systems; however, there is an important difference in that both of the UK’s legal systems the more formal solution of bankruptcy, which is often used in negotiations with creditors, is far more accessible and potent a negotiating tool.
In Ireland, despite important reforms to judicial bankruptcy, reducing the duration from 12 to 3 years, it is still unlikely bankruptcy will be as effective a negotiating tool as it is elsewhere on these islands.
One of the problems is the system is almost totally inaccessible to the private sector, with a civil servant, the Official Assignee normally acting as Trustee in all cases.
In addition to this, there remains the problem that in some cases debtors may even receive a 5 year bankruptcy payment order after discharge, meaning they could be paying towards their bankruptcy for as long as 8 years.
If Ireland can learn anything from personal insolvency laws in Scotland it is this: people heavily indebted by itself is not enough to ensure that debt relief remedies will be widely used; it is also necessary to ensure that the correct environment exists. This means allowing the private sector access to help drive take up and the right legislative conditions in place to ensure not only that debtors can access remedies.
This can be seen in Scotland where bankruptcies rose from 560 in 1986/87 to 11,970 in 1992/93 after the introduction of the Bankruptcy (Scotland) Act 1985; and again with protected trust deeds, which rose from 282 in 1993/94 to 5,363 in 2002/03 after the Bankruptcy (Scotland) Act 1993.
Again more recently this can be seen in 2008/09 when the number of bankruptcies increased from 6,158 in the preceding year to 14,777 after the introduction of the Bankruptcy and Diligence (Scotland) Act 2008 and in relation the Debt Arrangement Scheme (not a type of insolvency), where the number of plans approved jumped from 1,190 in 2010/11 to 3,319 in 2011/12 after the Debt Arrangement Scheme (Scotland) Regulations 2011 were introduced.
What is characteristic about all these changes is the various legislative measures either increased access for the private sector to provide solutions or removed legal and financial obstacles to debtors allowing them access remedies.
In a country where it is believed as many as one in four mortgages and one in three buy to let mortgages are in arrears and unsecured personal debt levels are well over double what they are in the UK, there is no better time for Ireland to begin opening the personal insolvency valves to allow consumers to access debt relief and debt management remedies.
Taking again Scotland as an example, since 2008 over 102,000 Scots have used some form of personal insolvency to deal with their over indebtedness, whereas in Ireland only 20 petitions for bankruptcy were awarded last year.
The benefits of this are clear to see for Scotland where the Scottish Government are reporting the number of personal insolvencies are continuing to fall and the average debt levels being seen by insolvency practitioners are often half what they were even a few years ago. It is also rare now to find debtors in Scotland with more than 10% negative equity in their principal home.
It seems logical then that as the Scottish Government begins to close the valve allowing access to personal insolvency with the Bankruptcy and Debt Advice (Scotland) Bill, the Irish Government needs to begin opening theirs.
However, it also seems unlikely in a country that has a broadly similar sized population as Scotland and a far greater level of personal indebtedness, that the 15-20,000 personal insolvencies per year that Scotland has been witnessing for the last five years is anywhere close to being achieved in Ireland.
Unless creditors begin to accept debt write downs, it would appear inevitable that further primary legislation will be required; indicating that it’s unlikely Ireland’s new modern personal insolvency laws will begin to do their job for at least another 12-18 months.
Inevitable Ireland will need to open its formal bankruptcy laws up to the private insolvency industry and or allow the Irish Insolvency Service, or the Circuit Courts to set aside creditor objections in Debt Settlement and Personal Insolvency Agreements.
Creating the correct legal environment is vital if any country wants to see the volume in personal insolvencies increase to what is required to help with significant over indebtedness: otherwise it is unlikely any private sector firms will make the necessary investments in software, staff and procedures to ensure costs are reduced and returns to creditors are maximised; whilst also allowing the remedies to be widely available to not only high net income borrowers, but also the thousands of middle income consumers needing debt relief.
However, not all aspects of the current Irish scheme are likely to be slow in developing. Ironically, despite fears that the new insolvency remedies will not be accessible to the poor, it is likely the most successful of the three new remedies, Debt Relief Notices, which are similar to Debt Relief Orders in England, Wales and Northern Ireland and Low Income, Low Asset bankruptcies in Scotland will be the remedy that first succeeds.
In the other legal systems of these Islands, the comparable remedies have all proved to be popular, but crucially because like Debt Relief Notices and unlike the other schemes, they do not require creditor consent.