Tipp FM Legal Slot – 18th December 2012
John M. Lynch on Personal Insolvency Bill [soundcloud id=’167065645′]
When is the Personal Insolvency Bill expected to come into law?
The Personal Insolvency Bill was published on 29th June 2012 and is expected to come into law this week. The Bill gives struggling homeowners the opportunity to write down the debt on their mortgages by spreading it over a six year period. The Bill also reforms the Bankruptcy Act 1988 and a significant new measure under the Bill is to reduce the bankruptcy period from 12 years to 3 years (8 years in some cases).
How would the Personal Insolvency Bill help personal or mortgage debtors?
Recent figures show that 11% of all home loans have fallen into arrears by 90 days or more with many thousands more struggling to make their monthly payments.
Up to a quarter of all Irish mortgage debt could be written down under the new proposals.
The Personal Insolvency Bill will help people to manage personal debt through budgeting advice and new arrangements with lenders and it will assist personal or mortgage debtors. The deals will be dealt with on a case by case basis and creditors, such as banks, will have to agree, but up to a quarter of all Irish mortgage debt could be written down under the new proposals.
What proposals or new arrangements are in Personal Insolvency Bill?
The Personal Insolvency Bill will assist personal or mortgage debtors and new proposals include:
A Debt Relief Certificate will allow people with no assets or no income with debts of less than €20,000 to be written off. These debts are likely to be credit card debt and personal loans. The Bill establishes an insolvency service which will administer debt relief options. In order to qualify borrowers must have a net monthly disposable income of €60 or less, assets of €400 or less, and must be resident in Ireland. Net disposable income includes salary or wages, welfare benefits such as job seekers allowance, income from pension, rental income and contributions from other household members. Certain debts are excluded including court fines, child support and spousal maintenance.
A Debt Settlement Arrangement (DSA) will cover loans with two or more creditors in the amount of €20,000 or more. The borrower will have to pay off a certain amount for up to 5 years and the balance will then be written off.
A Personal Insolvency Arrangement (PIA) will apply specifically to mortgage holders for secured and unsecured debts of €20,000 to €3million. 65% of the lenders must be in agreement for some of the debt to be written down. A borrower could have the option of handing back their property and paying part of the balance in monthly instalments over 6 years and the remainder would then be written off.
What would be the role of a Personal Insolvency Practitioner and who would set the amount that could be written off?
Personal Insolvency Practitioner
A personal insolvency practitioner licensed will make the proposal on behalf of the borrower provided the borrower themselves satisfy a number of criteria i.e. must be living in the State for a year before the date of application or domiciled here, the property which the loan was taken out for must be within the State, the borrower must be unable to pay their debts as they fall due and not have been declared bankrupt etc. The practitioner will also verify and certify a financial statement prepared by the borrower confirming their financial position.
The Insolvency Service
The amount which may be written off will be determined by a new body called The Insolvency Service with reference to the amount of outstanding debt the borrower has, the borrower’s income and the value of the assets they own while leaving the borrower with funds to allow a reasonable standard of living while repayments are being made. The practitioner here will prove to be a vital party who will form the link between the borrower, the Insolvency Service and the lender(s) in coming to an agreement as those who hold a 65% or higher stake in the borrower’s debt must agree to proposals.
Do people who have personal or mortgage debt have to satisfy any conditions to avail of a Personal Insolvency arrangement?
Communicate with Your Lender
The old adage of the “once in a lifetime opportunity applies” and it is important to be aware that those who avail of a Personal Insolvency Arrangement can only do so once. Careful consideration needs to be given by those who wish to seek debt relief in this manner.
For those people in debt for mortgages on their homes it is very important to be aware that this arrangement will only be available if they have been engaging with their lender for at least six months prior to their application. Co-operation and negotiation are therefore key to the success of any such application and those who ignore their arrears will not be able to avail of the new arrangement.
It is vital therefore for those who may wish to avail of them to be seen to be actively corresponding with their lenders if not doing so already.
What changes does the Personal Insolvency Bill propose for our Bankruptcy period?
Modern insolvency law tries to strike a balance between the interests of creditors and debtors whereas our current bankruptcy laws favour only creditors and it is very difficult for a bankrupt person to return to business life. Proposals for a new bankruptcy period under the Personal Insolvency Bill, however, are aimed at balancing the interests of lenders and borrowers.
Proposed changes to our bankruptcy period of 12 years
The Personal Insolvency Bill proposes to reform the Bankruptcy Act 1988. A significant new measure under the bill is to reduce the bankruptcy period from 12 years to 3 years (or in some cases 8 years). Judicial bankruptcy proposed under the new Bill could apply to secured and unsecured debts. Bankruptcy could be voluntary or involuntary. Under the Bill if a debtor owes €20,000 or less the creditor cannot petition the Court to make them bankrupt. If a petition for bankruptcy is successful the debtor’s assets will then be controlled by the Official Assignee. The debtor’s earnings, after their living expenses are deducted, will be used to pay their creditors.
3 year bankruptcy period
In certain circumstances, the bankruptcy period could be 8 years, instead of 3, because after the initial 3 years the court may decide the debtor has to continue paying his past creditors for a further 5 years. It remains to be seen how this will be applied in practice. Discharge from bankruptcy could be further delayed by 8 years if the bankrupt person is non-complaint, fraudulent or dishonest during the process.
Under the new proposals how a Bankrupt person’s property would be dealt with after discharge?
New bankruptcy provisions in the Bill include:
Under section 85 (4) (Automatic discharge from bankruptcy) of the Personal Insolvency Bill after discharge from bankruptcy the bankrupt will have a duty to cooperate with the Official Assignee to help in the realisation and distribution of his/her property.
Full disclosure and realisation of all the bankrupt’s assets and interests would be required for the benefit of creditors.
Official Assignee and power to stop the discharge of Bankruptcy
Under section 85A (Objection to automatic discharge from bankruptcy) the Official Assignee or personal insolvency trustee has explicit power to object to the bankrupt person being discharged from bankruptcy. Grounds for objection include the bankrupt’s lack of cooperation, dishonesty or other wrongful conduct. If satisfied, the Court may suspend the discharge while investigating further or extend the period of discharge to a maximum of 8 years.
It is hoped that the new measures under the Bill to reduce the bankruptcy period from 12 years to 3 (or in some cases 8) years will allow people to wipe the slate clean and make a fresh start once this period has expired.
Some of the questions that will need to be addressed in the coming year:
- What is a reasonable standard of living that a debtor can expect before having to meet commitments under the various debt arrangements?
- How will the test of disproportionately large cost of living in the family home be applied?
- How will the personal insolvency practitioner model work in making this debt management regime work and will creditors work with them?
- Will the secured creditors (Banks) play ball with the Insolvency Service?
- What level of supervision will there be over Personal Insolvency Practitioner;
- Will we apply the UK experience and codes of practice?
- How diligent will the Insolvency Service be in policing the accuracy of the prescribed financial statement which is the cornerstone of an application by a debtor?
- Will the Circuit Court take an active role in coaxing creditors to accept debt arrangements?
- Will people give greater consideration to Bankruptcy in this country rather than the UK?
At this stage what advice do you have for people who are struggling with their mortgages and other debt?
One of the most important factors at this stage is for people to be aware of exactly what loan arrangements are in place with each lender and what powers your lender has to enforce these. In preparation for these new laws we have been assisting many clients in carrying out full audits to ensure all proper procedures were followed by the lender at the time the loan was entered into. Any errors on their part could prove to be useful in negotiating the debt downwards at a later stage.
There has never been a better time for this new approach to debt with so many businesses closing and mortgages struggling, not because of the greed or incompetence of borrowers, but because of over-lending, falling wages, unemployment and a collapse in demand for goods and services. Over the last number of years people have been putting the problem on the long finger. This is not in any way unexpected due to all the media and government hype to the effect that our financial woes are being addressed. It has become more than obvious that the present credit difficulties are here to stay for a considerable amount of time into the future.
All the strategies of postponing debt by deferring interest or capital payments are no longer a realistic approach. We have taken the view that it is now time to deal with debt management in the context of long-term debt with long-term solutions. With this in mind our strategy is twofold – firstly establish the amount of debt which you are capable of servicing and, secondly, put whatever strategies into place to deal with the balance which are realistic.
We have added new services to help clients deal with insolvency issues and we offer expert advice on the new measures.
As a team, we have continued to improve our expertise and this year, in preparation for our new Insolvency laws, I completed a Diploma in Insolvency and Andrea Gleasure completed a Certificate in Banking.