Tipp FM Legal Slot – 10th December 2013
John M. Lynch on Bankruptcy and Personal Insolvency
It took a while for the Insolvency process to get up and running – as you know we have been talking about it for the past two and half or three years.
The last element of it – the Bankruptcy element – was closed off last week.
The Personal Insolvency Act changed our bankruptcy legislation. Under the new regime in Ireland the Bankruptcy period has been reduced from 12 years to 3 years.
The move by Alan Shatter completed the Government’s reform of personal insolvency and bankruptcy law in Ireland.
How has the Personal Insolvency process progressed so far?
The Insolvency code is our way, in Ireland, of trying to address the problems that we’ve had over the last number of years. For five years we’ve had people trying to deal with unsustainable debt.
We had a lot of political discussion and input and suggestions on how best to deal with it and one of the main ways introduced by Alan Shatter, Minister for Justice, was to introduce a non-judicial insolvency code or arrangements. This is the Insolvency Act.
It started last year – it was brought into law on St. Stephen’s Day.
Having been brought into law various officials had to be appointed and offices opened, legislation had to be introduced, judges had to be appointed in order to deal with it, and statutory changes had to be introduced.
What is attitude of lenders to the new measures?
There has been a slow change – there are a lot of people waiting to see what will happen.
As the process evolves and matures you will find more people understanding what is involved.
The big change we have seen – through our seminars – is the lack of understanding as to what exactly is involved; the impact it will have on your daily lives; whether you should have an informal arrangement with the bank, and if you do have an informal arrangement will there be write downs?; If you have an arrangement through the Insolvency Act will that involve a write down; if you go into bankruptcy what is the difference between bankruptcy and an arrangement; is it better to go into bankruptcy or an arrangement?
Now that Bankruptcy is down to three years is it more attractive then Insolvency?
Bankruptcy won’t always be the better option.
When we started talking about bankruptcy in July there was no interest in it. Now, in December, there is a considerable amount of more interest as there has been a shift in perception towards it.
More people are looking at going down the bankruptcy route, but that still does not mean that there will not be a considerable amount of people for which an insolvency arrangement will be a better option.
The significant difference between an arrangement and bankruptcy is that in an arrangement situation you retain a certain element of control, you can protect the family home, and all of your assets are not automatically transferred into the assignee in bankruptcy.
As soon as you are declared bankruptcy – you are unable to meet their debts as they fall due – you transfer all of your assets to the Assignee in Bankruptcy, which will have an immediate impact on people.
As part of the new rules, an order can be made where a bankrupt person will have to pay income to creditors for five years. This would mean that the bankrupt may then be paying creditors for up to eight years.
In bankruptcy, you are locked into an arrangement to pay income for five years, which effectively is the same as an insolvency arrangement – or within a year of it.
In the case of an Assignee in Bankruptcy they are liquidators. The object of the Assignee in Bankruptcy is to liquidate whereas in insolvency you are not in a liquidation situation; it may or may not involve the sale of assets, the family home can be protected, and the income arrangement is guided in the same way as bankruptcy, but it has more flexibility.
When it comes to income arrangements is the reasonable standard of living the same across the board?
Initially there was much debate about the minimum standard of living that people entering into insolvency arrangements are entitled to. I have found that many clients who I have been dealing with were living below the reasonable standard of living.
The Personal Insolvency code reduced the bankruptcy period to three years, but it also introduced a cross the board benchmark below which you should not be asked to live.
The reasonable standard of living will give you a level below which you can’t go, but neither the Assignee in Bankruptcy nor the Personal Insolvency Practitioner will marshal that; they won’t be arriving at people’s houses checking shopping lists!
The purpose of Personal Insolvency arrangements and the purpose of bankruptcy is not to punish people. The objective was from a political policy perspective was that the country – and its people – needed to get back up on its feet.
Can people keep their “trophy homes”?
As a Personal Insolvency Practitioner (PIP) I am obliged, under the Personal Insolvency code, to make sure that if someone is living in a “trophy home”, which is disproportionate, they would have to trade down.
In bankruptcy, if the bankrupt’s partner is not bankrupt s/he would only own half of it.
How long will it take for Insolvency Arrangements to go through?
We are involved in putting a number of insolvency arrangements together. There are a number of people who are weighing up their options between insolvency and bankruptcy.