Tipp FM Legal Slot – 9th July 2013
John M.Lynch on Bankruptcy Reform in Ireland
During the past few weeks we have been discussing the Personal Insolvency Act 2012 and how it will work in practice in terms of relief options for those with mortgage arrears and other debt. We have been discussing the area at our seminars and also the significant new measure under the Act to reduce the bankruptcy period from 12 years to 3 years (or in some cases 8 years). This morning I will discuss bankruptcy reform in more detail.
What is Bankruptcy?
Bankruptcy is a process where the property or assets of an individual, who is either unable or unwilling to pay their debts, (called or referred to as a debtor), is transferred to a person who is given charge of the property by the High Court (called a trustee) to be sold.
Basically, bankruptcy is where people lose control of their assets and are under the jurisdiction of an official of the bankruptcy court for the period of time they are in bankruptcy and the assets are sold and realised.
How will the new measures under the Personal Insolvency Act reform the existing bankruptcy system?
Modern insolvency law tries to strike a balance between the interests of creditors and debtors whereas our bankruptcy laws since the 1988 Act favour only creditors and it is very difficult for a bankrupt person to return to business life. The new bankruptcy period under the Personal Insolvency Act 2012, however, is aimed at balancing the interests of lenders and borrowers.
How long does bankruptcy last?
The Personal Insolvency Act 2012 has taken steps to reform the Bankruptcy Act 1988. A significant new measure under the Act is to reduce the bankruptcy period from 12 years to 3 years (or in some cases 8 years). Prior to this, people were in bankruptcy for 8 years; before that it was 15 years and indefinitely at one point.
It is hoped that the new measures under the Act 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.
How are people legally able to apply for Bankruptcy in the UK?
It is referred to as forum shopping; because we are within the European Union people can go to different jurisdictions. It was prevalent where people resided in Ireland, but were originally from other countries, for example people can apply for a divorce in any other EU country if they can establish residence and the same principle applies with Bankruptcy.
Under the European framework you can apply for Bankruptcy once you can establish a comi – a centre of main influence in the country where you are applying as long as it is in the EU.
We have now seen situations where creditors have gone to the UK and objected to the bankruptcy.
How will the bankruptcy code operate in practice?
Under the new regime in Ireland the Bankruptcy period has been reduced to 3 years; as the landscape of debt has changed dramatically the Personal Insolvency Act has changed the bankruptcy legislation. People can now make arrangements through an intermediary – the Personal Insolvency Practitioner (PIP).
The PIP will start with insolvency, go through the process, and people will come out the other side solvent, As personal insolvency was addressed through the Act it also updated the area bankruptcy. People will first deal with the Personal Insolvency code and the last option will be bankruptcy. The Court may then decide that people should not enter bankruptcy and enter into insolvency arrangements.
How does a debtor become bankrupt?
Judicial bankruptcy proposed under the new Act could apply to secured and unsecured debts. Bankruptcy could be voluntary or involuntary. Under the Act 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 or a trustee. The debtor’s earnings, after their living expenses are deducted, will be used to pay their creditors.
Do all creditors have the same standing in the bankruptcy?
Preferential creditors, for example employee’s wages, will be paid first. Secured creditors have priority as they have two options – they have underlying assets and they can take the asset and realise it and they can apply for the balance under the insolvency code or the bankruptcy code so they have a double status.
In what circumstances could the new bankruptcy period be extended beyond 3 years?
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.
The Official Assignee, a trustee or a creditor can object to the automatic discharge of someone from bankruptcy after three years where there is lack of cooperation or nondisclosure. This could extend the bankruptcy period to 8 years. The court also has power to make a bankruptcy payment order for up to 5 years after discharge from bankruptcy.
The Act also covers excess of pension contributions which can be subject to the control of the official assignee. It should be remembered that unrealized assets continue to be vested in the official assignee after discharge from bankruptcy.
What happens to the bankrupt person’s property after discharge?
New bankruptcy provisions in the Act include under section 85 (4) (Automatic discharge from bankruptcy) of the Personal Insolvency Act 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.
Who has the 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.
Can the person operate a bank account and still trade while bankrupt?
Yes, they can operate a bank account. However if they obtain credit of €650 or more without disclosing their bankruptcy, they are guilty of an offence.
Where can listeners learn more about the new Bankruptcy code?
To find out more about the new Bankruptcy code register for next Wednesday’s seminar in the Castletroy Park Hotel, Limerick at 5.30pm