Bankruptcy & Personal Insolvency – One Year On
The new law on bankruptcy came into effect recently after Minister for Justice Alan Shatter signed an order to introduce the measure. The move completed the Government’s new personal insolvency and bankruptcy model in Ireland.
Personal Insolvency Process
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 people have been trying to deal with unsustainable debt.
We had a lot of political discussion on how best to deal with it and one of the main ways was to
introduce a non-judicial insolvency code or arrangement. This is the Insolvency Act; the first step was taken last year when it was brought into law on St. Stephen’s Day.
Since then, various officials had to be appointed and offices opened, legislation had to be introduced, judges had to be appointed to deal with it, and statutory changes had to be introduced.
Attitude of Lenders
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 it and getting involved.
The big thing 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?
Bankruptcy or 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 has been a shift in perception of 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 bankrupt – you are unable to meet your 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 Bankruptcy, an agreement or order can be made where a bankrupt person will have to pay income to creditors for five years. If this is not done at the first available opportunity that timeframe may be longer.
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.
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.
How much Money will I have?
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 the same minimum standard of living which is 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 are not to punish people. The objective from a political policy perspective was that the country – and its people – needed to get back up on its feet.
There has been much talk of “trophy homes” since the start of this process.
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 will have to trade down unless they can find alternative means of sustaining the cost of staying in their homes.
In these situations, it is important to bear in mind that an insolvent person’s partner will usually have an interest in the home which is not lost.