Debtors' haircuts - the pain starts here

There is probably only one financial problem that surpasses the euro crisis for intractability and that is the Irish personal and mortgage debt crisis. It has all of the conflicts and complexities of the euro crisis but differs in one crucial respect –it is more personal.

Somehow –even though the effects of austerity are increasingly visible on Greek (and Irish) streets –sovereign default and deficits are one step further removed from the personal experience and anecdotal evidence of friends and family caught in a debt nightmare.

It seems from the comments of Minister for Justice and Law Reform, Alan Shatter, that the purported panacea for this –the Personal Insolvency Bill –will finally be published by the end of this month. This is not a panacea, however, but simply a very imperfect attempt to strike a balance between debtors and creditors: an impossible task that aims to recognise reality while giving the hopelessly indebted some platform to reenter the productive economy with some incentive to perform. And this to say nothing of the necessary humanistic imperative of providing some security for people wishing to stay in the family home.

As currently constituted, the Personal Insolvency Bill will bring about a regime where, depending on the debtor’s particular profile, three new non-judicial debt settlement systems will be available:

·A Debt Relief Certificate to allow for the full write-off of qualifying unsecured debt up to €20,000

·A Debt Settlement Arrangement for the agreed settlement of unsecured debt of €20,001 and over;

·A Personal Insolvency Arrangement for the agreed settlement of both secured and unsecured debt of €20,001 and over.

At this stage, the cooperation and agreement of bank creditors is essential to the working of the new regime and this may be a considerable barrier to implementation on a wide scale. But leaving aside this critical issue the other practical effects of the new regime are simply immense.

On the one hand, a new personal insolvency regime is essential to clear out the deadwood of legacy debt and the non-recognition of the banking system of the extent of its problem in this regard. On the other hand, the potential crystallisation of this bad debt may trigger an additional capital call for the banking system as stress tests may reveal that the 2010 stress tests of the Blackrock group - until now widely considered bullet-proof - have in fact passed the worst case scenario.

If, however, the new insolvency regime is thought to be overly onerous on the banking system, it is already being speculated that at least one foreign player may decide it has had enough of the Irish market, rendering a rapidly evolving cartellist banking system even more oligopolistic.

It has for some time been well understood that strategic default - particularly on investment properties - has been a factor in the market although banks have been reluctant to publicise this lest it encourage others. It is a fact, however, that ever since a new insolvency regime was first mooted, the ears of less scrupulous individuals pricked up, alerted as they are to a potential exit from their obligations. After all, why make immediate painful adjustments to lifestyle to meet those obligations when the promise of redemption is perhaps a matter of months away?

For many debtors, however, the reality is of frequent meetings with bank creditors and regular interrogation on discretionary spend in line by line analysis of bank statements.

Which brings us to the practicalities of the new regime.

Those wishing to avail of any of the new schemes will be obliged to make a full and frank disclosure of all assets and liabilities - similar to the present mortgage arrears standard financial statement. This exercise will have the objective of disclosing the applicant's net worth. Properties with any residual net equity value - the family home in some cases excepted - will likely be required to be disposed of as well as other liquid investments.

Secured creditors will have first call on any net assets at this point but, in the more likely even of a net deficit, attention will turn to the applicant's income.

At this point there is likely to be intense scrutiny of discretionary and lifestyle expenditure and this will be the key battleground in negotiations.

For the habits and expectations of the Celtic tiger era are unlikely to be cast aside without a fight. There is no question but that the stigma that traditionally attached to bad debtors has been hugely diminished in this country leading to a perverse culture of tolerance of default. Undoubtedly this has been exacerbated by anger towards the banking system that has depersonalised the effects of debt default on the wider economy: ultimately the Exchequer becomes everyone - and consequently no one.

But there are no winners here regardless of whatever way the balance of the burden is shared between debtor and creditor. Creditors are facing substantial write-offs. Debtors are facing bankruptcy or the prospect of five or six years of austerity in agreed post-write-off debt rescheduling programmes.

It remains to be seen how the discretionary spend issue is tackled. What, for example, will be an acceptable lifestyle for those accustomed to the high life be? The sheer amount of subjectivity on those involved is huge. Will debtors, for example, be obliged to take children out of fee-paying education? Dispose of personal heirlooms? Arrange alternative accommodation for elderly relatives in care?

On all sides, the pain starts here