Personal Insolvency: New Bill has much to prove

December will bring up the second anniversary of the EC-EU-IMF “troika” deal that marked the official surrender of our economic sovereignty.

Though an ignominious chapter in our history, the programme mandated by our new masters certainly contains many much-needed reforms that might otherwise have proved beyond the capacity or willingness of our political class to implement.

One such critical reform is that of our personal insolvency laws. Following the bursting of the economic bubble, the situation of many of our citizens is – to put it mildly – urgent.

Until this summer, when the details of the Personal Insolvency Bill were published, literally thousands of struggling individuals and families had been waiting to see how far its provisions might go to help relieve their situation – the “can’t pays”. In parallel with the genuine hard cases there is also undoubtedly a large constituency of less scrupulous people who have been scrutinising the text line by line for an easy exit from their debts. These are the “won’t pays” who have strategic mortgage default top-of-mind.

Throw the legitimate interests of creditors into the mix and it becomes clear that the drafting of the legislation must have been an extraordinarily difficult and delicate task. Regrettably, in spite of the best intentions of the legislators, the shortcomings are many.

If one wants to get a sense of the potential of the new regime a logical place to start is to compare the situation with that of the UK, which has its equivalent Individual Voluntary Arrangement (IVA). Conditions in Ireland are now very similar to those that have prevailed in the UK with high levels of consumer debt, a pent-up demand for debt relief and a strong desire to maintain home ownership. In addition, the Personal Insolvency Bill contains changes to the bankruptcy regime that would make it more difficult to make an individual bankrupt and so there should be some incentive for banks and other creditors to facilitate arrangements.

Indeed, based on the England and Wales experience, StubbsGazette’s estimate is that annual demand for the various arrangements in the legislation could reach 7,000. Irish government estimates are for an initial 15,000 in immediate need of joining a scheme. There would also, according to the Department of Finance, be a further 5,000 per annum availing of the new regime thereafter. This seems reasonable: the fact that there appears to be no momentum towards establishing a Central Credit Register in Ireland means that a fundamental, systemic state of over-indebtedness will persist, further underpinning demand in the longer term.

But, on the face of things, there are two giant obstacles to the successful working of the new Bill.

The first relates to the creditor veto. Under the proposed new regime the agreement of at least 65 per cent of creditors is necessary for a scheme to proceed. This threshold is favourable compared to the UK where 75 per cent agreement is needed but in that country there is far more diversity in terms of creditor spread per individual debtor. In Ireland the concentration of debt in a single creditor – typically a mortgage provider – is an obstacle to scheme agreements in many instances. And even where arrangements happen it is possible that banks will come in at a late stage with a counter-offer to scupper the deal.

Likewise, under current provisions, the debtor must previously have tried to engage the bank and only then can they engage a personal insolvency practitioner (PIP). In the area of secured debt they must have been through the Mortgage Arrears Resolution Process (MARP) for six months before the PIP can take over.

The next big obstacle is the fees to be paid to the PIP. There are no provisions in the current Bill in this respect. Given the amount of up-front work, those who might be interested in becoming PIPs are adamant that anything less favourable than the UK model could not be countenanced on a commercial basis. On that basis direct payment would come from current creditors and indications are that banks are very loath to agree any payment in advance of work being done. A regime where fees are largely agreed through negotiation with unwilling creditors could be lethal for the process.

But while technically there may be grounds for pessimism, there are reasons to believe that a workable solution will evolve: banks are already engaging in informal arrangements with debtors.

Banks in particular will have to be politically realistic. The government has invested much political capital in the proposed new regime and has left some hostages to fortune with the predictions concerning take-up. With AIB and Anglo under state control there will be political pressure from the Department of Finance for the new regime to succeed for those institutions in particular.

Present customer behaviour is also a factor. Anecdotal evidence is that unsecured debt is being been prioritised by debtors over secured, so credit card companies and credit unions, for example, are being paid in preference to mortgage suppliers, as customers realise that in the short term the balance of power lies with the unsecured creditors. Indeed, unsecured creditors have been proactive in this regard and are doing deals where they have identified that individuals are missing mortgage payments. Meanwhile, credit unions are deducting directly from public servants’ salaries. These activities act as an incentive for banks to agree to schemes.

But there are still massive unknowns. For instance, it is unclear who will be allowed to practice as a PIP and who will regulate the industry. The requirement that a debtor in a scheme should have a “reasonable standard of living” is another key unknown variable with no clues in the Bill as to what constitutes reasonable living expenses.

In the UK, people resort to an IVA to protect equity in the home but the boom/bust conditions in Ireland mean that there may be less – or even negative – equity in homes of prospective scheme candidates. Against that, there is a strong cultural attachment to the home in Ireland.

Only time – and possibly several redrafts of the Bill – will tell whether the forthcoming Act will deliver on its promise of a new page for the economy and its hopelessly indebted citizens.