Marie Sherlock: The long awaited heads of the Draft Personal Insolvency Bill was published today and at first glance, there is much to welcome.
For too long Ireland has stood far behind most other advanced industrial countries in not having a non-judicial framework in place to address contemporary problems of over- indebtedness, but Ireland will now move ahead of the curve by including not only unsecured, but also secured, typically mortgage debt in the new debt settlement institution. The problem of addressing the debt overhang problem could only ever be achieved by adopting a holistic approach to all forms of debt currently borne by Irish households, and I’m glad to say that today’s draft is a vital first step in the right direction.
There are three new forms of non-judicial debt resolution proposed (i) debt relief certificates to cater for unsecured debt under €20,000, (ii) debt settlement arrangements to cater for unsecured debts over the value of €20,001 and (iii) personal insolvency arrangements which will cover unsecured and secured debt up to a value of €3m.
Ultimately, it would seem that the success or failure of the non-judicial system to function as a less costly, more effective and more humane system for dealing with the problem of over-indebtedness in this country, will rest on five key measures.
The first is that debtors wishing to enter a non-judicial process will have access to appropriate advice and representation. The draft bill sets out clear guidelines for each of the three debt resolution processes on how the intermediary (for the debt relief certificate) or personal insolvency trustee (for the debt settlement and personal insolvency arrangements) will advise the debtors and mediate in the debt resolution process.
The only concern is that debtors should not be saddled with excessive costs for this service, but the draft bill states that other the initial fee, the debtor will not have to bear the costs of the process. There is some mention that the Insolvency service will “recover costs”, but does not state from whom. I would firmly share the view of the Law Reform Commission which was set out in their 2010 Report on Personal Debt Management in Ireland that the State should not be made bear these costs (for a task that if the Banks were doing correctly, there would be no need for these new processes) and that the creditors should be held liable.
The second key measure will be the success in forcing the banks to the negotiating table. There is some concern that the banks have an effective veto over their participation- the personal insolvency process depends on the agreement of 75% of “secured” creditors- which is typically the mortgage lender. Given what we know about the practises of some lenders in this country and that some 50% of those mortgages in arrears are with banks outside the “covered” institutions, there is a danger that some mortgage lenders will not engage. However it must also be noted that failure to participate in the non judicial process will be factored into consideration in the awarding of costs if a bankruptcy petition goes to the Courts.
The third measure is that a decent minimum level of income must be established for households who enter any of the three non judicial processes and to its credit the draft heads of Bill is very clear on this. But the detail has yet to be ironed out and will be set out by way of ministerial regulation. Imposing a new repayment schedule in a debt settlement/insolvency arrangement should not have the effect of forcing more households into a dependence on social welfare. Already, we have seen that the availability of the mortgage interest supplement has become an implicit subsidy to the Banks, while helping households’ repay some of their mortgage. The Social welfare system and the State must not be made take on any more of the costs of resolving the problems of the banks.
Fourthly, keeping people in their homes, where it is viable to do so will be a key measure of success, so that additional pressure in not loaded on an already over-subscribed social housing waiting list. Remember that as of the end of September 2011, over one in eight mortgages held in this country were either in arrears or had pre-empted arrears by restructuring the mortgage schedule or payment. Personal insolvency will not necessarily result in an individual having to surrender their home and the Bill details how the recommendations of the Keane report on mortgage arrears published last October, must be considered as part of the range of options for the debtor in terms of split mortgages, mortgage to rent and trade down mortgages, even though these proposals are not without their problems in terms of broad assumptions on rising incomes and increasing house values.
In terms of the balance sheet implications for the banks, the draft heads of bill specifies that no write down can be below the current value of the security, so if the bottom up stress testing exercise undertaken by Blackrock was done correctly last Spring, then the corresponding negative impact of a write down on the Bank’s balance sheet should be limited to the rolled up and future interest payments.
On a final note, this legislation has been long overdue but support for its introduction has taken time to gain traction and support, with plenty of doomsayers talking up the risks of moral hazard. Indeed, I remember sometime in late 2008 doing an radio debate against a certain economics professor from NUIG before he took up the role of Special Adviser to the Minister for Finance and was dismissed out of hand when putting forward our (hardly radical) proposals for distressed mortgage holders! But back to the draft heads of Bill, provision has been made for reform of the judicial bankruptcy procedures with the reduction in the discharge period from 12years down to 3years which opens up a significant difference in the discharge period between the judicial and non judicial procedures. Non judicial personal insolvency has a discharge period of 6-7 years. The terms of discharge for a bankrupt appear to be much more onerous, with 50% of all preferential creditors to be paid and a possible extension of the discharge period out to 8 years.
On a superficial level, the lack of a level playing pitch between the discharge periods for these two processes may appear unjust to a public dissatisfied with the pace in which delinquent bankers are being pursued and uneasy about salaries of €200,000 paid to developers co-operating with Nama. The Government will have a significant job to do in communicating its reasons for the distinction.