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Drowning in debt, but there's too few life jackets to go round

Last month the Government finally published its long-awaited plans to reform Ireland's antiquated personal insolvency legislation.

The new Personal Insolvency Bill proposes a number of reforms designed to help borrowers -- including both those with secured loans, i.e. mortgages, and unsecured loans, which they are unable to repay in full -- to either write off their debts or reduce them to manageable proportions.

For borrowers with unsecured debts such as bank overdrafts, personal loans, car loans and outstanding credit card balances, the Bill introduces two new debt resolution mechanisms.

For borrowers with unsecured debts of less than €20,000 "with no assets and no income and who are insolvent and have no realistic prospect of being able to pay their debts within the next five years" there will be debt relief notices.

The eligibility criteria for debt relief notices have been drawn extremely tightly. Only those with a "net disposable income" of less than €60 per month after "reasonable living expenses" have been deducted will qualify.

It's not quite the workhouse but neither is it the lap of luxury.

Once the debt relief notice has been issued the debtor will be subject to a three-year "supervisory period" during which he or she must notify the new Personal Insolvency Service, which will be established under the terms of the bill, of any "windfalls" over €500 or any other change in their material circumstances.

Borrowers with unsecured debts of more than €20,000 will be able to apply for a debt settlement arrangement.

While those who qualify for a debt relief notice at least get their debts fully written off, those condemned to debt settlement arrangements won't even have that consolation.

Their debts will be written down, subject to the agreement of 65pc of their creditors by value, rather than written off.

If their creditors agree to a debt settlement arrangement, the unfortunate borrower will then spend at least the next five years, a period that can be extended to six years, repaying the reduced amount which he or she owes their creditors.

For the borrower the main advantage of a debt settlement arrangement is that the family home is protected.

For borrowers with secured debts of up to €3m there will be personal insolvency arrangements.

Once again these require the approval of 65pc of all creditors and the borrower will be subject to very tight restrictions for at least the next six years, a period which can be extended to seven years, while he or she repays the reduced debt.

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Finally, for those who have no option but to file for bankruptcy, the bill also proposes reducing the restriction period on undischarged bankrupts from the current punitive 12 years to just three years.

While the reduction in the restriction period is welcome it still compares unfavourably with the 12-month restriction period endured by undischarged bankrupts in the UK.

Not surprisingly, many heavily indebted Irish builders and property developers are opting to file for bankruptcy in the UK rather than in Ireland (see panel).

To supervise these new insolvency arrangements, which have been described by one expert in the field as "bankruptcy-lite" a new Personal Insolvency Service will be established. Borrowers will only be able to apply once in their lifetimes for either a debt relief notice, debt settlement arrangement or personal insolvency arrangement.

Anyone subject to a debt relief notice or debt settlement arrangement must notify lenders of the fact if they apply for more than €650 of credit, while anyone still subject to a personal insolvency arrangement must notify lenders if they are seeking to borrow in excess of €1,000.

Launching the Bill, Justice Minister Alan Shatter said that it would "provide a modern insolvency process in Ireland which addresses the obligations of debtors and the rights of creditors in a proportionate and balanced way".

According to Mr Shatter, "the new personal insolvency laws will provide a significant incentive for financial institutions to develop and implement realistic agreements to resolve debt issues with their customers".

Others begged to differ. Independent TD Shane Ross claimed that the banks had had "an absolutely unacceptable input" into the drafting of the Bill.

Fellow Independent Finian McGrath also expressed his doubts about the Bill, describing it as "convoluted and complex".

So did the banks nobble the Personal Insolvency Bill to the detriment of debtors? There is definitely some circumstantial evidence to support this view.

The Bill is very much the child of the December 2010 Law Reform Commission report on personal debt management and debt enforcement.

In its report, the commission recommended that the approval of 60pc of creditors by value should be required before debtors could avail of the new debt resolution mechanism.

The report also recommended that the supervisory period for debt relief notices be just 12 months.

The fact that the creditor approval threshold was raised to 65pc in the Bill published last month and the supervisory period for debt relief notices was lengthened to three years has inevitably led to speculation of dirty dealings at the crossroads.

"It will only work if 65pc of creditors agree. That is a real problem. One creditor with less than half the debt can block agreement. You can put in all the work into a debt settlement arrangement and then you are stuck.

There is no appeal", says Noeline Blackwell, the director of FLAC -- the Free Legal Advice Centres.

In practice, the 65pc approval threshold gives the banks an effective veto.

However, some of the other provisions of the Bill, particularly the reduction in the current 12-year restriction for bankrupts to just three years, do provide debtors with some leverage. If a bank plays hardball with a debtor he or she will now have the option of filing for bankruptcy instead, Ms Blackwell believes.

The recession has led to a massive increase in the number of people seeking help and advice on their debts.

At FLAC the proportion of people contacting the organisation who are experiencing problems with their borrowings has increased from less than 3pc of the total in 2007 to almost 12p in 2011.

In fact, the underlying increase may be even greater as, according to Ms Blackwell, the problems being experienced by many of those who contact FLAC for other reasons have been made worse by their financial difficulties.

MABS, the Money Advice and Budgeting Service, is also experiencing a sharp rise in the demand for its services. Since the recession started there has been a 50pc increase in the number of people contacting it for advice about their financial problems.

Michael Culloty, MABS's national development officer, cautions against adopting a punitive approach to debtors.

"Employment levels were very high. People had bank accounts, they had credit available to them. They could afford those financial commitments given the incomes they were earning. What we are dealing with here is a systems failure, not a moral failure", he says.

Mr Culloty is highly critical of the income limits which will be imposed on those applying for the new debt resolution mechanisms, particularly the €60 per month ceiling in the case of debt relief notices.

While Mr Culloty and Ms Blackwell have reservations about certain aspects of the Bill, solicitor Barry Lyons, who specialises in the insolvency field, believes that, as currently constituted, the Government's proposals won't work.

"The process has got to be transparent. The outcome has got to be foreseeable. The draft legislation is going to guarantee one thing. It is destined not to succeed", he says.

"The approval threshold [for creditors] is too high. The banks' stated position is that there will be no debt write-offs. The banks have a veto.

"Nothing in this Bill changes that. Unless some way is found to lift the veto, it [the Bill] is not going to work."

So if the current insolvency legislation is so archaic and its proposed replacement so unsatisfactory, what is Mr Lyons' advice to borrowers with debts that they can't hope to repay?

"I would tell them to go to England [and file for bankruptcy in the UK]", he says. "People have come to me since the Bill was announced and I have had to say, 'I can do nothing for you'. It's a fool's errand, not fit for purpose. It's very disappointing".

So with most of those labouring at the insolvency coalface expressing their doubts, is the Bill doomed to fail? Perhaps in its current form, but only very rarely does the draft Bill pass unchanged into law.

While Mr Shatter has expressed the hope that his proposals will have been enacted into law by November, the minister may have to accept many amendments between now and then.

"What you see published is often very different from what goes onto the statue book", observes Mr Culloty.

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