Monday 19 March 2018

Stigma of bankruptcy is fading with new laws

STIGMA: Tom Courtenay as William Dorrit, the longest serving inmate of the Marshalsea Prison for Debt, from the TV series ‘Little Dorrit’. Photo: BBC/Mike Hogan
STIGMA: Tom Courtenay as William Dorrit, the longest serving inmate of the Marshalsea Prison for Debt, from the TV series ‘Little Dorrit’. Photo: BBC/Mike Hogan
Jerome Reilly

Jerome Reilly

THE historic stigma of being declared a bankrupt is fading by the day. After spending years trying to keep their heads above water, many in deep financial distress believe bankruptcy is now the only option.

And the process is relatively straightforward.

In simple terms this is what happens:

The person in debt goes to a personal insolvency practitioner (Pip) or an mortgage arrears agency who will examine if the debtor is eligible for bankruptcy or, instead would be better off agreeing to a personal insolvency arrangement.

To be eligible for bankruptcy there are three main criteria.

First, debts must exceed assets by more than €20,000.

Second, that the person is unable to pay their debts as they fall due.

Third, the client must have tried -- as far as circumstances allow -- one of the personal insolvency arrangements.

If your meet these criteria, the process is uncomplicated.

The bankruptcy process begins with a consultation with your Pip or adviser who will explain the ramifications of bankruptcy.

A form is sent out in the post. This 'statement of affairs' form is quite simple and nowhere near as complicated as the standard financial statement used in the insolvency process .

It is a document where the debtor sets out what they owe, what they have in assets and what they earn.

Based on this form, the adviser draws up another simple document called a bankruptcy petition. This is supported by an affidavit sworn by the debtor basically confirming that all the facts in the petition are true.

These papers are lodged in the Office of the High Court. The court then sets out a date for a judge to hear the case.

Typically, if a petition was lodged last week in the High Court office, then the hearing -- which should last five minutes -- will be sometime in January.

The debtor proves his liability is €20,000 more than the value of his assets.

The debtor tells the court they can't meet their debts and proof is provided by a letter from the adviser asserting the debtor has made efforts to come to an insolvency arrangement.

After this hearing you are now adjudicated a bankrupt.

Two things happen. First, all debts are written off immediately. Second, the debtor's assets are transferred to the official assignee -- the court-appointed arbitrator whose job is to ensure an even distribution of leftover assets or money to the different creditors.

The debtor then meets an official from the office of the Official Assignee who examines their affairs including income.

Another court hearing called the statutory hearing is then arranged. Creditors are "party" to this hearing. In other words, they are told the hearing is taking place and can make an application to the judge if they so wish.

If they believe the debtor has been untruthful and has €5m secretly squirrelled away in a foreign bank account, this is when they can raise this issue.

In the vast majority of cases the reality is that the statutory court hearing merely rubber stamps the bankruptcy.

The official assignee then looks at your income.

If the bankrupt debtor has excess income, they will pay the official assignee a certain amount of that excess income cash for a period of not more than five years. The official assignee then distributes this extra income among the creditors as he sees fit.

But what is extra income? Basically it is any income over and above that required to meet the minimum standards of living guidelines published last year as part of the insolvency legislation.

In practice, if the bankrupt person has a family with a number of children and is perhaps living in Dublin, the bankrupt could be earning in excess of €70,000 a year and still be well below the guidelines and therefore have no extra income to be taken by the official assignee.

When you go into bankruptcy all your assets including property goes into the pot of the official assignee.

If you have a buy-to-let property in positive equity (value of the house worth more than the mortgage) that is something the official assignee can take and sell and distribute any "profit" among your creditors.

For most people this doesn't arise, because the properties are in negative equity and therefore the official assignee has no interest in them.

He will probably sell or hand over buy-to-lets to the lender.

In relation to the family home, official assignee Chris Lehane has repeatedly said he wants to keep people and families in the family home.

The example he has been using is that if the husband goes bankrupt, he wants the wife to buy out the husband's interest.

In the event the property is in negative equity, the official assignee has come up with a figure of €5,000 to buy out the husband's interest and so take the family home out of the bankruptcy process.

That €5,000 could be paid over a period of time.

In the event that the family home is in huge positive equity, it is not inconceivable that he will ask the bankrupt to "trade down", but this would be a last resort.

Mr Lehane, as stated in several interviews, says that he is not interested in family homes except in those rare instances of valuable trophy homes with significant positive equity.

Jerome Reilly

Irish Independent

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