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Daniel McConnell: Half-baked insolvency law lacks vital ingredients

'DEBT is the Irish crisis -- sovereign debt, banking debt and personal debt. We are dealing with the sovereign debt and the banking debt effectively. Now we are putting in place a legal basis to deal with the personal debt," Finance Minister Michael Noonan told reporters at the launch of the Government's new insolvency law last Wednesday.

After four years of bailing out our greedy banks by way of a €440bn guarantee and recapitalisations of over €70bn and bailing out the rogue developers by way of Nama to the tune of another €31bn, the ordinary man and woman finally got their bailout last Wednesday.

For a long time there has been a broad consensus that something drastic had to be done to end the suffering of thousands of people who as a result of job losses, negative equity and failed businesses, can no longer meet their repayments. It is right that those people should be helped.

However, in contrast to the positive press release-led coverage of the new laws so far, a reading of the full 164-page Bill reveals the many holes, limitations and failures contained in Alan Shatter's new insolvency legislation.

In countless sections in the Bill -- from those dealing with the structures of the insolvency, to staff conditions of employment, to the specific debt-resolution measures proposed -- specific detail is sadly missing or worryingly vague.

While the broad principles of the legislation merit support, it is in its present form a half-baked Bill which leaves too much power with the banks, fails to adequately prevent turning some compliant mortgage-holders into delinquents and leaves taxpayers badly exposed to many unintended consequences.

Critics of the Bill have said this weekend it either doesn't go far enough and won't end the bankruptcy tourism to the UK, or that it will encourage a potential rush of "strategic defaulters" looking to screw the taxpayer.

The new Bill proposes a State-run insolvency facility to allow people manage their debt, and it cuts the bankruptcy period from 12 to three years.

Voluntary debt settlement systems are included to aid struggling debtors avoid having to go to court to resolve their debt crisis.

Under the new Bill, there are three avenues open to people who are in debt before bankruptcy has to be considered.

Firstly, those unable to pay unsecured debt of up to €20,000 (credit card debt, car loans etc) will be able to apply for a debt relief certificate. If granted, their debt will be frozen for a year. If the person's financial circumstances haven't changed after that, and there is no prospect of any debt being recovered, it will be written off. A person can only get two certificates in their lifetime and must wait six years from the first one before they can apply for a second one.

However, this measure makes no real difference to the situation that exists in practical terms at the moment, according to leading

Dublin lawyer Barry Lyons, of Lyons Kenny solicitors, which specialises in this area.

"At present, people in this circumstance by and large have no assets, and no way of paying back. The creditor goes to court, looks at the judge, who looks back at them and says, 'there is no money here'. They shrug their shoulders and go away. You can't get blood from a stone, this certificate will change nothing," Mr Lyons said.

A second option, covering credit card and other forms of unsecured debt over €20,000, is the five-year debt settlement arrangement (DSA). This allows the individual pay off "an amount" of their loans, the amount to be worked out with the help of a personal insolvency trustee.

Who are these trustees?

"They can come from a broad range of people with different skills -- for example, accountants, lawyers. They are performing the role of financial intermediary," said Alan Shatter. Legal oversight in this area is not yet in place, Mr Shatter admitted.

This measure has come in for significant criticism.

"How can a system have any credibility when these so-called insolvency trustees from any walk of life can bring any wacky idea to the table? This could be a disaster and end up in court in many cases," said Angel Mas, president of Genworth Financial's European Mortgage Insurance operations.

However, it is the next element of the plan which is the most adventurous and the most controversial. The proposed personal insolvency agreement (PIA) covers both unsecured and secured debt, typically mortgage debt. The inclusion of mortgage debt is known to have been strongly resisted by the banks, is totally unprecedented in Europe and will have major implications for many thousands of distressed homeowners, laden with untenable mortgages.

A PIA will cover both unsecured and secured debt, over €20,000 and with a ceiling of €3m. Someone will only be able to apply for a PIA once in their lifetime and it will run for six years. A trustee will propose a deal to creditors and then oversee the repayment plan for the duration, but banks cannot be compelled to write off mortgage debt.

"Including secured [debt] in this has catastrophic implications for the credibility of the banking system," said Angel Mas.

"As a result of how this is structured, the 90 per cent of mortgages that are performing are in a way being incentivised to become delinquent. There is a huge moral hazard here, and it is the taxpayer who will pay in the end. The devil will be in the detail," he added.

In the PIA, 55 per cent of the unsecured creditors and 75 per cent of the secured creditors must agree to the plan. It is this voluntary element which has also come under criticism.

"The banks will not volunteer to write off debt, doing that is anathema to bankers because they can't. The balance of power in this thing remains with the banks, it doesn't help the debtor at all," Lyons said.

If all this fails, then the debtor's only remaining option is a judicial bankruptcy. While the headlines have said a person could exit from bankruptcy within three years, down from 12 years at present, those within the industry are deeply cynical this will happen.

"This is not three years, this is an eight-year bankruptcy process," added Lyons. "The terms and conditions attached are so restrictive, it will be an eight-year process for most."

As a result, he said, this will do little to stop the flow of people from Ireland going to the UK to declare bankruptcy, so as to be free of the process after a minimum 12-month period.

"My phones have been hopping and my advice to those who have considered going to the UK is to keep going at least until the terms of the Bill issue" Lyons added.

If the Bill is to be successful, critics like Lyons and Mas have said it will need a radical overhaul when it goes through the Oireachtas.

"The outcome of the process is not foreseeable at the moment, we need to see the mechanism for dealing with debt," Lyons added.

Fianna Fail's Dara Calleary broadly welcomed the report, but said the absence of compellability on the banks to play ball is something that needs addressing. "There are many good things in there, but we need to force the banks to engage properly if this is to work," he said.

Michael Noonan believes that such concerns are not justified as the structure of the Bill places a huge onus on the banks to negotiate with customers in debt.

"The bulk of the personal debt will be solved by negotiations. The presence of legal recourse will push lending institutions into voluntary solutions with people who can't pay back their debts," he said.

Mr Noonan also revealed last Wednesday that the banks have been forced by the Regulator Matthew Elderfield to engage in debt forgiveness on a "case by case basis". This is in stark contrast to the messages put out by him and other ministers last summer.

"The Government never set its teeth against debt forgiveness in any circumstance," he said. "But what we said was that one has to realise that if the bank AIB, which is wholly owned by the taxpayer, is to forgive people, then taxpayers will have to pick it up.

"What we said there wouldn't be debt forgiveness by diktat. There would be no general programme of debt forgiveness. We are, however, in favour of debt forgiveness on a case-by-case basis."

The truth of the matter is that Alan Shatter and Michael Noonan should be commended for proposing a Bill that in some ways is genuinely innovative in trying to end Ireland's debt crisis.

However, one can only be concerned at the lack of clarity on the key issues such as moral hazard.

Mr Mas reckons the Irish taxpayer could be asked to take a hit of anything up to €20bn if people who are currently paying their mortgages decide they no longer want to continue paying.

As in the cases of the bank guarantee, bank recapitalisations, paying back bondholders and Nama -- the taxpayer has time and time again been asked to cough up to pay the debts of others. Before this Bill becomes law, the Government must ensure that doesn't happen again.

Sunday Independent