Going for broke
Through the ages, societies have made provision to deal with personal debt in various ways. John Phelan looks back at ten years of personal insolvency law in Ireland.
In ancient Babylonia, the Code of Hammurabi permitted an insolvent debtor to be sold into slavery until his debts were cleared.
Roman law, as found in the Twelve Tables, decreed that a creditor could personally imprison a debtor for 60 days, after which time, failing to reach an arrangement, the debtor would suffer capital punishment or be sold abroad.
Closer to home, Brehon Law (in the form of the troscead, or ‘fasting upon’) provided for the person who was owed money to spend a period of time without food outside the house of the shamed debtor, until the debt was paid or the debtor gave a pledge to pay.
Up until 2011, Ireland had only one mechanism in contemporary law to resolve personal insolvency. That was bankruptcy under the Bankruptcy Act 1988. That form of bankruptcy was still quite severe and, save for some technical mechanisms, such as coming to a composition with creditors, a person adjudicated bankrupt could ordinarily expect to die a bankrupt.
Crash, bang, wallop
In 2008, the year of the global financial crisis (epitomised in Ireland by a liquidity and solvency crisis in credit institutions and a severe crash in the property market), there were just eight adjudications for bankruptcy.
Against the backdrop of huge increases in the levels of personal debt in Ireland, the Law Reform Commission published a report on Personal Debt Management and Debt Enforcement in 2010. The report contained proposals for a draft Personal Insolvency Bill and an outline scheme of amendments to judicial bankruptcy legislation.
It formed the basis of the Personal Insolvency Act 2012, signed into law at the end of 2012. With the goal of providing a fresh start for people in debt, this groundbreaking legislation introduced three new statutory solutions as alternatives to bankruptcy. Each solution is available to a person only once, and the appropriate solution will depend on a person’s circumstances.
The first solution is a ‘debt-relief notice’. This solution is for people who have a low income, few assets, and debts of less than €35,000 that they cannot repay. A debt-relief notice lasts for up to three years, after which time the debts named in the notice are completely written-off. The debtor is not required to make any payments unless their financial situation improves during the term.
The second is a ‘debt-settlement arrangement’. This can last for up to five years and addresses unsecured debt, such as credit cards, loans, and overdrafts. Under the debt-settlement arrangement, a person agrees to repay a percentage of his or her overall debt that he or she can afford, normally in monthly payments over the term of the arrangement. At the end of the arrangement, the remaining unsecured debt is written off.
The third is a ‘personal-insolvency arrangement’. A personal insolvency arrangement is an agreement between the debtor and his or her creditors to enable the agreed settlement of secured debt up to €3 million – although this cap may be increased with the consent of all the creditors who have security.
It can last up to six years, though the average term in reality is less than two years. Designed to address the issue of long-term mortgage arrears, it is an unusual solution, in that it enables the inclusion of secured debts, a feature not commonly seen in the insolvency frameworks of other jurisdictions.
Applications for debt-relief notices are taken by approved intermediaries, such as the Money Advice and Budgeting Service (MABS). For the other two arrangements, the intermediary is a personal-insolvency practitioner.
Under new management
The Personal Insolvency Act 2012 provided for the establishment of a new independent statutory body – the Insolvency Service of Ireland – to administer the arrangements and to oversee the operation of the legislation. The service was established ten years ago, on 1 March 2013.
Once established, the service moved quickly to authorise a network of personal-insolvency practitioners around the country. These practitioners are key to the operation of the system.
They meet with the person in financial difficulty, collect all the factual information on their debts and their overall situation, propose an arrangement to creditors, and hold a meeting where creditors vote on whether to accept the arrangement. Many practitioners are also accountants or solicitors – both desirable skill-sets to have in this role.
The Insolvency Service worked with all stakeholders to establish standard protocols for the debt-settlement arrangement and the personal-insolvency arrangement. These protocols comprise a standard form for presenting a proposal for an arrangement. They also contain standard terms for an arrangement, covering matters such as what happens where the debtor holds assets that are to be sold, or where the debtor needs to take a break in their payments?
Another element of the framework is the publication by the Insolvency Service of guidelines on a reasonable standard of living and reasonable living expenses. Following weeks of speculation and controversy on what they might contain, the first set of guidelines was published on 18 April 2013.
Ten years on, the guidelines are a well-established and universally accepted part of personal insolvency. They help a personal-insolvency practitioner to propose a sustainable arrangement, and they provide assurance to the person enter-ing the arrangement that he or she will be protected and enjoy a reasonable standard of living over the term of the arrangement.
Communication breakdown
One of the biggest challenges for any new or relatively new agency is coming to the attention of the people who need to know about you. This is especially true in the information age, where ‘narrowcast’ has replaced broadcast, and we have so many things competing for our attention.
The Insolvency Service runs a communications campaign over the course of each year, with a mix of TV, radio, digital, video-on-demand, out-of-home, print and social-media. In addition to advertising, it also has a debtor-focused website (backontrack.ie) that was revamped last year to make it as simple and user-friendly as possible.
It has ‘decision trees’ to guide people to the options most appropriate for them, based on their circumstances, as well as stories and experiences of people who have availed of the different insolvency solutions. There is a handy calculator to let people see what their reasonable living expenses would be if they entered an arrangement.
Bankruptcy was mentioned at the beginning, so it is only right to note that, within the last decade, the administration of the functions of the official assignee in bankruptcy was brought within the Insolvency Service – and the term of bankruptcy was reduced initially to three years, and then to just one year.
Unlike the old days, where bankruptcies were almost always on the back of a creditor petition, nearly nine out of every ten bankruptcies now are self-petitioned. Bankruptcy is the fourth personal-insolvency solution – there for cases where one of the other arrangements is not suitable or cannot be made to work.
Apart from the significant reforms to bankruptcy, the single biggest change to the personal-insolvency framework over the last ten years occurred in 2015, when amendments to the legislation permitted a debtor to seek a court review in certain circumstances where creditors turn down a proposal for a personal-insolvency arrangement.
Intended to bring an end to the so-called ‘bank veto’, these ‘section 115A’ reviews have seen a large number of cases come before the courts, creating a new field of personal-insolvency jurisprudence. Court judgments have brought clarity to the operation of the legislation, and the most significant judgments are on the corporate website of the Insolvency Service. Personal insolvency has become an expanding and exciting field of law.
Behind the scenes
On the corporate tenth birthday of the Insolvency Service of Ireland, some things look quite familiar, but the appearance of familiarity hides significant changes behind the scenes. Family-home mortgages in arrears over 90 days have come down from a peak of 12.9% in September 2013 to 4.3% now.
Fewer accounts are in arrears, but the arrears on many of the residual accounts are long term. As time passes and people get older, the options available narrow. These cases are accepted to be hard to reach and hard to treat.
A number of credit institutions have exited the Irish market, selling their loan books as they went. The credit institutions that continue to operate here have significantly divested themselves also of loan books. The change in ownership of many mortgages has been dramatic.
Three in four mortgages in arrears are now held by funds rather than banks. The Insolvency Service conducts regular engagement with creditors and has, for years now, engaged with funds as their holdings grow and their importance to the personal-insolvency framework increases.
After the threat of the pandemic to national health, and the economic supports introduced to counteract its effects, it seemed that things might have gone back to normal. Instead, the Russian invasion of Ukraine, inflation, global supply-line difficulties, and resulting cost-of-living increases see clouds continue to darken the skies. Unlike when the global financial crises hit, this time around Ireland has a modern system of personal insolvency fit for whatever challenges lie ahead.
If you come across a client – or indeed anyone – who might benefit from the solutions we offer, please encourage them not to ignore it. Help is available, and there is a way out of financial difficulty, no matter how bad the situation may seem. What we see, time and time again, is the sense of relief a person feels once they ask for help and begin to take control of their situation.
Over the decade we have been in existence, our objective in everything we have done is to help people who are in genuine distress, to restore them to solvency, and to allow them their dignity as they move out from under the financial burdens they bear. That is what we will continue to do.
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John Phelan
John Phelan is head of regulation, policy, and corporate affairs at the Insolvency Service of Ireland. This article has been reviewed by Liza Doyle, solicitor and legal advisor to the Insolvency Service since 2013.