Attitudes to Insolvency in Ireland
It is interesting to look at the current attitudes to personal insolvency in Ireland as the third anniversary of the passing into law in December 2012 of the Personal Insolvency Act 2012 looms. Looking back now, it seems apparent that the low take up by insolvent debtors of the three new solutions offered i.e. DRN, DSA and PIA and indeed of the more debtor-friendly bankruptcy regime introduced, is attributable to several factors: real or perceived flaws or deficiencies in the legislation, the hardened attitudes of creditors particularly to the treatment of secured debt, the attitudes of debtors particularly to the real or perceived stigma associated with personal insolvency and the unfavourable contrast between the Irish solutions particularly bankruptcy to the insolvency regime in the UK including Northern Ireland.
Secured debt versus Unsecured debt
Looking at the debt scenario in Ireland, it seems clear that the problem of secured debt far outweighs that of unsecured debt. That is not to say that that there is not a problem of unsecured debts in Ireland – far from it - but if contrasted with the situation in the UK, the preponderance of personal insolvency problems in Ireland relates mainly to secured rather than to unsecured debts and in particular to the incidence of unsustainable mortgages.
Some of the flaws and deficiencies in the Irish laws have already begun to be addressed – the dropping of fees for protective certificates for example.
Two other proposed changes are to reduce the bankruptcy discharge period from three years to one year and to provide an appeals process whereby debtors whose PIA has been rejected by creditors can appeal to court on the grounds that the rejection was unreasonable
e.g. where the PIA offered creditors a better return than would be available if the debtor was to petition for bankruptcy or be forced into it.
There could be other grounds for appealing rejections of PIAs to court. Unfortunately, the delays in making these desirable changes to the insolvency process in Ireland seem to take forever given the time needed for legislation to be drafted and passed into law, the time required for rules of court to be amended, and the time taken by ministers to make ministerial orders for ‘commencement’ of new or amended legislation. In summary, the ‘law’s delay’ is as relevant today as it was when Shakespeare penned those famous words.
The solution statistics
In the almost three years since the Personal Insolvency Act 2012 was passed into law there have been only 1,463 arrangements accepted: 522 DRNs, 280 DSAs and 661 PIAs. Whose fault is that? Apart from the factors above, attitudes of creditors to proposals for DSAs and PIAs are generally deemed to be a major cause of rejections with acceptance rates of only 85% of DSAs and 73% of PIAs.
Creditors and PIAs
There is a considerable variation in creditors’ attitudes to proposals for PIAs particularly in relation to secured debt. Typically a PIA will involve proposals to deal with the debt relating to the debtor’s Principle Private Residence or PPR which will often though not always be in negative equity. The PIA applicant usually has insufficient surplus income available to pay the contractual monthly mortgage payment when allowance is made for the reasonable living expenses of his or her household. There may also be a considerable amount of arrears accrued on the mortgage account. Apart from the mortgage the debtor may also have payments on unsecured debts such as credit cards, loans and overdrafts which they are unable to service fully or at all.
In such a case, the PIA will usually include provisions for dealing with the mortgage so as to allow the debtor to retain the PPR.
For example the proposal may be to split the mortgage into two or three parts. For example suppose the property is valued at €180,000 and the mortgage balance including capitalised arrears is €320,000 giving a negative equity balance of €140,000. The proposal might suggest splitting the mortgage into a live mortgage of €180,000, a warehouse account of €80,000 and a write-off of €60,000.
The PIA proposal might provide for the debtor to repay both capital and interest on the live mortgage balance of €180,000 at the current contractual interest rate or it might suggest an alternative interest rate for the remaining term of the mortgage. It might perhaps also propose a limited extension to the mortgage term. The amount of the mortgage repayment would be set at a level that would permit the debtor to retain some disposable income in order to contribute a monthly amount towards the PIA that would go towards providing a dividend to the unsecured creditors and to pay the costs of administering the PIA over the normal six years term.
The warehouse account would have a frozen balance (due to the creditor) of €80,000 and attract an interest rate of 0%. This debt would be addressed only on the sale of the property or on the death of the borrower(s).
The amount of secured debt proposed to be written off can vary from nothing to a quite substantial part of the total mortgage debt and in this illustrative example is set at €60,000. This amount would be added to debts owed to the other unsecured creditors and would rank for dividend equally with those unsecured creditors. The mortgage provider receives nothing other than this dividend in respect of this ‘written-off’ debt.
The key requirement for such a PIA to be feasible is that the restructured mortgage be sustainable both for the proposed term of the PIA, usually six years as well as for the remaining term of the mortgage, whether extended or not. In other words, the debtor needs to be able to afford to pay the revised or restructured mortgage payments i.e. to be returned to solvency.
The trouble is that the mortgage provider can reject perfectly good PIA proposals where the return to creditors is markedly better than if the debtor were to be bankrupted. There is considerable variation between different creditors in their attitudes. Certain mortgage providers will not countenance debt write off on secured borrowings in any circumstances and have stated this clearly and unambiguously in the public domain including in response to questioning by the Public Accounts Committee of An Dail, regardless as to whether the proposed PIA returns are better than returns in bankruptcy or not. The inconsistency as between different creditors must be considered by the debtor and his or her PIP before putting forward proposals for a PIA. The acceptance rate for PIA’s (currently it stands at 73% since inception of the process) would be much lower but for the fact that many PIA proposals do not even see the light of day, given that failure to be accepted is pre-ordained and they are dead in the water before birth, killed by creditor attitudes. This is the biggest nettle that government must grasp if the insolvency regime in Ireland is to start moving at an acceptable rate.
Article written by: Paddy Byrne