The Blame Game
Wanting to blame somebody else for our own financial problems is an entirely predictable and human reaction, particularly in the current recession. There has been a huge growth in personal indebtedness in the last ten years, particularly mortgage debt and credit card debt.
If we want to allocate blame objectively, then we must consider the role of the three main parties who contributed to the problem: ourselves the borrowers, the lenders and the government. And if we want to find a solution to our predicament, we must look to the same three parties to contribute to the solution.
All we did wrong was to borrow more than we could reasonably and prudently afford to repay. We assumed that property values would keep increasing, that our income would keep increasing and that our employment was secure for the foreseeable future. All the lenders did wrong was to assume the same three things. As for the government, they were also optimistic that the good times would continue indefinitely and that light regulation would suffice, with the market controlling itself in terms of borrowing and lending.
As we now know, property values did not keep increasing, incomes have dropped and unemployment is rife. Lenders pushed the limits of prudence in relation to lending and regulation was not just light, it looked away as government buried its collective head in the sand.
Now, we are where we are and all three parties acknowledge their defective roles in the credit bubble which has led to the massive personal insolvency problems of the 21st century.
Seeking Solutions in Ireland
Solving these problems must also be a three way street. From the borrower’s point of view, getting out of debt depends on many factors: the amount of our personal debt; how much we earn; the value of our assets; our standard of living; our family living costs and even where we live. For people living in the Republic of Ireland, personal debt can be a life sentence. The bankruptcy laws are so outdated that very few people are bankrupted there anymore. The cost of bankruptcy is prohibitive and the procedure is rightly regarded as complex and bureaucratic. The option of an Individual Voluntary Arrangement is not available in Ireland either. Successive Irish governments have failed to act to provide such a solution fully twenty five years after it was introduced in the UK. There is some scope for optimism however. The new Irish government is regarded by most fair-minded commentators to be honest and free from corruption and to possess the competence and energy to address the issues of personal debt urgently. They are also lucky in that the Irish Law Reform Commission has recently published its final report on Personal Debt together with a draft bill which needs very little tweaking to be passed into law.
MABS & DMPs in Ireland
In the absence of such legislation being passed any time soon, the only real option available for the insolvent debtor in Ireland is to agree a debt management plan (DMP) with creditors. MABS, the government funded Money Advice and Budgeting Service, can provide advice and assistance in setting up such a plan. However, MABS lacks the resources to assist citizens on an ongoing basis to manage such a plan and it is unlikely that government will be able to afford to beef up MABS in the foreseeable future. After setting up such a plan, debtors are at the mercy of their creditors and depend on them acting with good will over many years – relying on the kindness of strangers, if you like.
Apart from MABS, a number of commercial specialist Debt Management providers have set up in Ireland and for a fee they offer DMP services. Such a provider can negotiate with creditors and make monthly payments to them on behalf of the debtor and on a pro rata basis. The debtor simply makes one affordable monthly payment and the provider distributes this money between creditors. The charge for such a service varies from one DMP provider to the next, so debtors should shop around to get the best value. There are downsides to a DMP. For a start it can last indefinitely and it would not be unusual for a DMP to last ten years. There is no guarantee that creditors will agree to freeze interest or penalties. Furthermore, creditors can take legal action against the debtor at any time. This is because there is inadequate legislation governing the operation of debt management plans. Creditors however can expect to recover all of the debts over time.
DMPs & Bankruptcy in the UK
While debtors living in England, Wales or Northern Ireland can also enter a DMP they also have further alternative options. Bankruptcy legislation in those jurisdictions has been simplified in recent years and an insolvent debtor can be discharged from bankruptcy in just one year, although he or she may be subject to an income payments order (IPO) for up to three years. Downsides in bankruptcy are that the bankrupt loses control of assets such as their house. For some, bankruptcy may spell the end of their careers. For many, the perceived social stigma of bankruptcy is a major issue, although in reality this is not as devastating as it was historically. The big downside for creditors is that bankruptcy provides a very poor return and they often receive nothing. In Scotland, sequestration is the name given to bankruptcy and the relevant legislation differs somewhat.
The IVA in the UK
English, Welsh and Northern Ireland citizens have a further legally controlled solution available to them in the form of an Individual Voluntary Arrangement (IVA). Some of the advantages are that interest and penalties on debts are frozen; the IVA will usually last just five years, although the term may be shorter or occasionally a little longer; the debtor avoids bankruptcy and will usually be able to keep their house and car although they might have to address any equity therein during the term of the IVA; creditors receive a much greater return for the monies they have lent compared to what they would receive in bankruptcy; all legal action is stopped and the debtor is debt free on the successful completion of the (time limited) IVA. There are downsides to an IVA also. Under the legislation the debtor must use the services of an Insolvency Practitioner (IP). Fees for these services are deducted from the monies the debtor contributes to repay creditors. However, your creditors will have agreed these fees up front so there are no surprises for the debtor or the creditors. While the five years term may seem long compared to the three years during which income payments have to be made in bankruptcy, it is considerably shorter than the usual duration of a DMP. If the IVA should fail during its term, creditors are again free to pursue the debtor for the full unpaid balances still owing and the protection enjoyed by the debtor while the IVA was running ceases. In Scotland a Protected Trust Deed is regarded as the equivalent of an IVA, although the relevant legislation differs somewhat.
Looking to Europe
Under EU insolvency legislation introduced in 2002 i.e. Council regulation (EC) No 1346/2000, it is possible for a debtor to seek and obtain a solution for personal insolvency in another member state of the EU. For example, an Irish citizen might be able to enter an IVA or petition for bankruptcy in England, Wales or Northern Ireland. To do this the debtor would have to be able to show that their ‘centre of main interests’ is in that other member state. The regulation states that ‘the centre of main interests’ should correspond to the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties’