It’s a question many of us ask ourselves particularly in the current recession. There has been a huge growth in personal indebtedness in the last ten years.
Most people feel that credit cards are largely to blame but in reality the blame must lie with those of us who borrowed too much money and the credit industry which extended too much credit to us. Neither borrowers nor lenders paid sufficient regard to our ability to repay our debts.
Getting out of debt depends on many factors: the amount of our debts; how much we earn; our assets; our standard of living, our living costs and those of our family. Where we live might also be a factor. Some jurisdictions have what might be described as ‘debtor friendly’ processes and procedures for people who unfortunately find themselves unable to pay their bills or to repay their debts as they fall due. Other jurisdictions are in the process of developing and enhancing their solutions for people who are personally insolvent. Take the Republic of Ireland as a case in point.
Getting out of debt in Ireland
Until recently, getting into serious debt in Ireland could turn out to be a life sentence. The bankruptcy laws were so outdated that very few people were bankrupted there. The discharge period was at least twelve years. The cost of bankruptcy was prohibitive and the bankruptcy procedures were complex, bureaucratic, impracticable and essentially unworkable. The option of an Individual Voluntary Arrangement or IVA was not available in Ireland either. Successive Irish governments had failed to act to provide such a solution fully twenty six years after it was introduced in the UK via the Insolvency Act of 1986. The UK later introduced and expanded another personal insolvency solution for debtors with low levels of debts, low income and few if any assets. That was the Debt Relief Order sometimes described as the ‘poor man’s bankruptcy’, a somewhat unfortunate phrase given that any debtor who is faced with bankruptcy can hardly be described as rich!
So what has changed in Ireland?
Well, quite a lot! The coalition government enacted the Personal Insolvency Act 2012 which introduced three totally new solutions for the personally insolvent and also amended the old bankruptcy legislation. These solutions have only recently been rolled out or ‘commenced’, the most recent being the ‘commencement’ via ministerial order last week of the implementation of some of the reforms of the old bankruptcy laws. The delays in implementation of the new solutions is attributable in part to the delays in setting up and resourcing the necessary infrastructure such as the establishment of the new Insolvency Service of Ireland and the training and authorization of licensed insolvency practitioners. The requirement that the debtor obtain a protective certificate prior to offering proposals to creditors for two of the new solutions was also a significant delaying barrier to implementation. Many insolvency experts consider this requirement unnecessary given that the UK jurisdiction has long discarded its ‘Interim Order’ procedure, except in the most extreme or pressing of cases.
The first of the three new solutions is a Debt Relief Notice, very similar to the UK’s Debt Relief Order except that the duration is three years compared to one year in the UK. This is being made available via the government funded Money Advice and Budgeting Service or MABS and is for people with a relatively low level of debt, less than €20,000, as well as a low level of disposable income, less than €60 per month and no more than €400 in assets, subject to some exemptions. See our separate articles on the details of the DRN.
The second of the three new solutions is the Debt Settlement Arrangement or DSA and this is for people with unlimited amounts of unsecured debts which they are unable to repay. The DSA does not deal with secured debts such as mortgages. People who may be eligible for a DSA must engage the services of a personal insolvency practitioner or PIP. A DSA lasts for between five and six years during which the debtor makes payments from disposable income and/or from assets that are available to them. Creditors are paid from these payments with the balance of unpaid debts written off at the end of the term of the DSA. See our separate articles on the details of the DSA.
The third of the three new solutions is the Personal Insolvency Arrangement or PIA and this caters for people with both unlimited levels of unsecured debts and secured debts of up to €3 million, unless creditors consent to a higher level, which they are unable to repay. People who may be eligible for a PIA must also engage the services of a PIP. A PIA lasts for between six and seven years during which the debtor makes payments from disposable income and/or from assets that are available to them. The PIA may allow for the write-off of some portion of the secured debts as well as the unpaid balance of the unsecured debts at the end of the term of the PIA. See our separate articles on the details of the PIA.
The final piece of the jigsaw was the ‘commencement’ of the changes to the bankruptcy procedures in Ireland. The whole edifice of solutions to personal insolvency hinges on some mechanism being in place to encourage creditors to consider and accept DSAs and PIAs in particular. The practical availability of bankruptcy provides the ‘stick’ in the ‘carrot and stick’ scenario whereby the debtor can make an offer of a DSA or a PIA to creditors while being able to state that if creditors do not accept the proposal, they will be forced into bankruptcy and creditors will be forced to accept a much worse return than would otherwise have been available. See our separate articles on the changes to the bankruptcy procedures.
Debtors who do not wish to enter a formal statutory insolvency process can of course seek to reach an informal agreement with their creditors. One option is to agree a debt management plan or DMP with creditors. Advice can be obtained from MABS or from a specialist debt management provider to set up and manage a DMP. For a fee such a provider can negotiate with creditors on behalf of the debtor and make monthly payments to them on a pro rata basis. The debtor makes one affordable monthly payment and the provider distributes this money between creditors. The charge for such a service varies from one provider to the next, so the debtor 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. From a creditors’ point of view however, they can expect to recover all of the debts in time.
Getting out of Debt in the UK
If you live in England, Wales or Northern Ireland you can also enter a DMP but you also have additional options. The bankruptcy legislation there has been simplified in recent years and you can be discharged from bankruptcy in just one year. You may however be subject to an income payments order for up to three years. Downsides in bankruptcy are that you lose control of your assets such as your 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.
English, Welsh and Northern Ireland citizens have a further legally controlled solution available to them in the form of an Individual Voluntary Arrangement or IVA. Some of the advantages of an IVA 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; bankruptcy is avoided and the debtor 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 will receive a much greater return for the monies borrowed from them 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 term of the IVA. There are downsides to an IVA also. Under the legislation you must use the services of an Insolvency Practitioner or IP. Fees for these services are deducted from the monies contribute by the debtor with the balance of these monies going to repay creditors. However, creditors will have agreed these fees up front so there are no surprises for either the debtor or the creditors. The five years term is long compared to the three years during which the debtor might have to make income payments in bankruptcy but 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 and the protection enjoyed in the IVA would cease. In Scotland a Protected Trust Deed would be regarded as the equivalent of an IVA, although the relevant legislation differs somewhat.
Under EU insolvency legislation introduced in 2002 i.e. Council regulation (EC) No 1346/2000, it might be possible to seek and obtain a solution for your insolvency in another EU member state. 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’ or COMI 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’
If you are insolvent and you think that your financial circumstances may correspond to any of the scenarios summarized above and you want to consider any of the options outlined, you should consider seeking financial advice and obtaining independent legal advice, particularly if you are considering bankruptcy or wish to avail of an insolvency solution in a foreign jurisdiction.