Going bankrupt in Ireland has never been seen as an easy option. It’s prohibitively expensive and used mainly by high profile businesspeople with extreme levels of debt. Indeed, many of these choose to become bankrupt in the neighboring U.K., rather than in Ireland, to avoid the harsh conditions associated with Irish bankruptcy law. This can mean not being discharged from your debt for 12 years.
Ireland: Three new options for the indebted
Now, however, new legislation has been introduced giving people with unmanageable debt another set of options. A new body known as the Insolvency Service of Ireland (ISI) has appointed its first Personal Insolvency Practitioners (PIPs), a group of debt experts who will deal with applications from individuals looking to avail of one of the new debt resolution options.
The new legislation sets out three types of arrangements: a Debt Relief Certificate (DRC) for unsecured debts up to €20,000, a Debt Settlement Arrangement (DSA) for unsecured debts in excess of that €20,000 and a Personal Insolvency Arrangement (PIA) for those with secured and unsecured debts looking to protect their home from repossession. In most cases, if the debt isn’t repaid, it will be written off in five or six years.
At least one hundred applications have been received already and thousands more are expected, but with just 14 PIPs recruited so far, Valuewalk asked one, Tom Murray of corporate recovery specialist Friel Stafford, if that was enough, considering the extent of Ireland’s personal debt crisis:
“Whilst there have only been 14 PIPs appointed initially – we expect that to increase shortly. Based on the anticipated demand, there will be enough PIP’s to handle the workload.”
And what sort of demand is Friel Stafford seeing so far?
“We have had a significant increase in the number of calls to our office since the ISI published the list of authorised PIP’s. This is to be expected as insolvent individuals have been waiting on this legalisation to be implemented. As a firm, we have anticipated this and have invested in training and resourcing our staff to deal with the volume of queries and complexity of the issues being faced.”
Insolvency could make you bankrupt
Becoming ‘insolvent’ doesn’t come without a cost. Friel Stafford says initial consultation fees are likely to be around €300, but negotiating a deal with a bank, depending on the amount of debt could cost anything from €1000 upwards with added costs for reviewing a debt. For someone with a debt of less than €10,000, is it even worthwhile?
Under the new rules, debtors will face strict spending rules, such as €29 per week to cover ‘social inclusion’. A single adult in an urban area may not be allowed to run a car. What is sure is that personal insolvency will mean five to six years of living on very meager levels of disposable income.
Uncertainty ahead for mortgage holders
For those with mortgages, it could be argued that it’s in the interests of the homeowners, where possible, to come to a voluntary deal with their bank before entering an insolvency arrangement. There is the possibility that the new regulations could enable the banks to crack down on mortgage holders forcing their hand into seeking insolvency arrangements. On the eve of the new insolvency legislation coming into effect, boss of AIB, David Duffy has said that the bank was gearing up to get tough on strategic defaulters:
‘There is no rent-free option anymore. Around 20 per cent of mortgage arrears cases are situations where people are not paying a mortgage when there is enough income to meet monthly repayments.’
He also said that the bank noticed that strategic default increased when the new insolvency legislation was announced but tapered off when people saw how tough the personal insolvency process would be.
The number of repossessions could explode
His statement also comes just weeks after a reform of the Land And Conveyancing Act came into effect on July 31st, allowing banks to repossess home and investment properties more quickly. The law allows for a repossession case to be adjourned so that the homeowner and the bank can negotiate a personal insolvency arrangement through a PIP.
Obviously, the implications of this won’t be know for some months, but David Hall of the Irish Mortgage Holders’ Association (IMHO) warns that there is a danger that PIPs will encourage mortgage holders to seek insolvency service arrangement before exhausting all other possibilities: “People would be better off doing a deal outside the insolvency process with their bank.”
He added that in the light of new legislation allowing banks to repossess properties more quickly, those who haven’t already done deals with their bank could find themselves unable to do so in future, “I expect banks to take advantage of this, which will only add to the nightmare experienced by mortgage holders in the past few years.”
If the Irish economy picks up again, those who opt for the new insolvency options in the interim could regret it. But it’s mortgage holders that have most to fear. The months ahead will either see so-called ‘strategic’ defaulters paying up or a massive upsurge in repossessions.