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Home / ... / Personal Bankruptcy – Is it time to change the law?

Following a series of interest rate rises over recent months, some of Ireland’s mortgage holders are beginning to feel the pinch. That uncomfortable fact makes it timely to take a look at our bankruptcy provisions.

Upon qualifying in 1987 I took up a two year contract with a New York based firm of accountants. During my time there I recall one of the firm’s corporate bankruptcy partners stating one day that “The average American family is 6 weeks away from bankruptcy”. I queried his statement, and asked how one of the wealthiest nations in the world could have such a situation. He explained that the average American family at that time was heavily in debt with mortgages, credit card debt and car loans, and had very little savings. He said that if the bread winner in each family lost their jobs, they would be unable, within a period of 6 weeks, to pay their bills as they fell due. Being unable to pay your debts as they fall due is a classic definition of bankruptcy. 20 years later, looking around the present Irish economy, I can see parallels.

Recent research suggests that some 23% of the Republic’s economy is dependant on the construction sector. Indeed, the IMF has expressed concern about the Irish economy’s dependence on the construction sector. It is being acknowledged that the construction boom cannot continue and that a downturn will arrive in the medium term.

It is clear that the growing levels of personal debt have made us more sensitive to interest rate changes. Rising interest rates and a down turn in the economy create a classic “pincer” movement, which will trap many people in bankruptcy.

The “pincer” movement referred to above will be exacerbated if it transpires that the explosive growth in property values was really a massive pyramid selling scheme orchestrated by the lending banks – overseen by the Central Bank! As with any pyramid scheme, the last ones in lose the most.

An economy’s proper functioning depends on both businesses and consumers paying their bills on time. Any legislative obstacles to the smooth running of the credit cycle should therefore be removed.

Given the above background, the question arises as to whether the existing legislation around personal bankruptcy should be amended.

Firstly, it is necessary to look at the existing enforcement options which are open to a creditor who is owed money. These options are set out in a table in the print edition of this article.

While many practitioners are unhappy with various aspects of the present enforcement options, they do (with the exception of bankruptcy), on a broad brush basis, work.

Secondly, it is necessary to look at the options open to a debtor.

One option open to a debtor is to go into bankruptcy. In 2005, the United Kingdom had 47,291 bankruptcies. The Republic of Ireland had 9. While there are a number of factors for the disparity between the two countries in the number of bankruptcies, the dominant factor is cost. It is relatively cheap to go into bankruptcy in the UK, while it is very expensive (both from the debtor perspective and from the creditor perspective) to organise bankruptcy in Ireland.

The present Irish bankruptcy procedures are cumbersome and too costly to implement. I believe that, generally speaking, someone should only be made bankrupt when they are not prepared to enter into an open and honest dialogue with their creditors, and propose a realistic payment plan. The payment plan may involve the creditor writing off a portion of their debt. However, there are times when it is necessary for a debtor to be made bankrupt. The present legislation effectively penalises the creditor for taking a bankruptcy petition due to the heavy legal costs associated. It is an area in need of radical reform.

MABS

One of the options open to a debtor is to approach the Money Advice and Budgeting Service. MABS is financed by the Department of Social and Family Affairs. With 62 offices spread around the country MABS provides a free and confidential service for people with debt issues. It has carved out a reputation for itself with the banks and other creditors, such as utility suppliers, as a very competent “honest broker” in dealing with such issues.

In its early days, MABS focused on low income families. However, some of the offices are now encountering middle class families with debt problems.

COMMITTAL ORDERS MABS would like to see Committal Orders not being used for people with consumer debt. I believe that the use of Committal Orders should be allowed to continue, but should only be used when debtors are being evasive.

ATTACHMENT OF EARNINGS

One option that is available in the UK is Attachment of Earnings whereby a creditor can apply to the debtor’s employer and request instalments to be deducted from the debtor’s salary and paid to the creditor. This is not a facility available in the Republic. Some years ago the Government’s legislative programme contained a commitment in relation to an Attachment of Earnings Bill.

However, the Bill is not in the current legislative programme. In my view such a Bill should be processed as quickly as possible, as I believe creditors would prefer to use such a route rather than resort to committal proceedings.

INDIVIDUAL VOLUNTARY ARRANGEMENTS

Irish legislation does not allow formal Individual Voluntary Arrangements (IVA), unlike the United Kingdom, which had 20,293 formal IVAs in 2005. An IVA is, in effect, a “mini Examinership” for individuals, whereby an Insolvency Practitioner determines the individual’s assets, and proposes a scheme of arrangement with creditors. A major advantage of an IVA is that there is no stigma of bankruptcy.

There is strong evidence to suggest that IVAs are being abused in the United Kingdom, with people building up significant “lifestyle” debt on credit cards, and then effectively writing off their debt through an IVA. In some IVA cases, the Insolvency Practitioner’s fees can utilise most of the available assets, to the detriment of the individual’s creditors. While some Irish Insolvency practitioners may welcome the creation of a new market by new legislation establishing formal IVAs, I do not believe that such legislation should be enacted for two reasons:

- Firstly, I believe that, similar to the UK experience, the legislation would be quickly abused by people with “lifestyle” debt.

- Secondly, MABS, with its nationwide network of offices, agree “informal” IVAs with creditors on a daily basis, at no cost to the creditors or the debtor and therefore the creditors receive more money.

CONCLUSION

The present debt collection options open to creditors, with the exception of the bankruptcy option, generally work well. However, they could be significantly improved if legislation was introduced to allow Attachment of Earnings. Bankruptcy legislation itself is in need of radical reform. I see no need to introduce Individual Voluntary Arrangements for individuals.

Jim Stafford is Principal of Friel Stafford Chartered Accountants, a specialist Corporate Recovery and Insolvency Practice.

has a system of "debted means test" for recovery of bad debts been introduced in irish law?

I agree with Colm Duffy that you remarks on IVAs are not fully accurate, and lack the historical background that would improve understanding of the purpose and genesis of IVA. I find your use of lifestyle debt quite condescending, and urge you to have a more open mind about the reasons people accumulated debt, and the general marketing of debt by the Banks over the last 30 years. Sheila Fitzgerald Open University

Arranging debtor is quite similar to an IVA where no advertisement is made in a national newspaper

i have a question too. Over 4-5 month ago my husband i i opened restaurant. Unfortunatelly it doesnt work out. We have debs on company account 3500euro, and personal the same. we got letter form bank that thay will clos our bank acc in 21 day and we nedd to pay it back. We are trying to change the style of resturant maybe than it will work out. We really want to try. But is there any possibility to ask bank to wait some time?? at the moment we cannot pay the debs. thanks for help

Your comments on IVAs are in my opinion way off the mark, however having read the rest of your article Im impressed and have assumed that on the matter of IVAs you have been wrongly informed. I would like to discuss this with you as I have been in the business for some time. Regards Colm Duffy McCambridge Duffy

If you filed bankruptcy in California, will it effect your credit rating here in Ireland.

Paula As the information in your posting is limited, I suggest you provide a full briefing to a competent solicitor so that he may advise you on your legal options. Jim Stafford

Having been self employed for 1.5 yrs and following the death of my husbands brother (who was our landlord) we were locked out of our business premises by his brothers partner in Oct 2007. This was after he had settled through the courts on an amount to dissolve partnership with the deceased wife we where not given access to our shop equiptment, stock or any other possesions again. The company has debts of around 50,000 and one loan of 210,000 which is also under gaurentor by the brothers partner. We are financially ruined with no savings a mortage, 3 children and both of us only working part-time. We live in D15 and would appreciate advice on what to do as we have a hugh amount of solicitors letters and money demands with no way of paying these bills Regards Paula