Undergoing the Effect of Debt

Capital punishment for even the most heinous criminal offenses was abolished in most western democracies with a few significant exceptions such as the USA. In regard to personal debt however, the USA has a most civilized range of laws dealing with insolvency both personal and corporate. Contrasting a good deal in both of these issues is the Republic of Ireland. The death penalty is long abolished in Ireland but the personal insolvency regime there has been described by a great many august experts as unrealistic, rarely used, very expensive and exceedingly penal.

Actually Ireland isn't only out of sync with the USA. Its bankruptcy laws compare unfavorably with most European countries in particular with its twenty six partner member states of the European Union. The essential feature of American insolvency law is the notion of a fresh start, debt forgiveness and encouragement of an enterprise culture. It can be much like getting a 'badge of honour’ to have been declared insolvent in the USA and to have been made bankrupt several times doesn't preclude the possibility of bouncing back and making an effort all over again. Ireland conversely is still stuck in a attitude of punishment and prevention if you are thought to have transgressed financially.

The new Fine Gael led government currently has the opportunity to transform all that. Fine Gael’s pre-election policy paper on consumer debt declared that it proposed to modernize Irish bankruptcy laws and to establish new legal processes to deal with personal and business over-indebtednessthat would allow people to avoid the bankruptcy process in the first instance. It proposed to introduce a flexible type of bankruptcy system just like Northern Ireland’s system that would allow the courts to set bankruptcy terms depending on each individual’s situation. It would consider whether there had been any fraud or excessive recklessness on the part of the insolvent person or whether the insolvency occurred simply as a result of inescapable changes in the debtor’s position. When it was proven that the borrower had engaged in reckless or fraudulent deals, a restriction order could be made in conjunction with a longer bankruptcy time period so as to punish the borrower and to deter against such conduct in the future.

Fine Gael proposed to create an out of court debt settlement system similar to the existing system in Northern Ireland that would offer a method for small businesses which are owed money to demand payment utilising an officer of the courts to force a settlement and that would result in no ramifications for the borrower if payment were made. It also offered to introduce an Individual Voluntary Debt Plan (IVDP) similar to the UK’s Individual Voluntary Arrangement (IVA) which would be a new legally binding arrangement. Under the IVDP an indebted individual and his or her lenders would agree to getting a plan drafted by a certified insolvency professional or practitioner to restructure the individual’s outstanding liabilities. The IVDP would be voted on by creditors and would protect the individual from interest charges and the risk of enforcement while outstanding liabilities would be restructured and resolved.

For small firms experiencing debt issues, Fine Gael offered to create what it termed as a Commercial Voluntary Debt Plan (CVDP) which would be just like the Company Voluntary Arrangement (CVA) in the UK. The new system would help small firms striving in the downturn to restructure their debts and business with the help of professional insolvency practitioners while under the protection of the State, thus warding off the high cost of the examinership process.
It now falls to the new coalition government of Fine Gael and Labour to enact appropriate new personal insolvency legislation in Ireland according to its policies. A great deal of the heavy lifting was undertaken by the Law Reform Commission (LRC) which finalized its recommendations for change to the insolvency laws when it published its final report on Personal Debt Management and Debt Enforcement in December 2010. The LRC went one step further when it included as an appendix to that report a Draft Insolvency Bill 2010. Considerable credit must go to the Green Party which unfortunately lost all of its seats in the general election in February 2010. After pressing for reform in the area of personal insolvency legislation it found itself out of office before it could introduce or enact new legislation. The financial tsunami currently engulfing Ireland at a sovereign level has obviously diverted the focus of government from the travails of the personally insolvent citizen. However, the IMF, ECB and EU troika have demanded the reformation of Irish personal insolvency law and have set a time frame of March 2012 for implementation.

The plans contained in the LRC’s draft bill are quite significant. They say, for example, that borrowers should not be jailed for non-payment of debt even in cases where the debtor can afford to pay but refuses to do so. The recommended sanction is community service and not jail time.

This is not the only radical proposal. The draft bill provides for what is effectively debt forgiveness although it is apparent that the use of the phrase 'debt forgiveness’ is studiously avoided. In fact in the 440 pages report the word 'forgiveness’ appears only three times and two of those appearances are quotes from other sources. It would seem that the report sticks to the letter of the words of the previous and now-retired Fianna Fail Minister of Justice Minister Dermot Ahern when he ruled out 'debt forgiveness’ for ordinary people in May 2009 when the LRCs interim report was launched.

In spite of the heavy hand of such political direction, the LRC has displayed significant courage and enlightenment in ensuring that the spirit of its final report and the draft bill include generous provisions for what is debt forgiveness in all but name. In particular the plans for insolvent borrowers with no income and no resources (NINA) provide for what are referred to as Debt Relief Orders. In effect qualifying borrowers would be able to have their unsecured liabilities 100 % written off within a twelve months interval so that they could begin afresh. It is likely that there would be a threshold on the total quantum of debts. Above that ceiling a Debt Relief Order would not be available for the insolvent borrower but the ceiling has not been specified as yet. In the UK the debt threshold is £15,000.

The primary provision suggested by the LRC was the setting up of a Debt Settlement Arrangement (DSA) scheme whereby insolvent debtors could pay what they could manage for a interval not exceeding five years, after which the outstanding balances of their liabilities would be cleared in their entirety. Under this structure at least 60% of voting lenders as measured by the value of unsecured debts would have to agree to the DSA for it to be authorized and binding on all unsecured creditors, including those who chose not to vote on the proposal.

Additional provisions recommended by the LRC included setting up a Debt Enforcement Office (DEO) to arrange non-judicial settlement of debts; setting up a Debt Settlement Office (DSO) as an integral part of the DEO to license and watch over insolvency practitioners, to be known as Personal Insolvency Trustees and establishing a regulatory regime to control debt collection and debt advice bodies.

Although the LRC itself originally excluded detailed consideration of and recommendations for amending Irish Bankruptcy law (or formulating new law) from its scope and terms of reference, it has in fact and in spite of itself, made thirteen very specific recommendations (provisions) relating to bankruptcy in an appendix to the report - on top of its clear declaration recognizing the need to change the Bankruptcy Act 1988. A footnote to that appendix makes fascinating and fairly incredulous reading: 'The commission has not included these provisions in the draft Personal Insolvency Bill in Appendix A as it understands that a new legislative framework to reform the Bankruptcy Act 1988 is currently (December 2010) under consideration’.

It seems clear that the LRC was extremely unhappy with the lack of political progress in taking steps to take on the reform of bankruptcy law, an enormous endeavor which could take many more years to accomplish, even if the complete resources of the LRC were assigned to it. Can the imagination, energy and dedication of a new government cut short that timescale? It would be astounding and indeed unacceptable if Ireland’s draconian bankruptcy law, though rarely utilised, could possibly continue being the law of the land for another half decade or more. The IMF, ECB and the European Commission were able to descend on Dublin at short notice and in a matter of weeks agree actions to tackle the insolvency conditions of the Irish banks and of the sovereign state itself. The competence, urgency and energy displayed so far by the new Fine Gael and Labour coalition government gives some hope for optimism. For the hard pressed insolvent Irish consumer the hope is that the penalty for debt is neither capital punishment nor a life sentence.