In a previous article one of my colleagues discussed the options proposed under the recently published Personal Insolvency Legislation. This was the proposal for the Debt Relief Certificate for unsecured debt under €20,000. There are two other relevant options for both secured and unsecured debt in this proposed legislation.
The first of these is a Debt Settlement Arrangement (DSA). This system provides for debt settlement between a debtor and two or more creditors to repay an amount of unsecured consumer type debt only over a set period. For example, where a debtor has a number of unsecured debts such as credit cards, personal loans, overdrafts, retail, store catalogues etc which amount to over €20,000, and has difficulty in repaying those debts in full, the debtor can make contact with a Personal Insolvency Trustee who having examined their circumstances and completed a financial statement of affairs may apply to the Insolvency Service for a protective certificate in respect of preparation of a DSA. If granted by the Insolvency Service, the protective certificate would provide for a stand still period of 30 days during which creditors may not take action against the debtor. For the arrangement to be approved, 65% of creditors must agree to it. It will then be registered in the Insolvency Register.
After a period of five years if the debtor has kept up the arrangements made, all of the debt covered under the arrangement will be discharged.
A further option under the proposed legislation is a Personal Insolvency Arrangement (PIA). This is a debt settlement arrangement for individuals with secured and unsecured debt between €20,000 and €3,000,000. The provision under the legislation for the PIA is that it must involve one or more creditors but there must be at least one secured creditor involving property situated in the State. Once again there is a role for the Personal Insolvency Trustee in that they will put a proposal to all creditors and if accepted, the trustee will oversee the repayment plan for the duration. The creditors must approve the PIA and it must be by a majority of 65% in value of actual votes cast at the meeting of creditors. A creditor also has the option of challenging the approval of the arrangement by proceeding to the Circuit Court.
Once a PIA is approved and registered with the Insolvency Service, no creditor can take action against the debtor/his property for any debt covered by the PIA. The PIA is aimed at helping people who have been burdened with unsustainable mortgages through a combination of reckless lending and reckless borrowing. A person will be able to apply for a PIA only once in their lifetime and only if they can prove they are unable to pay their debts as they fall due and if it is unforeseeable that they are likely to become solvent. A PIA will run for six years.
The question often asked is whether this is debt forgiveness. The overwhelming view is that it is not as banks will not have to automatically forgive any debt and there is unlikely to be any blanket forgiveness.
A PIA will apply where for example someone has a mortgage of €400,000 on a house worth just €200,000 and can only afford to pay a maximum mortgage of €300,000. The borrower and their trustee might propose a debt reduction of €100,000 and then the bank will have two choices either accept the deal and get some money back or push people into bankruptcy. The bankruptcy could see foreclosures on a family home and leave the bank holding a house they can’t sell. Then there are the legal costs. If the bankruptcy option is pursued, the debtor will have to be bankrupt for only three years, after which they are free of all debt.
There is no doubt that the proposals under this draft personal insolvency legislation are complex and need careful examination. It is important to emphasise that these are merely in draft format but the intention is to have a bill published by the end of April at which point no doubt more debate will take place and the provisions of the legislation will be refined further. We await developments.