Reasonable doubt about “Reasonable Living Expenses”?

At this point, most people will have heard of the Personal Insolvency Act, 2012. This Act introduced three new insolvency procedures to help individuals resolve issues of personal indebtedness. These procedures are Debt Relief Notices (“DRN”), Debt Settlement Arrangements (“DSA”) and Personal Insolvency Arrangements (“PIA”). An individual known as an approved intermediary (“AI”) with respect to a DRN or a personal insolvency practitioner (“PIP”) in relation to a DSA/PIA will work with all parties to implement the various arrangements under the Act.   The Insolvency Service of Ireland (“ISI”) was established to oversee and operate the new personal insolvency system.

Under Section 23 of the Act, the ISI must prepare and issue guidelines as to what constitutes a reasonable standard of living and reasonable living expenses. These guidelines were published in April 2013 and they are intended to give direction to approved intermediaries and personal insolvency practitioners in assessing what may be considered “reasonable” in the context of a standard of living. The ISI has made it clear that “a reasonable standard of living does not mean that a person should only live at subsistence level but neither does it mean that a person should live at a luxury level. Basically, an individual should still be able to participate in the life of the community as other citizens do”. It is expected that a reasonable standard of living is one that meets a person’s physical, psychological and social needs.

The reasonable living expenses are the expenses a person will necessarily incur in achieving a “reasonable standard of living”. Under the guidelines, the costs attributed to a typical household are termed “set costs”. In addition to these, there will be the reasonable costs of housing, child care and other special circumstances if relevant. Combined, these will result in the total reasonable living expenses for the household.

The guidelines have established 15 main reasonable needs of a household – food, clothing, personal care, health, household goods, household services, communications, education, transport, household energy, insurance, savings and contingencies, social inclusion and participation, housing and childcare. A household expenditure allowance has been allocated for each of these needs (excluding housing and childcare) based on particular household types. Obviously, such allowances will vary depending on a number of factors including the individual’s employment status, the size and composition of the individual’s household and whether or not a vehicle is necessary etc. For example, the typical monthly “set costs” for a household with two adults, two children (ages 8 and 13) and a vehicle is €1,891.70 under the guidelines.

Once the set costs have been established, the PIP will review the required housing costs, child care costs and any special circumstances to arrive at the total reasonable living expenses. The reasonableness of child care costs will be considered by the PIP taking into account the required hours of child care, the type of child care and the typical cost of child care in the locality. If child care costs appear excessive, proof of same may be required. The PIP will also consider what amounts to a reasonable and sustainable accommodation expenditure. Matters to be taken into account will include the costs of the current accommodation, the ability of other persons residing with the individual to contribute to the costs, the accommodation needs of the individual and his family and the costs of alternative accommodation. Obviously, every individual is different and their requirements will vary depending on matters such as age, health and whether they have a physical, sensory, mental health or intellectual disability. A category of special circumstances exists whereby the individual is allowed to contribute financially to reasonable costs which arise as a consequence of ill health or disability.

Provided an individual applying for an insolvency arrangement falls within the overall headline figure for reasonable living expenses, the ISI will not dictate how the individual’s money is to be spent. It is important that the individual retains the autonomy to make their own choices but bearing in mind the constraints of reasonableness and the overall limits on expenditure. In a DSA or PIA, the decision on reasonableness or otherwise of living expenses would be a matter for the creditors to decide on a case by case basis and approve at the creditors’ meeting. Accordingly, if creditors accept that the individual requires higher living expenses than prescribed in the guidelines, this can be accommodated. However, for any individuals applying for a DRN (write off), there is a strict application of the reasonable living expenses guidelines in deciding the eligibility of the applicant.

The ISI will prepare and issue guidelines at least every year which will be available to the public on its website It is expected that the guidelines will be revised from time to time to take into account any new issues or circumstances that arise and affect individuals.

The guidelines are indicative and are intended to assist AIs and PIPs to determine what is a reasonable standard of living and the reasonable living expenses necessary to achieve same. The guidelines will be applied differently in each individual scenario and an approved intermediary or personal insolvency practitioner can advise you fully in this regard.