James Reilly aside, it was a good week in the Dail for debtors. The Personal Insolvency Bill started its journey through the Oireachtas last Wednesday. It should be broadly welcomed around the country.
Justice Minister Alan Shatter deserves credit for the legislation – it’s probably the first serious piece of law-making from this Government which begins to push some responsibility back onto the banks for their contribution to the economic collapse. At the same time, it provides a way out of the quicksand of debt for many individuals, families and businesses.
Every silver lining, it would seem, has a cloud: recently reports appeared in the media that, even with the new legislation, people might have to sell their wedding rings to pay down debts.
Mr Shatter said that he “would need to hear very convincing arguments as to why a person applying for a full debt write-off of up to €20,000 from his or her creditors should be allowed to retain expensive items of jewellery which might be sold to repay some of the debt incurred”. He mentioned engagement rings specifically. As anything over €400 in value is up for consideration, wedding rings could yet end up in the pot.
As well as preventing a thriving secondary market in wedding rings, some other aspects of the legislation need fine tuning before the bill is passed into law.
Judicial reviews needed
The first of these is the review process. This is a brand spanking new law and needs a little hand holding. The minister has suggested a judicial review after 10 years, which is far too long.
The legislation, rightly, leaves a lot of discretion to the courts. It creates innovative new settlement arrangements and introduces a whole new profession to Ireland — Personal Insolvency Practitioners, or ‘PIP’s.
A lot of things could go wrong, with potentially devastating consequences for citizens. To guard against this, there needs to be an annual Oireachtas review to ensure a healthy balance between borrowers and lenders is found.
Who defines a reasonable standard of living?
The second element that needs work concerns the phrase “reasonable standard of living”. This is what the Personal Insolvency Bill says a person should be left with during the six year debt settlement period. This critical phrase leaves a lot of room for interpretation. How it is applied by the courts will hugely influence the effectiveness of the legislation, and the quality of life of many Irish citizens for decades to come. The bill itself doesn’t outline what a reasonable standard of living is. So the question is, who will?
The banks have a view, though they’re not always forthcoming with it. When asked, at the Finance Committee, they have tended to obfuscate. They don’t typically have written guidelines on what they will leave people with. “Every case is different,” etc, etc.
One banker told me they would ultimately leave the borrower with whatever they would get on social welfare. In other words, they would take as much as they could possibly get away with. This makes sense if you’re a bank, but not for the country as a whole. Forced into this situation, many would not try to advance their careers, and would not have the disposable income to invest, say, in their children’s futures, or indeed to spend in the domestic economy.
Research from the UK found that paying about one-third of net household income to service a mortgage and other debts leaves enough for a “reasonable standard of living”. This amount could probably be increased for some high earners, but the point is that with so much room for interpretation, and with such high incentives for the banks to push it as low as possible, some guidance from the Oireachtas is needed.
Who are the personal insolvency professionals?
The third area for improvement in the bill concerns the Personal Insolvency Professionals. These people will be the frontline troops in the battle to restructure private debt in Ireland. When a debtor wants to discuss how they restructure their unmanageable car loan, credit card debt or mortgage, it is to a Personal Insolvency Professional the legislation will point them. These PIPs will have power and influence, and will be critical to the country’s recovery from private debt, for which Ireland holds the record in Europe, by a mile.
It is crucial that the individuals and agencies who deal with debtors are qualified to do so and properly regulated. But the bill doesn’t outline who’s right for the role and what type of qualifications and training they require.
Both the Free Legal Advice Centres (FLAC) and Chartered Accountants Ireland have raised concerns about the fact that there’s no outline as to a code of conduct, audit or disciplinary processes.
The Oireachtas must address each of these concerns during the legislative process, with the Justice Committee at the vanguard.
Indeed, one of the reasons the legislation is robust is because of the inclusive process used in its creation. The heads of the bill (a pre-legislation summary) were published some months back, giving the Justice Committee time to report to the minister on what the Oireachtas wanted included.
Family Home Protection Bill
Last year I proposed a Family Home Protection Bill, which would give judges some discretion in deciding whether to give a family home to a bank. I had the opportunity to present the proposal to the Justice Committee, and their first recommendation to the minister was to ensure greater protection for the ‘principle private residence’.
When the draft bill was published last week, I was delighted to see some elements of the Family Home Protection Bill peering back at me. I hope it will allow equitable agreements between creditors and debtors, and ensure that banks can’t employ bully tactics. I hope it will safeguard family homes and ease the burden on anyone drowning in debt.
This is how the Oireachtas is meant to work, though it rarely does. Collectively, the departments of Social Protection, Justice and Equality, Public Expenditure and Reform, and Jobs, Enterprise and Innovation have enacted 16 bills. In these bills, only two opposition amendments were accepted.
Let’s put that in context. The Social Welfare and Pensions Bill, alone, had 52 amendments proposed by the opposition. If that is indicative of the other 15 bills, then just two of 800 proposed amendments from non-Government TDs and senators made it into law. The robustness and wide support for the Personal Insolvency Bill clearly demonstrates a better way. The bill has the potential to make a big difference. For this to happen, we will need to change our attitude to commercial and personal insolvency and bankruptcy in Ireland. We must remove the stigma.
There has never been a better time, with so many businesses closing and mortgages struggling, not because of the greed or incompetence of borrowers, but because of over-lending, falling wages, unemployment and a collapse in demand for goods and services.
We need to learn a lesson from America, where commercial failure is nothing to be ashamed of. Indeed, successful entrepreneurs I have heard talk there usually start their speeches by stating, proudly, that their current venture was the first to succeed after several failures. And, they say, it was the lessons learned from their initial failures that equipped them to finally get it right. Maybe that’s a particularly pertinent lesson for a small island nation that fell on hard times and needs to get back on its feet and start to succeed once again.
This article originally appeared in the Sunday Independent, July, 15, 2012.