2.The Personal Insolvency Bill 2012
4. The Role of the Personal Insolvency Practitioner
5. Application of Personal Insolvency Bill in Family Law Disputes
The main aim of the Personal Insolvency Bill 2012 is, according to our present Minister for Justice, to reform personal insolvency laws as opposed to corporate insolvency laws.
Again according to the Minister the Bill intends to provide incentives for lending institutions to sort out various debt issues between themselves and their borrowers.
It will be interesting to see how effective the provisions of this bill will be in forcing Banks and Building Societies to act in a fashion which takes into account the difficulties and problems of borrowers whilst at the same time looking after their own profits.
The present Bill has come about as a result of an Order from the Troika to the Government to reform the present insolvency system which dates back to the 19th century and which is rarely used or availed of.
Apparently during the years 2008 to 2011 (i.e. a period when one would have thought that there would be a huge amount of bankruptcies etc.) only 87 people have been adjudicated bankrupt in Ireland.
It is clear that the Irish Banks will be slow to fully engage with the new procedures and this is clear from comments made by NCB Stockbrokers in a recent report on the Irish economy. In that report they stated that “the current focus around troubled mortgages in Ireland has given rise to concerns about the impact personal insolvency applications could have on Banks residential mortgage books”.
It is somewhat ironic that Banks and other lending institutions are succeeding where the Catholic Church has failed i.e. in keeping troubled marriages intact as there is often no way out of the financial mess in which some couples exist.
The problem of over indebtedness is often linked to marriage breakdown. Obviously the Legal Aid Board Law Centres deal with such issues all the time. Noeline Blackwell, Director General of FLAC said the Organisation had seen the terrible problem of over indebtedness since 2008 having dealt with 83,000 queries since then. That is why FLAC have been lobbying for the reform of laws relating to personal debt for a long time.
The Insolvency Bill however does not deal in any specific way with marriage breakdown apart from the odd reference to the Family Home Protection Act. The provisions of the Bill also in some instances protect maintenance payments.
There is a clear need for separate legislation in this area but I will deal with that issue later.
2. The Personal Insolvency Bill 2012
The Personal Insolvency Bill provides three legal mechanisms to assist individuals in financial difficulty.
I will briefly summarise each mechanism as follows:-
(a) Debt Relief Notices (DRN)
The aim of this provision is to create a non judicial process whereby individuals with relatively small debts which have become unmanageable can deal with same. It is in effect a “poor persons bankruptcy”.
(i) The Debtor must have qualifying debts that amount to €20,000 or less.
(ii) The Debtor must have available to him/her, allowing for “reasonable living expenses”, net disposable income of €60.00 or less per month.
(iii) The Debtor must have assets or savings worth €400.00 or less.
(iv) The Debtor must be domiciled in the State or have ordinarily resided in the State within one year before the Application.
(v) The Debtor must be insolvent and have no likelihood of become solvent within a period of five years.
(vi) 25% or more of qualifying debts can not have been built up during the six months preceding the Application.
(vii) Only one Debt Relief Notice per lifetime is allowed.
(i) The Debtor who wishes to apply for a Debt Relief Notice must submit a written statement of his/her financial affairs to an approved intermediary. As yet it is entirely unclear as to what “an approved intermediary” is. It could be MABS or some other similar group.
(ii) The approved intermediary then holds a meeting with the Debtor to advise him/her of the various options for dealing with the financial difficulties which have arisen. Once this is done the Debtor must then confirm in writing to the approved intermediary that he/she wishes to proceed with the Application for a Debt Relief Notice and must fully disclose his/her financial affairs and completed the prescribed financial statement.
(iii) The Application is then made by the approved intermediary to the new Insolvency Service which will have to be set up (no doubt at great expense) for a Debt Relief Notice. The Insolvency Service can raise queries or ask for additional information or documents if it wishes.
(iv) If the Insolvency Service feel that a certificate should issue then the Service must furnish the certificate, the application and all supporting documentation to the appropriate Court who shall then, if satisfied with the application, issue a Debt Relief Notice in respect of the debt specified in the application.
It is interesting that each of the three legal mechanisms require some form of application to Court even though the basic intention of the legislation as repeatedly stated by the Minister for Justice and others was to provide a “non judicial debt resolution process”. The type of debts which are covered by this particular remedy are intended to be Credit Card debts, unsecured Bank loans, rent arrears, EBS and Gas bill arrears etc. Debts which are outside this particular remedy are Revenue liabilities and taxes, Court fines and family maintenance payments. It is unclear as to whether or not such “family maintenance payments” need to have been made by way of Court Order or agreement. It would certainly be open to a couple to agree very large maintenance payments which would bring the income down below the required level.
The Debt Relief Notice, once made, remains in effect for a period of three years. It is recorded in the Register of Debt Relief Notices. During that period no Creditor can issue proceedings against the Debtor for enforcement of the debt or initiate Bankruptcy Proceedings.
It is possible for a Debtor to “buy” himself/herself off the Register of Debt Relief Notices if repayments of at least 50% of the value of the debt specified in the Notice are paid off by him/her. If that payment is made his/her name should be removed from the Register, the Debt Relief Notice shall cease to have effect and he/she shall be discharged from all of the debts concerned. In any event after the expiry of the three year period the entire the debt/debts are written off.
There is no involvement of what is termed a “Personal Insolvency Practitioner (PIP)” in this particular arrangement.
(b) Debt Settlement Arrangement (DSA)
This mechanism or system applies to unsecured debts of over €20,000 which are due to one or more Creditors. There is no upper limit on the amount of debt due. This envisages an arrangement to repay various Creditors a certain amount of such debt over a period of five years.
To be eligible to make a proposal for a Debt Settlement Arrangement the following criteria on the part of the Debtor must be satisfied, namely:-
(i) The Debtor must be domiciled in the State or have ordinarily resided in the State for one year prior to the date of application.
(ii) The Debtor must have completed a Prescribed Financial Statement and made a Statutory Declaration confirming that same is complete and accurate.
(iii) The Personal Insolvency Practitioner must have issued a certificate to the effect that in his/her opinion there is no likelihood of the Debtor becoming solvent within a period of five years.
(iv) The Debtor must make a Statutory Declaration declaring that he/she has not been able to agree an alternative repayment arrangement with his/her Creditors or that his/her Creditors have confirmed their unwillingness to enter into an alternative repayment arrangement.
(v) Again only one of these applications can be made in the Debtors lifetime.
Again the application is made to the Insolvency Service for what is called a “Protective Certificate” but this time it is made by a Personal Insolvency Practitioner (PIP). The PIP must be happy that the criteria set out in the Bill have been met and if the Insolvency Service are also satisfied then the Service applies to Court for the Protective Certificate.
In turn if the Court is satisfied then it issues the Certificate which remains in force for 70 days from the date of issue.
Again details relating to the Protective Certificate are placed on the Register of Protective Certificates and the effect of the issuing of such a Certificate is that it prohibits the initiation or continuation of certain Enforcement Proceedings, prohibits the presentation of a Bankruptcy Petition, prevents and stops the issuing of proceedings against the Debtor or his/her property save with the permission of the Court.
The granting of such a Certificate does not prevent a Creditor from pursuing Guarantors of certain debts but basically allows the PIP and the Debtor some time to work out some form of financial arrangement.
A Creditor can appeal against the issuing of a Protective Certificate. Once a Certificate is granted the PIP must notify the Creditors concerned and invite them to make submissions as to how the debts might be dealt with.
There are certain mandatory requirements set out concerning Debt Settlement Arrangements including provisions in relation to the duration of the arrangement, the various debts covered, the payment of the costs and outlays of the Personal Insolvency Practitioner etc.
Subject to certain conditions any form of Debt Settlement Arrangement is possible as long as everyone approves. Secured Creditors of the debt may not participate in a Debt Settlement Arrangement with regard to a secured debt. Preferential debts are to be dealt with in the same manner as if the Debtor were a bankrupt i.e. these need to be paid in full. A Debt Settlement Arrangement cannot prevent a secured Creditor from dealing with their security or pursuing same.
Section 63 of the Bill provides for the treatment of a principal private residence in a Debt Settlement Arrangement. The Bill provides that a PIP shall insofar as is possible attempt to finalise a Debt Settlement Arrangement which will not require the Debtor to dispose of or vacate his/her principal private residence.
A Debt Settlement Arrangement shall not provide for the disposal of the Debtors interest in the principal private residence unless the Debtor has firstly obtained independent legal advice in relation to same or has declined to do so and also that “all applicable provisions of the Family Home Protection Act 1976 or the Civil Partnership and Certain Rights and Obligations of the Co-habitants Act 2010 are complied with”. Once a Debt Settlement Arrangement is finalised the PIP calls a Creditors Meeting to consider same. For same to be approved there must be at least 65% in value of the Creditors present and voting in favour of same.
If the arrangement is not approved then the Protective Certificate lapses and the DSA procedure terminates. A Debtor cannot appeal a rejection by the Creditors of the DSA and the Creditors can pursue their debts as normal.
However as I have said already a Creditor(s) can firstly appeal against the issuing of a Protective Certificate and can also appeal to the Court if they feel that they have been “unfairly prejudiced”.
It is highly likely that a number of Creditors including any lending institutions may appeal to the Courts one way or the other as they will be in a stronger financial position to do so.
Again a Debt Settlement Arrangement shall not provide for the disposal of the Debtors interest in the principal private residence unless absolutely necessary and unless the Debtor has obtained independent legal advice beforehand. Any other alternatives to the vacating of a family home must be considered.
Results and Effects of a DSA
If the Debtor complies with the arrangement for five years then all of his/her debts are discharged.
The PIP must review the arrangement every year. If the Debtor is in arrears or defaults for a six month period the DSA is automatically terminated and the Debtor is liable for the entirety of the debts due.
(c) Personal Insolvency Arrangements (PIA)
This particular arrangement has caused the most controversy although, in my view, the mechanism which will involve a larger amount of individuals in difficulties will be the first one i.e. the Debt Relief Notice.
Again the Personal Insolvency Practitioner (PIP) is involved in this particular mechanism.
This mechanism provides for an arrangement between a Debtor and one or more Creditors where the secured debt does not excess €3 million. This arrangement also applies to unsecured debt and there is no limit on the unsecured amounts.
There must be no hope of the Debtor becoming solvent during the next five years and he/she cannot have availed of the other arrangements.
Again this arrangement does not apply to maintenance payments, taxes, fines etc.
Again to be eligible for a Personal Insolvency Arrangement the following criteria must be met, namely:-
(i) The Debtor must be insolvent.
(ii) At least one of his/her Creditors must be a secured Creditor.
(ii) The aggregate secured debt must be less than €3 million.
(iv) The Debtor must be domiciled in the State or have ordinarily resided there within one year before the date of the application.
(v) The Debtor must have completed a Prescribed Financial Statement.
(vi) There must be no likelihood of the Debtor becoming solvent within a period of five years commencing on the date of the making of the Declaration.
(vii) The Financial Statement must be complete and accurate.
(viii) The Debtor must make a Declaration that he/she has co-operated for a period of at least six months with his/her secured Creditors in relation to the principal private residence in accordance with any process approved or required by the Central Bank.
Again, as I have said, this arrangement involves a Personal Insolvency Practitioner. Once the eligibility criteria have been met and the Prescribed Financial Statement furnished to the Personal Insolvency Practitioner the PIP then issues a Certificate stating that in his/her opinion there is no likelihood of the Debtor becoming solvent within a five year period.
The PIP then applies for a Protective Certificate to the Insolvency Service on behalf of the Debtor. The Insolvency Service then consider the Application and if they are happy issue a Protective Certificate. Same remains in force for 70 days (which period can be extended for up to 40 days in certain circumstances).
Again the issuing of this Protective Certificate prevents certain enforcement proceedings, the issuing of new proceedings or a Bankruptcy Petition etc.
The PIP then goes to work with the various Creditors etc. and attempts to conclude a Personal Insolvency Arrangement.
Again preferential debts are treated as if the Debtor was becoming a bankrupt.
The PIP again must do everything he/she can to protect the principal private residence of the Debtor and ensure that same does not have to be vacated. Of course this is not possible in many cases.
The purpose of this part of the legislation is to differentiate between those who are unable to pay their debts from those who simply won’t pay their debts. There are a range of solutions referred to in the Bill and any arrangement can only last for seven years.
Most importantly the Bill states that a Personal Insolvency Arrangement must ensure that, despite any payments which have to be made, that the Debtor including his/her dependents shall have a reasonable standard of living. There is of course no definition of what is a “reasonable standard of living”. Apparently the Insolvency Service whenever it is created is to provide guidelines.
Once the arrangement is concluded a meeting must be called by the PIP and for the arrangement to be approved there must be a vote in favour of same by 65% of those present, 50% value of secured Creditors and 50% value of the unsecured Creditors. One would imagine that this would be quite difficult to achieve in a lot of cases.
If the arrangement is not approved the Debtor cannot appeal to the Court or anywhere else whilst the Creditor(s) can. If a Creditor e.g. a Bank or Building Society don’t approve of what has happened they can apply to Court. They can do so on a number of grounds.
One assumes that if a Debtor wants to defend such an Application that he/she will have to pay legal costs etc. and may not be able to do so. A Bank or other lending institution will have unlimited funds to cover costs.
If there is no appeal then the Insolvency Service applies to Court to approve the arrangement.
As occurs in Debt Settlement Arrangements the Debtor must disclose the fact that he/she may have received a windfall. The Debtor cannot do side deals with one Creditor to the exclusion of others.
If the Debtor is in default of payments for a period of six months then the arrangement collapses and all the debts become due.
At all times the Debtor must act honourably, make fully disclosure and act in good faith. This may be hard to enforce!
If the Debtor complies with the terms of the Personal Insolvency Arrangement then, at the conclusion of the arrangement he/she shall be discharged from all unsecured debts but not from all secured debts unless agreed in the arrangement.
The Bill then provides for fundamental changes to bankruptcy laws as follows:-
1. The new minimum amount for a Creditor petition for bankruptcy whether a single Creditor or Combined Non Partner Creditors is increased to €20,000.
The amount which the Creditor must prove must exceed €20,000.
2. Provision is made for a 14 day notice requirement to ensure that a Bankruptcy Summons is not brought prematurely by a Creditor.
3. When an Application is made the Court must consider whether it may be more appropriate to adjourn proceedings to allow the Debtor to attempt to enter into a Debt Settlement Arrangement or Personal Insolvency Arrangement.
4. The Bill provides for the automatic discharge from bankruptcy after the expiry of a three year period from the date of adjudication. Prior to this Bill the relevant period was 12 years. This period may be extended by a further five years if there is some form of fraud or non disclosure.
5. The Bill permits the bankrupt individual to retain certain items e.g. furniture etc. The maximum value of these items has been increased from €3,100 to €6,000.
Reference was made in the Dail debates to retaining certain items of personal jewellery etc. Fianna Fail proposed that “one item of jewellery of ceremonial significance” be among the items excluded but the Minister for Justice said that no one would be deprived of a modest engagement ring valued at “a couple of hundred Euro” but ruled out exempting “€300,000 diamond bazooka engagement rings” from the proposed personal insolvency legislation.
The Minister said “one individuals €100 that has ceremonial significance might be another individuals €200,000 or €300,000 diamond bazooka that they regard as having a great deal more ceremony than the €100”.
The Minister indicated that he would consider increasing the value of a car that can be retained by Debtors from the planned limit of €1,200.
4. The Role of the Personal Insolvency Practitioner
The Bill envisages the creation of an entire new career as a Personal Insolvency Practitioner.
As can be seen from the above the Personal Insolvency Practitioner (PIP) is very much involved in Debt Settlement Arrangements and Personal Insolvency Arrangements.
The Bill provides for the regulation of PIPs which will no doubt involve the setting up of yet another supervisory body of some sort.
The Bill states that “a designated person may authorise persons to carry on business as Personal Insolvency Practitioners”.
The Bill also states that a person cannot carry on business as a Personal Insolvency Practitioner unless he/she takes out an indemnity bond to cover the theft or misuse of the funds of Debtors and Creditors by that person. One wonders how expensive these bonds will become.
There is no provision in the Bill as it stands for the payment of the PIPs costs and expenses. Presumably it is envisaged that these will come out of the Debtors assets which of course often may not be sufficient to pay a PIP properly.
There was certainly some suggestion floated at one stage that a sum of €250.00 would be paid to PIPs by the State one presumes. This may or may not have just been wishful thinking. There is absolutely nothing to prevent Solicitors becoming Personal Insolvency Practitioners as well as carrying on a legal practice. Indeed it is essential that nothing is put into the Bill to prevent us doing so. In newspaper articles and in the media reference is regularly made to Accountants carrying out this role.
The Law Society has, for once, made submissions on this issue which include the following proposals:-
1. Solicitors should be entitled to become Personal Insolvency Practitioners.
2. Solicitors should be equally preferred to other professions in this area.
3. The Law Society should be the licensing and regulatory authority for Solicitor Personal Insolvency Practitioners.
4. The Society could design and deliver suitable education and training for Solicitor Personal Insolvency Practitioners.
I feel that the proposals at numbers 1 and 2 above are helpful but I have no idea why the Law Society feel they should either educate PIPs or indeed regulate them.
Clearly however if this Bill is passed in roughly its present form then there will be a huge opportunity for many practitioners to become involved in this area.
5. Application of Personal Insolvency Bill in Family Law Disputes
The Bill as drafted does not deal specifically in any way with marital breakdown situations. It makes reference now and again to attempting to protect a principal private residence and also protecting maintenance payments. This is however of little help for couples involved in family breakdowns. This is somewhat surprising in view of the fact that the Minister for Justice is a former leading family lawyer.
According to a UK study the typical age of those who enter the Personal Insolvency process in Britain is between 25 and 44 years of age. These are also the years during which couples tend to split up if they are going to do so.
There is a clear need for separate Personal Insolvency legislation to deal with relationships which have broken down or are in the process of breaking down.
The Australian Experience
As usual Australia are way ahead of everyone else when dealing with relationship breakdown issues.
The Family Court and Federal Magistrates Court in Australia can deal with the bankruptcy of a party to a marriage or de facto relationship involved in certain family law proceedings.
The Court has jurisdiction in any matter connected with, or arising out of, the bankruptcy of a party to a marriage or de facto relationship in relation to property settlements, declarations in relation to interests in property and setting aside property orders, spousal maintenance and child maintenance and various other issues.
Once a party to a marriage or de facto relationship which has broken down becomes bankrupt, his/her property (with the exception of some assets) is immediately vested in the Trustee in Bankruptcy. Once this has occurred the bankrupt party is no longer able to transfer any property or pursue any entitlement to property settlement. Only the Trustee can do that.
In Australia the Trustee of the Bankrupt can apply to Court to become a party to any family law proceedings. If the Court is satisfied that the interests of Creditors will be affected by the Court making a Maintenance Order or an Order for settlement of property then the Court must join the Trustee as a party to the proceedings.
Once the Trustee becomes a party to the proceedings the Bankrupt basically loses most of his/her rights. He/she is not entitled to make any submissions to the Court about property already vested in the Trustee. There are only exceptional circumstances where this rule will be varied.
It is up to the Court to determine the competing rights of the Creditors and the non bankrupt party. However the non bankrupt party does not have any priority over the Creditors of the bankrupt spouse. Nor indeed to the Creditors have any priority over the non bankrupt party.
The Court can make various Orders directing the Trustee to transfer property etc. to the non bankrupt party if appropriate. This could be done in lieu of a Maintenance Order. Once this property is transferred it is not available to the Creditors of the bankrupt party.
The Trustee in Bankruptcy even has a right to apply to the Family Court to vary a Maintenance Order made previously. He/she can also apply to set aside earlier property transactions.
The Irish Situation
During the Celtic Tiger years when a couple separated or divorced there were regularly a lot more assets to divide than there are nowadays. Family homes and other properties were generally not in negative equity.
Once the recession commenced relationships naturally continued to breakdown. However quite a large proportion of couples decided to do very little or nothing in the hope that things would improve. Couples continued to live in the same property even though they were actually separated from each other.
If they did actually separate and agree that one or other party would retain the family home whilst being responsible for a mortgage, the only security was an indemnity in favour of the other party by that person.
The signing of an indemnity for instance in a Deed of Separation was in fact useless as a Building Society or lending institution would never agree to it particularly when there was negative equity. If arrears occurred they would simply enforce the charge.
What is happening more and more nowadays is that couples are now looking for certainty again. No matter how bad things are they still want some form of finality so that they can perhaps restart their lives again.
The only real way of dealing with these issues is to introduce new family law legislation dealing with insolvency and negative equity in family homes and actually give more power to the Family Courts in dealing with these areas.
In quite a number of cases of marital breakdown the Courts attempt to take into account the rights of NAMA, lending institutions, the couple themselves and any children of the relationship. This is a virtually impossible task without some form of clear legislation. The main difficulty arises in situations where there are large mortgages on family homes which are in substantial negative equity.
According to the Central Bank there are approximately 40,000-50,000 mortgage which have been re-structured by the Banks.
What does this mean however? Usually it means that borrowers have been allowed to make interest only repayments for a relatively short period. A huge number of these re-structured mortgages are not sustainable.
The Banks and lending institutions are taking no risks whatsoever in re-structuring loans in this way. They are in fact maximising their profits by putting people on interest only or lengthening repayment periods. All this does is add on huge amounts to the capital sum which will ultimately have to be repaid.
The various lending institutions are careful to ensure that the periods of interest only repayments are constantly reviewed thereby putting the borrowers under huge pressure every six months or so.
Whenever the management of Banks or other lending institutions make statements or appear before the various Dail Committees they continually state that their job is to maximise profits. They have little or no interest in the borrowers themselves. This is despite the fact that the State has a majority stake in most of the various lending institutions in Ireland at present. Alan Shatter when introducing the Bill stated that “This Bill is designed to provide a modern insolvency process in Ireland which addresses the obligations of Debtors and the rights of Creditors in a proportionate and balanced way having regard to the financial reality of an individuals true circumstances”.
The aim of this legislation is to provide “new non judicial debt resolution processes”.
This is all very good in theory but it seems clear that a huge amount of power still remains with Banks and other lending institutions. They can object to any arrangements entered into or can appeal to the Courts in connection with same. They have unlimited resources to do this whereas impecunious borrowers do not.
Bankruptcy and Separation/Divorce
Writing recently in the Irish Independent Stephen Donnelly TD provided an excellent example of how the third mechanism i.e. Personal Insolvency Arrangement (PIA) might work.
He gave the example of a couple who borrowed €400,000 in 2004 and purchased a house that is now worth €150,000. One party lost their job and the couple are no longer able to meet their mortgage repayments. After attempting unsuccessfully to work things out with their Bank the couple go to a Personal Insolvency Practitioner (PIP).
The PIP determines that, after providing for a reasonable standard of living, the couple could pay the Bank €1,100 per month. This would service capital and interest on a mortgage of €220,000. The PIP proposes to the Bank that €180,000 of the €400,000 loan be written off and that the couple begin to service a new mortgage of €220,000. This loan is still significantly over the market value of the house but is affordable and lets the couple remain in their home.
The Bank could of course object to this arrangement or apply to Court to prevent same taking place.
The only way therefore for the couple to pressurise the Bank is to indicate that they will go bankrupt which would mean that the Bank, instead of receiving €220,000 plus interest would only receive €150,000 (or even less) for the sale of the property. This would not be in the long term interests of the Bank but lending institutions often do not look at these issues in that way.
The relative relaxation of the law in relation to bankruptcy could well mean that there will be an increasing number of spouses who apply for bankruptcy in order to defeat the claims of the other spouse. There is however still a stigma attaching to bankruptcy.
Generally when a marriage breaks down the assets (if any) of each party form the pot of assets which are divided. If one party is bankrupt then the majority of the assets of that particular individual are no longer owned by them. It is the Trustee in Bankruptcy who owns them.
As I have said there is no real legislation in Ireland dealing with such situations.
If the matrimonial home is jointly owned by the Bankrupt and his/her spouse, the house cannot be transferred into the other spouses sole name without the Trustee in Bankruptcy’s consent. This is likely only to be given if the spouse can buy the Bankrupt’s share at a reasonable market value.
What often happens in circumstances where it is possible that one or other of the spouses may become bankrupt is that a race takes place whereby the other spouse applies to the Family Court for Orders protecting the family home or other assets or for Orders by way of Maintenance or Lump Sum Orders before any bankruptcy can take place.
It remains to be seen how the new insolvency legislation will assist individuals involved in matrimonial or relationship breakdown situations. On looking at the proposed legislation as it stands at present there doesn’t seem to be a huge amount of assistance for such individuals and the future looks bleak.