Experiencing the Penalty of Debt

Capital punishment for even the most heinous criminal offenses has long been abolished in the majority of western democracies with some significant exceptions such as the USA. In regard to personal debt however, the USA has a most benign set of laws dealing with indebtedness both personal and corporate. Contrasting very much in both of these matters is the Republic of Ireland. The death penalty is long eliminated in Ireland but the personal insolvency regime there has been explained by a great many august authorities as unrealistic, rarely used, very costly and exceedingly penal.
The simple truth is Ireland is not merely out of sync with the USA. Its bankruptcy laws and regulations compare and contrast unfavourably with most European states especially with its twenty six partner member states of the European Union. The remarkable characteristic of American insolvency law is the concept of a brand new beginning, debt forgiveness and encouragement of an enterprise culture. It can be like winning a ‘badge of honour’ to have been proclaimed insolvent in the USA and to have been made bankrupt multiple times doesn’t preclude the opportunity of bouncing back and trying once more. Ireland conversely remains embedded in a approach of penalty and prevention for those who are judged to have transgressed financially.

The popular Fine Gael led government currently has the opportunity to change all that. Fine Gael’s pre-election policy on personal debt stated that it proposed to change Irish bankruptcy laws and to create new legal processes to contend with personal and commercial over-indebtednessthat would allow people to avoid the bankruptcy process first and foremost. It proposed to bring in a flexible bankruptcy system similar to Northern Ireland’s system that would enable the courts to set bankruptcy terms based on each individual’s circumstances. It would consider whether there had been any fraud or undue recklessness on the part of the insolvent individual or if the insolvency came about simply because of inescapable changes in the debtor’s position. Where it was established that the debtor had engaged in reckless or fraudulent dealings, a restriction order could be granted together with a lengthier bankruptcy period so as to punish the debtor and to deter against such conduct in the future.

Fine Gael proposed to develop an out of court debt settlement system similar to the present system in Northern Ireland that would offer a route for firms that are owed money to demand settlement utilizing an officer of the courts to force a settlement and that would bring about no repercussions for the debtor if settlement 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 brand new legally binding arrangement. Under the IVDP an indebted individual and his or her creditors would consent to having a schedule drawn up by a certified insolvency professional or practitioner to restructure the individual’s due liabilities. The IVDP would be voted on by lenders and would shield the individual from interest charges and the risk of enforcement while due liabilities would be restructured and resolved.

For small firms going through debt difficulties, Fine Gael promised to bring in what it referred to as a Commercial Voluntary Debt Plan (CVDP) which would be the same as the Company Voluntary Arrangement (CVA) in the UK. The new system would aid small firms battling in the recession to restructure their debt and enterprise with the help of professional insolvency practitioners while under the protection of the State, as a result avoiding the excessive cost of the examinership process.
It now falls to the new coalition government of Fine Gael and Labour to enact suitable new personal insolvency legislation in Ireland in accordance with its policies. Much of the hard work was carried out by the Law Reform Commission (LRC) which completed 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. Much credit must go to the Green Party which unfortunately lost all of its seats in the general election in February 2010. After pressing for change in the area of personal insolvency legislation it found itself out of office before it could bring in or enact new legislation. The financial tsunami presently engulfing Ireland at a sovereign level has clearly diverted the attention 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 timeline of March 2012 for implementation.

The recommendations contained in the LRC’s draft bill are quite significant. They say, for example, that debtors 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 suggested sanction is community service and not jail time.

This is not the only significant suggestion. The draft bill provides for what is actually debt forgiveness although it is obvious that the use of the words ‘debt forgiveness’ is studiously sidestepped. 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 appears that the report adheres to the letter of the words of the former 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 exhibited significant courage and enlightenment in ensuring that the nature of its final report and the draft bill contain generous provisions for what is debt forgiveness in all but name. In particular the plans for insolvent debtors with no earnings and no resources (NINA) provide for what are described as Debt Relief Orders. In effect qualifying debtors would be able to have their unsecured liabilities entirely written off inside of a twelve months period of time so that they could start off afresh. It is likely that there would be a threshold on the overall quantum of liabilities. Above that ceiling a Debt Relief Order would not be obtainable for the insolvent borrower but the threshold has not been stipulated as yet. In the UK the debt upper limit is £30,000.

The major provision proposed by the LRC was the setting up of a Debt Settlement Arrangement (DSA) system whereby insolvent borrowers could pay what they could manage for a interval not surpassing five years, after which the unpaid balances of their liabilities would be wiped out in their entirety. Under this plan at least 60% of voting creditors as calculated 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.

Other provisions suggested by the LRC included establishing 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 licence and control insolvency practitioners, to be known as Personal Insolvency Trustees and creating a regulatory regime to control debt collection and debt advice bodies.

Whilst the LRC itself originally omitted 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 assertion picking out the necessity to reform 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 very clear that the LRC was particularly dissatisfied with the lack of political progress in taking steps to address the reform of bankruptcy law, an enormous undertaking which could take many more years to carry out, even if the entire resources of the LRC were allocated to it. Can the imagination, vitality and determination of a new government shorten that timescale? It would be astounding and indeed unacceptable if Ireland’s draconian bankruptcy law, though seldom employed, could possibly remain 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 measures to tackle the insolvency problems 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.