Law Reform Commission offers hope to those mired in Dickensian debt noose, writes Bill Hobbs
Last week, the Law Reform Commission unveiled a small silver lining from within a very dark consumer protection cloud that should force the snail like pace of Irish legislative reform.
In its 416 page report, the commission recommends fundamental change in the relationship between those who owe money and those who are owed money. Designed to redress laws derived from Dickensian societal norms, its proposals include a draft bill that should be law by this time next year, given this state’s solemn undertaking to revise its antiquated insolvency laws under the IMF/EU agreement.
With over 100,000 households experiencing significant mortgage debt problems, official statistics merely hint at the scale of wider unaffordable indebtedness. There is no financial safety net – no way for someone to earn a fresh start, to get out from underneath the unbearable burden of unaffordable debt save lifelong insolvency, bankruptcy, permanent emigration or death.
This is all about to change. The commission’s fundamental aim is to ensure that people who cannot pay off unsecured loans in full are provided with a statutory financial safety net mechanism to earn a “fresh start” - to become once again “economically active members of society”. In considering international principles and precedents it has designed an equitable and just non-judicial system for 21st century Ireland.
This design would see the establishment of a debt enforcement and settlement office to oversee the workings of a centralised debt recovery system and a new debt settlement scheme.
The scheme would be administered through a national network of licensed and regulated personal insolvency practitioners whose role would be to act as independent objective mediators in advising, arranging and administering debt settlement plans between consumer and small business debtors and their creditors.
Under these plans, people will agree to make debt repayments based on what they can afford to repay over a period of upwards of five years. Estimates of affordability will allow for a basic standard of living above social welfare rates while protecting a person’s ability to earn an income. Allowing people space to rebuild their financial affairs, should incomes improve then only 50% of future increases will be allocated to repayments.
Providing 60% of a person’s creditors by value agree to a settlement plan, then it will become legally enforceable. The schemes rules will protect people against manipulative creditor practices and its moral hazard measures will prevent people unjustly benefitting. Providing people stick to the plan, they will earn a fresh start when it concludes, as any balance left owing will be written off.
Provision is also made for “no assets and no income” or NANI cases. An order can be made preventing legal action by creditors and wiping out debts owing after twelve months. Other changes include shortening bankruptcy from twelve to three years, increasing the minimum qualifying threshold from €1900 to €50,000 and limiting priority debts including excluding revenue debt.
The commission predicts most people will opt for debt settlement agreements as bankruptcy would be reserved for the wealthy or “once wealthy” category. In a radical step, it also says that nobody should be jailed for non-payment of debts including those who can pay, but refuse to pay – they would be subject to community orders.
While the commission did not deal with secured debts, its recommendation on dealing with the largest element of secured household debt – home mortgages- is quite interesting. It says that once called in, as the portion the loan owing over and above the value of the property becomes unsecured, it should form part of a debt settlement agreement.
This could open the door to a mortgage option where a lender agrees to mark down the value of a loan to the current home market value and allows balance to be dealt with through the debt settlement plan. Treating unsecured mortgage balances in this way could provide a mechanism through which unaffordable negative equity is settled within five years.
The commission is quite strong on creditors paying the costs of operating the system. It also says debt collectors and money advisors should be licensed and regulated. While the Central Bank has a role in both, the boundary is somewhat blurred between these actors and personal insolvency practitioners. Establishing the correct compliance framework will be critical to make sure that regulatory white spaces don’t emerge where state agencies drop the ball, believing others are running with it.
There are far too many people suffering needlessly from failure of legislators to act in the past. Any new government must implement the commission’s reforms and resolve key policy areas such as priority debts and enforcing costs on creditors.
Most importantly any statutory regime must have the powers to enforce compliance by personal insolvency practitioners, including setting their reasonable remuneration. Prevarication and dilution of the proposed reforms to favour sectional interests cannot be allowed to happen.
A version of this article appeared in the Irish Examiner, Business Section Monday 20th December 2010
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