Personal Insolvency / a new regime

The Personal Insolvency Act 2012 (the Act) was finally enacted last December. Before it could become effective the Minister for Justice had to issue Commencement Notices. The Commencement Notices have now issued and the majority of the Act is now in operation as of the 1st of March 2013. I have attempted to set out a brief summary of the effect of the Act.

The Act provides for the establishment of the Insolvency Service of Ireland (the ISI) to oversee this new debt resolution process.   The ISI will supervise what are called “insolvency arrangements”.   The ISI have also prepared draft guidelines on “reasonable standards of living and reasonable living expenses” for people who are availing of the new insolvency regime.  The draft guidelines are presently with the Minister and should be published sometime this month (April 2013) once approved by the Minister.  The purpose of the Act is to facilitate individuals who are insolvent (i.e. not able to meet their liabilities) put in place an arrangement with their Creditors which will be binding on all parties once approved.   It effectively allows them put in place a structured path out of their insolvency which will in most cases involve significant write down of debts.

There are 3 debt resolution mechanisms provided for in the Act each dependant upon the level and nature of the debt.  I should say at the outset that certain debts are excluded from consideration e.g. family law maintenance, liabilities arising from personal injury claims or debts arising under the Proceeds of Crime Act.   Also there is excludable debt which is essentially debts due and owing to central or local government re taxes or debts arising under the Multi Unit Development Act or Social Welfare debts.  Essentially in respect of the excludable debt the Creditors have to agree to be admitted to the new regime (which one can safely assume they will not) and therefore these debts are excluded from consideration.

At present we are awaiting the appointment of Personal Insolvency Practitioners which is essential before the DSA procedure and PIA procedure referred to in the foregoing 2 paragraphs can be implemented.   The Money Advice Bureau (MABS) has been appointed as an approved intermediary for the DRN procedure referred to at paragraph 1 below.

1. If you owe less than €20,000.00 (whether secured or unsecured) – utilise Debt Relief Notice Procedure (“DRN procedure”).

a. If you utilise the DRN procedure it facilitates total debt forgiveness up to €20,000.00 after 3 years.     The procedure is very straightforward:

(i) The Debtor submits a written statement to MABS (“the prescribed Financial Statement”).

(ii) MABS issues a Statement confirming the prescribed Financial Statement is in order to the ISI.

(iii) ISI issues a Certificate that the Application is in order and submits that Certificate along with a copy of the Application and the supporting Financial Statement to the Circuit Court and the Circuit Court issues the Debt Relief Notice (DRN).

(iv) Once the DRN is issued the Debtor is protected from any existing Proceedings progressing or the commencement of any new Proceedings.

(v) From the point of view of the Creditor who receives the Notice, he is prohibited from bringing any legal proceedings or progressing any proceedings already in being or taking any further steps to secure the debt, including enforcement of an already existing Court Order.

(vi) Also the Creditor can not take any steps to recover goods in the possession of a Debtor.  Furthermore they are prohibited from contacting the Debtor (unless requested to do so).

(vii) There are downsides for the Debtor in that his lifestyle is effectively supervised for 3 years.  If he gets a gift worth over €500.00 he has to give 50% of it to the ISI to pass on to his Creditors.  Also if his income increases by €400.00 or more per month 50% of it must be given to the ISI to pay to his Creditors.   Also he is prohibited from obtaining any credit in excess of €650.00 without notifying the Bank or Lending Institution that the Debtor is availing of the DRN procedure.

2. If you owe more than €20,000.00 and the debt is unsecured – utilise the Debt Settlement Arrangement Procedure (“DSA procedure”). There is no financial limit.  All that is required is that you are insolvent and domiciled in the State. The duration of the DSA is 5 years with a possible 1 year extension. The procedures employed are somewhat different and more formal than for the DRN procedure outlined above:

(i) The Debtor appoints a Personal Insolvency Practitioner (“PIP”) to prepare the prescribed Financial Statement.   The PIP will advise the Debtor about the procedure and their suitability to enter the procedure. Assuming the Debtor is suitable the PIP notifies the ISI of the Debtor’s intention to propose DSA and apply for a Protective Certificate.  Once the ISI is satisfied as to its appropriateness the Circuit Court or High Court (depending on the amount of debt) issues a Protective Certificate which lasts 70 days (extendable for a further 40 days).

(ii) PIP notifies Creditors of the issuing of a Protective Certificate and that the Debtor intends to make a proposal for a DSA and invites the Creditors to make submissions.   The PIP calls a Creditors meeting to approve the DSA.    65% approval is required.

(iii) Objectors have 14 days thereafter to challenge the DSA.

(iv) After 14 days the Court approves the DSA.   All Creditors are bound by the terms of the DSA.

3. If you owe more than €20,000.00 and part or all is secured – utilise the Personal Insolvency Arrangement Procedure (“PIA Procedure”).   Once you are insolvent and resident in the State and the debt is less than €3 million you can enter into the PIA procedure, which lasts for 6 years and is extendable by 1 further year with your Creditors.   The procedure is similar as for the DSA Procedure with one important exception.   The proposal must be accepted by 65% of total Creditors and by at least 50% of both secured and unsecured Creditors.

Generally in respect of these procedures there is an acceptance by the Debtor Applicant that they are insolvent.   Therefore if they breach the terms of either procedure or are not admitted to either Procedure then they are opening the door to Bankruptcy Proceedings.

While the legislation has been enacted many of the necessary steps to get the new insolvency regime up and running have not been put in place and it is likely that it will be another couple of months before Debtors will be able to avail of this new regime.    From a Creditors perspective, if it is that they have a Judgement or are in the process of obtaining a Judgement against someone they should proceed with all haste as once they get Judgement it can be registered as a Judgement Mortgage and arguably they will have put themselves in a stronger position in dealing with their Debtors as they convert it from being an unsecured debt into a secured debt by virtue of the Judgement Mortgage being registered.

While the Act deals with general debt one must also bear in mind the guidelines issued by the Central Bank in respect of Mortgage debt.   In this respect it is worth mentioning, in passing, the Mortgage Arrears Resolution Process (“MARP”) which protects Bank’s customers in their dealings with the Bank.   Essentially it is the Code on Mortgage arrears.   Unfortunately for the customer the Central Bank appears to be contemplating diluting some of the original protections contained in the Code.    They envisage allowing Banks to have increased unsolicited contact with customers regarding arrears and more worryingly interfering with Tracker Mortgages.   These changes are relevant to the  new insolvency regime as it would appear that the Minister’s intention is to insist on customers in Mortgage arrears exhausting the MARP process before they can avail of the new insolvency regime.

The Jury is very much out on whether the procedures will resolve the debt crisis in the Country.   One can safely predict that the DRN procedure will be successful.  However the real test of the Acts success will be whether it manages to deal with secured debt.