Looking at a British solution to a mounting Irish debt problem

MOTOR Neuron Disease in all its horror was brought to life by Colm Murray.

His television documentary, portrayed Colm’s traits of inspirational courage and self deprecation. He is a regular race-goer, where his bonhomie, banter and bad tips brighten any day. MND is a killer disease, with crippling physical paralysis. John McCarthy (Mad Pride), Deputy Michael Fitzpatrick (FF TD from Naas) and Paul Magee (son of Jimmy) were victims of this most cruel illness. The programme vividly portrayed the reality of living with terminal illness.

No matter how empathetic you are, one cannot really understand the mentality of waking up on a cold February morning with expectation of death. I don’t pretend to fully absorb the hopelessness involved.

A similar, although much less despairing, disconnection relates to the plight of personal insolvency. A daily routine of being submerged in debt requires deep denial. You can rationalise the inevitability of litigation, court judgments, bailiffs calling to your door and ultimate penury. Worrying about it won’t make creditors go away. Shielding other family members from facts involves secrecy, obfuscation and even dishonesty. The end-game probably means the loss of ownership of the roof over your head.

Repossession of family assets and deductions from future earnings are certain outcomes. Unless you experience the living hell, you cannot fully appreciate the vulnerability. Media and public perceptions of those who exit the country have not rationalised the extent to which it is the very last option to be undertaken. Dislocating from your family, friends and local community is a recipe for solitary confinement. Up rooting yourself involves truncating income and employment streams. Marital relationships are put on the line. Ignominious stigma of running away casts reputational shadows indelibly on your future. Yet, it’s called “bankruptcy tourism” or “forum shopping” as if it represented sunshine escapism.

More than 30,000 mortgage holders and 10,000 business people face prospects of exporting their problems, despite government proposals for personal insolvency legislation. Their genuinely motivated legislative response doesn’t provide a chance of a fresh start any time soon. To properly appreciate debt dilemmas, one must rationalise the basis of secured lending. It is common practice and ubiquitous that not only does the lender effectively own secured assets, to dispose of as they see fit, but also a “personal guarantee”.

Personal guarantees mean that the terms of loans can be rewritten in an open-ended way to treat all realisable cash as fair game for debt recovery in perpetuity. Courts have consistently upheld that debtors are only entitled to minimal living expenses, with everything else available to financial institutions. Banks and Nama hold all the aces when the cards are dealt. They resolutely oppose fundamental change to the present balance of Irish legal rights between creditors and debtors. This legislative landscape might explain why the number of people declared bankrupt here were only 17 in 2009 and 29 in 2010 — compared to 135,089 in England/Wales and 20,329 in Scotland in 2010.

There is a common misconception that the UK provides a one-year discharge date from bankruptcy, allowing people to walk free on the first anniversary of being declared bankrupt in a court. There is a difference between a discharge date and remaining unrestricted. An EU directive allows any European citizen establish a COMI (centre of main interest) in any state provided detailed criteria of residency, income, expenditure patterns and living arrangements have been met. After petitioning a UK county court for bankruptcy, one must submit to a regime whereby up to three years’ income is subject to an Income Payments Agreement (IPA) and Income Payments Order (IPO). The trustee in bankruptcy, who is appointed by the official court receiver, operates the EC Regulation on Insolvency Proceedings, as amended in February 2010.

Government reforms provide for four different tiers of debt situations. For unsecured bad debts, there will be non-judicial remedies. If you lost your job, with no income or assets, you can seek a debt relief certificate. After one year, if you remain broke, your liabilities up to €20,000 will be erased. This deals with impossible bills from credit cards, utility energy companies or other consumer debts. Debt settlement agreements will be available for larger similar unsecured un-repaid bills over this threshold, whereby all creditors can agree a repayment plan over five years. Both procedures provide a legal basis for what is an everyday reality. Court judgments cannot procure blood out of a stone. At the end of the day, despite repeated bailiff visitations, there is no cash on hand. The new state Insolvency Service will oversee both measures. No details are available on the timetable to establish this agency, its personnel numbers or budget. It will probably be 2013 before it’s fully operational — better late than never. The greatest innovation is the second-tier proposal to provide for Personal Insolvency Agreements (PIA). This covers liabilities between €20,000 and €3m. It’s broadly similar to Individual Voluntary Agreements (IVA) operating in Britain. It involves pooling all debts, secured and unsecured, into a singular share out of agreed repayments over six years. Professional costs incurred will have first charge on revenue and absorb meagre resources.

The biggest imponderable will be how banks exercise their effective veto. 75% of secured lenders must consent. Confidentiality clauses mean they can screw debtors in private and ensure no escape.

PIAs are a potentially viable option that mirrors resolution of corporate insolvency. Those who lecture on moral hazards and taxpayer exposure to debt write-offs are usually smug people who have no relevant, practical experience — Celtic cubs and bubble-wrapped pensioners. The fundamental tenet of business insolvency is the writing down of debt. Whether through examinership, receivership or liquidation the modus operandi is a hit for creditors. Contracts are systematically ripped up and renegotiated. Cents in the euro are the limits of expectations of unpaid liabilities. Company law fosters a situation whereby the enterprise is facilitated into a new life or death. 48,000 Irish companies have entered insolvency over recent years. Is it such a large step to provide individuals with the same metamorphosis?

The final category, debt beyond €3m, will be subject to revised court bankruptcy procedures. This reduces the discharge date from 12 years to three years. However, crucially, the income restriction period is a further five years. Compare UK and Irish bankruptcy regimes: ultimately release periods are respectively three years and eight years. This represents a massive victory for lenders. Exodus of entrepreneurs, despite enormous personal trauma, will continue apace.

No legal right has been established for people to walk away from mortgages, facilitating repossessions. A surrender situation is a glaring omission in the bill. Does the Dáil really want to grasp this nettle? The simplest remedy is to replicate what the Brits do — it’s called a British solution to an Irish problem.