Know all your available options

THE Insolvency Service of Ireland (ISI) was set up in March 2013 to provide debt relief mechanisms to those facing insolvency, or the inability to service their existing debts. The new service was set up under the Personal Insolvency Act 2012 and while it’s yet to formally process any applications from struggling debtors it finally opened for applications on Sept 9.

* Pre-Insolvency

For any borrower considering an arrangement under the new legislation, they must comply with certain criteria before entering the process.

Firstly, they must be insolvent. This means they cannot pay their debts as they fall due by any means. If, for example, you have a mortgage in difficulty but have equity in your home, you may not be eligible for an arrangement as you could in theory sell your home, repay the debt, and have cash left over.

Secondly, before approaching the ISI you must have sought to do a deal with your creditors yourself, or through your financial advisor, to deal with your difficulty. This must be evidenced and no application will be accepted by the ISI until a borrower shows that they have made all reasonable efforts to deal with the problem themselves.

Once you have complied with these requirements you are then eligible to seek an agreement with your creditors formally through the insolvency process.

* The Register

Any deal which is agreed within the insolvency process will be placed on a public register.

If any variations to the deal are required during its lifetime, this will also be noted on the register and similarly the successful completion of the arrangement will be noted on the register. Currently, there is no mechanism for removing a deal from the register post- completion and given the public nature of the register, careful consideration needs to be given to entering any arrangement.

* Operation of deals

In both circumstances a PIP (personal insolvency practitioner) effectively replaces the borrower at the negotiating and decision-making table in dealing with the debt.

Should a deal be reached, the PIP will also administer the arrangement for its duration, make annual reports to the ISI on its progress and may interact on a borrower’s behalf with creditors.

Under both a DSA (debt settlement arrangement) and a PIA (personal insolvency arrangement), debtors are required to adhere to reasonable living expenses as laid out by the ISI.

These detail the amount a debtor will be allowed to spend for ordinary living expenses for the duration of the arrangement with the remainder of their income being made available for their creditors. Certain items — for example a second car, health insurance or third-level education fees — are not included in these standard living expenses and would need to be negotiated as part of any arrangement.

Prior to making any decisions about seeking an arrangement through the ISI, or seeking to declare bankruptcy, it is always strongly advised to seek independent professional financial advice.

Decisions made in respect of these arrangements can have long-lasting consequences and you need to know all your options before proceeding.

Should I try and do a deal outside insolvency?

For all borrowers, there is a requirement to attempt to deal with their creditors prior to entering an ISI arrangement. There is huge merit in carefully and diligently attempting to deal with your creditors yourself or with the assistance of your financial advisor. Then look at insolvency or bankruptcy as a final option when all other avenues have been explored.

There are benefits for those who can reach agreements outside the system.

* Bank co-operation

Firstly, the bank, if agreeing to a deal on a cooperative and informal basis, are much more likely to grant concessions to borrowers which they otherwise would not be obliged to. For example, the ISI sets out reasonable living expenses that borrowers must adhere to. Banks generally stick to these guidelines but importantly with a tolerance of 10-15%. This 10-15% additional living expenses is huge to a family with less than €2,000 per month to live on.

The banks privately say they much prefer to do a deal outside the insolvency service where there is no involvement of a PIP, no rigid structure, no annual report to the ISI by the PIP and no disclosure of potential write-offs where properties are sold.

Similarly, if you have a second car or health insurance, you are more likely to be allowed these items in an informal arrangement than within the insolvency service where they are not provided for.

* Reviews

There is no requirement to make or disclose annual reviews through a PIP to the ISI. This means for a borrower that once they strike a deal with the bank, and stick to it, there is no further intrusion to their lives and they can start the process of rebuilding.

* Cost

It is a lot cheaper to do a deal informally. Fees for a PIP to administer a deal are expected to start at €3,000-€5,000. It seems it is very expensive to go broke in Ireland. A borrower can negotiate an informal deal themselves i.e. for free, or engage a financial advisor at a fraction the cost of a PIP.

* No removal from register

There is no mechanism for removing your name from this register even after the arrangement has been successfully completed. It stands as a life-long testament to a borrower’s previous difficulties and will likely have ramifications on a person’s ability to obtain a mortgage, business loan, car finance or credit card well into the future.

For any borrower looking at the insolvency process as a solution to their financial problems, it needs to be seen as the final step of a journey. Not the first step, or even the middle step, but where all other options have been explored in full and ultimately rejected.

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