Insolvency service not fit for purpose - Reduction in bankruptcy term

The Government’s decision to reduce the term of bankruptcy from three years to one year is a pragmatic and humane response to the distress caused by constant indebtedness.

The new law will help to remove the stigma associated with it and bring this jurisdiction into line with what is happening in the North and the rest of the UK.

It takes a carrot and stick approach. Under the bill introduced by Justice Minister Frances Fitzgerald, penalties for those who try to hide their assets will be increased. In serious cases of non-cooperation, a person’s maximum bankruptcy period will be extended up to 15 years, from eight at present.

It has been welcomed by, among others, the Irish Mortgage Holders’ Organisation which, up to now, has been very critical of the Government’s failures on the issue. The IMHO said the move to one year would “end the torture” thousands of distressed mortgage holders have endured for more than seven years.

But will it?

While welcome, the new law reflects the problems that remain with Ireland’s insolvency service which needs a complete overhaul, not just a piecemeal approach like this.

While the new law will primarily aid business people who, through no fault of their own, went bankrupt, there are still many thousands of ordinary householders who risk being put out of their homes as a result of losing their jobs and, consequently, being unable to maintain mortgage payments.

The insolvency system is a privatised one, depending largely on creditors — many of them banks — agreeing to accept less than a full payment of debt owed.

It can also prove to be a costly process for those involved. There is no totally free service for a personal insolvency arrangement or a debt-settlement arrangement.

It is little wonder then that there was a significant reduction in demand for debt restructuring from July to September of this year, with figures from the Insolvency Service of Ireland showing a fall of 12% in the overall level of arrangements completed.

It is true that much of that fall may be attributed to the decline in bankruptcy applications as a change in the law had been heralded for the past nine months.

Nonetheless, the insolvency agreement figures are tiny compared to the level of indebtedness. Overall, there were 300 arrangements agreed in the third quarter of this year, yet there are thousands of householders in mortgage distress.

Earlier this year, the CSO revealed that the burden of debt carried by Irish mortgage holders relative to the value of their homes is the highest in the eurozone.

It found the median (or middle) loan-to-value ratio for owner-occupier mortgage holders here was 72.9%, nearly twice the eurozone average of 37%.

While most of those householders are managing to meet mortgage repayments, many are not. The reasonable conclusion must be that our insolvency service is overly complex, not fit for purpose, and is in urgent need of a new approach to personal indebtedness.