F-words may just hold the key to new insolvency guidelines

Debt may be the f-word in many households, but for those fearing being put through the wringer by the new Insolvency Service, the f-paragraph might provide reassurance.

Paragraph f, sub-section 3 of section 23 of the Personal Insolvency Act 2012, states that when deciding what income an individual should be left to live on while their debts are being processed, there should be regard to “the need to facilitate the social inclusion of debtors and their dependants, and their active participation in economic activity in the State”.

And while exactly what that means won’t be clear until guidelines as to what constitutes reasonable living expenses are published next week, it does suggest the service aims to be pragmatic rather than punitive.

Of course what’s practical to one person can be punishment to another, and social media is alive with stories of the relative/colleague/neighbour who can’t pay their mortgage butinsist Sky Sports and yearly ski trips are essentials, not extravagances.

It would be easy to wait with glee to see those unable to separate the niceties from the necessities get a harsh lesson in home economics.

But Michael Culloty of the Money Advice and Budgeting Service says there are people who have a lot of adjustment to do, and urges a gentle rather than judgmental approach.

“It all depends where you are in the debt cycle. When people find that they have lost control of their finances, they can find it very difficult emotionally to accept where they are and come to the realisation that they have to make huge changes.

“But if you make a standard financial statement and you’ve put in two holidays a year in Italy or if you are 23 and on the highest health insurance plan, that’s automatically going to be questioned. We don’t tell people what to do but we will advise them that they better have appropriate answers.”

From what’s known so far about the guidelines, wintering in Tuscany will not be considered appropriate for anyone wanting their debts resolved, but Mr Culloty says people should not be scared by reports they will be denied a second family car or private health insurance.

“For people in very rural areas where one of them is working and the other is caring for the children and where there’s no public transport, two cars can be essential. They just shouldn’t be two Lamborghinis. And if someone has a serious health issue, health insurance can be an acceptable expense.”

In drawing up its guidelines, the Insolvency Service is also required to consult with financial and social policy experts and it is understood much use has been made of the research carried out by the Vincentian Partnership for Social Justice. It has a huge database of the minimum income levels it says are necessary for healthy, positive, and dignified lifestyles — and that includes modest socialising and saving.

“If the Vincentian scheme is going to be used, I think the Insolvency Service will take a humane and researched approach,” says Mr Culloty.

The devil will be in the detail when the guidelines are published, but we are all hoping there may be a god in there too.