By understanding what bankruptcy is, and how it works, people can escape from an impossible debt burden and get on with their lives, says Ross Maguire
UP TO last year the only legal option for a borrower in distress in Ireland was to beg for mercy.
The troika recognised this and demanded that the State introduce modern insolvency laws providing for debt resolution for ordinary people. Former US president Bill Clinton had pointed to this as far back as 2009.
The Personal Insolvency Act finally emerged at the beginning of 2014. It is noteworthy that it took weeks to put Nama together but years to put in place some sort of response to the personal debt crisis.
The basic idea of the insolvency system needs to be understood and is very often misunderstood.
Firstly — how do I know if I am insolvent? The State has now published expenditure guidelines below which people are not required to live. On the basis of these guidelines, a family of five living in Dublin could well need to earn in excess of €70,000 annually before any payments to debt should be made.
On this basis, I estimate that there may be hundreds of thousands of people who are actually insolvent but just don’t realise it. They are paying debt that should not be paid and to do so, they are denying themselves and their families in a way that is no longer required.
Feeding the debt monster is the national obsession in the hope that the dreaded creature will take pity on us — but he will not take pity and the old adage of throwing good money after bad has never been more apposite.
None of this is surprising, for the maths do not lie. The Celtic Tiger left in its wake enormous debt — debt that will not and cannot be repaid. Yes you can continue to make payments, but it is high time to think strategically.
Recently a couple came to see me with debt relating to a premises that they had bought for their business during the boom. They now have debt of €800,000 and a property worth €200,000. For years they have scrimped and scrapped to keep the bank happy.
Now the bank has made an offer which will involve them living below living expenditure guidelines for four years after which the bank wants all of its money back? This couple felt this was their only option but, as it happens, they are wrong. There is no longer a legal requirement to be a debt slave.
Bankruptcy is the gamechanger once it is properly understood. This couple can have all their debts written off immediately. Then they can start again.
They are young enough and are small business owners whose real wealth is in their skills and their in their contacts.
They could be up and running again in weeks which is good for them and for the economy. And during the three years of bankruptcy they will actually have more disposable income to live on because right now, they are living below guidelines to keep some Irish bank happy. And after the three years has passed they can become millionaires and it will all be theirs.
Willie Penrose TD has tabled a bill which will make bankruptcy even more effective in resolving our personal debt problems. Under his legislation, there will be automatic discharge in one year and payment orders will be capped at four years.
The basis of Mr Penrose’s bill is simple — let’s get on with it! What is the point in keeping people down any more? Why not just give them a break, so that we can all move on.
Importantly, the family home will re-vest in the bankrupt after three years should the property not be sold. This will make it more likely that people can retain their homes in bankruptcy provided they can pay the mortgage or a restructured version of it.
Either way it is necessary in Ireland that people at least understand bankruptcy and the fact that for so many, there are almost no downsides.
The effect of a working bankruptcy regime is that it causes banks to want to do deals. The insolvency arrangements under the legislation inevitably involve massive debt write-down. Banks will only agree to this once they realise that bankruptcy will be used by borrowers. This is how the system works and bankruptcy is the gamechanger.
After seven years of this bank-driven nonsense, we really need a game changer. Should the Government support Mr Penrose’s bill, it will give succour to thousands and will greatly help our fledgling economic recovery, not by promoting the Googles of this world, but by giving our own people the break they so really deserve.
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