IT IS A fact of life in market economies that people go broke.
This being so, the laws should be framed so as to mean that ‘going broke’ is not the end of the world. The limited liability company was designed to allow people to enter into commercial ventures without the need to risk everything. And vitally, in developed economies a system of personal insolvency exists so as to mean that people always get a second chance.
The game changer
Ireland has been unique in not having a proper system of personal insolvency. This has meant that we have been unable to deal with the fallout from the property collapse. For over half a decade we have been paralysed and each month has seen a steady increase in mortgage arrears. And for every mortgage in arrears, there is a real person or family whose life is on hold.
Late last year the Oireachtas passed into law the Personal Insolvency Act and later this year it will come into effect.
On the basis of ‘better late than never’ we should have no doubt: this will be a game changer. Now the balance of power shifts towards the borrower and banks will be forced to do the deals that should have been done years ago. Once those deals start in earnest recovery of our country can begin.
The Personal Insolvency Act – how does it work?
As the system is new to Ireland it is important that we understand how it works. Unfortunately, in the vacuum that has existed over the past years, all sorts of ideas have been aired many of which have no basis in the reality of law of insolvency. More recently some consumer advocates and commentators have been grossly misrepresenting the new insolvency system and this creates confusion and frightens many already vulnerable members of the public.
The basis of the system is that a borrower engages a Personal Insolvency Practitioner (PIP) who, working with the borrower, puts a proposal to the creditors which enables the borrower to return to solvency. This inevitably means a proposal involving debt write-down and will always be approved by the borrower who must want and believe in the deal.
When the PIP presents the proposal to the creditors he also shows them what they will get should the borrower go bankrupt. And once there is more for the creditors in the PIP proposal there is an obvious commercial rational for banks to accept the deal.
This is why in the UK over 94 per cent of deals are accepted.
So the real key to understanding the system is to understand bankruptcy – what it is and what it means.
Bankruptcy has a bad reputation in Ireland but let’s look closely at it.
The first thing to note is that in three years all debts are written off in full.
The second thing to note is that during the three years, the borrower goes about life as normal. If he has a job, he continues to have a job. The only difference is that any surplus income is used to pay off creditors. For many people there is simply no surplus income.
For those in negative equity bankruptcy will have no effect on the family home. The assignee (the person in charge of the bankruptcy) has no interest in homes in negative equity.
If there is positive equity the assignee can seek to sell the home but he must go to court to seek permission and the courts have a wide discretion to refuse.
The bottom line is that the home is far better protected in bankruptcy that outside it.
Changing the relationship between banks and borrowers
So now we can see how viable and positive the option of bankruptcy is. Remember, in three years all debts are written off.
This is the profound change in the relationship between borrowers and their banks. Now the borrower can look his banks and creditors in the eye and offer the deal on a take it or leave it basis. If the banks refuse they will get much less in bankruptcy.
And this is what makes deals get done.
If it weren’t so serious, it would be almost hilarious to see various stake holders scratching their heads and wondering why the banks are not doing deals. It’s like wondering why dogs bark or snakes hiss – that is just what they do. Banks will not do deals until they are forced to do them and the new laws will do just that.
Debtors should take professional advice
Of more concern are those, including the banks, that are misrepresenting the true position. This is done either to deliberately frighten people or, in some cases, from genuine ignorance of how the system works.
Debtors should take professional advice (however preliminary this advice may be) from persons with verified experience and qualifications in law, finance or insolvency. Under the new Act, the Insolvency Service of Ireland will grant practising licences only to Personal Insolvency Practitioners (PIPs) who are appropriately qualified.
So, let’s clear up a few issues.
Firstly there should be no charge for people seeking to make proposals for insolvency arrangements. The law is crystal clear – fees are to be paid from the deal. So if I owe €100 and cannot pay it but can pay €20, the bank takes that €20 minus a proportion for fees. The amount for fees is agreed between the Banks and the PIP. The remaining balance of €80 is written off.
If somebody needs to go further and apply for bankruptcy, the law says that the Banks should pay the costs if they have unreasonably refused to accept the insolvency proposal.
Being on the register is no shame
There is a register, so a person who does a deal has his or her name on the register during the duration of the deal. But so what? We should see people who take back control of their own lives in the most positive way. This is exactly what this country needs right now – people who refuse to be debt slaves.
This debt problem has been with us for too long. For too long individuals and families, who did no wrong, have been forced to live on the edge, uncertain of their future – always at the mercy of some anonymous banker.
We had thought in New Beginning of a borrowers’ union or the like to force change. But now there will be de facto union of borrowers; in their tens of thousands, strong individuals can stand up for themselves and their families. This can be done wholly within the law and can be hugely effective in a way that other forms of protest could never be.
A time for action
The financial industry in this country has been responsible for so many ills.
First they flooded the market with credit driving up house prices so that young families needed to borrow extraordinary amounts just to live in modest homes.
Then when the banks went broke they hooked themselves to the ship of State and pulled it down with them.
And as we attempt to recover they keep their boot to the necks of citizens making such recovery well nigh impossible.
But the time has now come when we can effectively resist. This is not a time for the naysayers or for fear mongering. This is the time for action. And action means borrowers, the length and breadth of Ireland, working with the expertly trained PIPs to put forward deals which mean they become solvent again.
And once this happens the banks will come to heel, and what should have happened five years ago will begin to happen.
Bring it on!
Ross Maguire SC is a co-founder of New Beginning.