The much anticipated Personal Insolvency Bill has been published and introduces wide-ranging measures to seek to deal with the issue of personal debt affecting many people in the country today. The headline changes are the reduction of the period a person is bankrupt from 12 to 3 years and the introduction of three new debt resolution processes which, while being under the jurisdiction of the Courts are predominantly non judicial based processes involving the newly established Insolvency Service. In this alert we look at the main areas of the Bill and the effect of the processes not only for the Debtors themselves but also for their creditors who will be affected by these processes.
- Debt Relief Notices
Debt Relief Notices (DRNs) are the first of three new debt resolution processes being introduced in the Bill and cover unsecured debts up to a maximum of €20,000. An application for a DRN will be possible in specified circumstances which are set out below. 1.1 Types of Debt included:
Up to a total of €20,000, the following debt is included:
- Credit card debt
- Overdrafts or unsecured loans from a bank or other financial institution
- Debt for payment of one or more utility bill
- Liquidated debts incurred by an individual as surety for another person such as guarantees that have been called up
1.2 Excluded debt:
Debt which is not eligible for inclusion under a DRN includes liabilities owed under domestic support orders, debts owed to the State under various provisions of legislation including the household charge, Local Authority rates, services charges owed to management companies under the Multi-Units Development Act 2011 and liabilities arising from damages awarded by a court in respect of personal injuries etc. Secured debt cannot be included.
The Debtor must meet the following eligibility criteria:
- Have qualified debts of up to €20,000
- Have a net disposable income of €60 or less a month
- Have assets calculated to be worth less than €400
- Be normally resident in Ireland or have lived/ had a place of business in Ireland for 1 year
- Be insolvent with no likelihood of becoming solvent within 5 years, while also maintaining a reasonable standard of living for himself / herself
- Have given up possession of any Hire Purchase goods as relevant
Significantly, a DRN will not apply where 25% or more of a Debtor’s qualifying debt was incurred within 6 months of the application for a DRN. It is likely that this provision has been included to prevent a situation where an individual opts not to pay their debts in order to avail of a DRN.
The Debtor himself / herself does not make the application for a DRN. Rather the application is made by an approved intermediary on behalf of the Debtor. While the Bill is silent as to who the “approved intermediaries” will be, the press release issued by the Department of Justice in connection with the publication of the Bill indicates that this role will likely be taken by persons currently operating in the Money Advice and Budgeting Service (MABS). The Bill sets out the procedure for engagement between the Debtor and the approved intermediary including a written statement disclosing all of his / her financial affairs, information in relation to his / her creditors, and his / her liabilities. The approved intermediary will meet the Debtor and provide advice and information on whether they satisfy the eligibility criteria, the effect and consequences of making an application for a DRN, other options open to the Debtor. A Debtor must then confirm in writing that he or she wishes to apply for a DRN. The approved intermediary assesses the information and assists the Debtor to complete a Prescribed Financial Statement. If the approved intermediary is satisfied that the Debtor is eligible for a DRN, they will make a statement to that effect and make an application to the Insolvency Service. The Insolvency Service then considers the application and may request supplementary information to assist this process. Once it is satisfied that the application is in order, the Insolvency Service will issue a Certificate to that effect, forward the Certificate to the Circuit Court and notify the approved intermediary. The final stage is where the Circuit Court reviews the Certificate and the related documentation and if satisfied that all criteria have been met, issues a DRN in respect of the qualifying debt.
Once a DRN has been issued then, for a period of three years, a creditor may not:
- initiate legal proceedings in relation to the debt in question;
- pursue legal proceedings already initiated;
- take any steps to secure or recover payment of the debt;
- execute or enforce a judgment or order of a court against the Debtor in respect of the debt;
- take any step to recover goods in possession or custody of the Debtor;
- contact the Debtor regarding payment of the debt;
- amend or terminate any other agreement in place with the Debtor;
- initiate bankruptcy proceedings in relation to the Debtor.
The effect is therefore substantial for creditors who are not in a position to take any steps to recover the debt due. In addition goods which may even have the benefit of retention of title will not be permitted to be taken by the creditor. It is not quite clear why the period of the DRN has been extended to a three year supervisory period but it does give the Debtor significant time to deal with his / her debts.
1.6 Financial arrangements / clawback during supervisory period:
During the supervisory period, Debtors are obliged to inform the Insolvency Service of any material change in their circumstances, in particular, any increase or decrease in the level of their assets, liabilities or income and there are potential consequences for the Debtor. For instance, if a Debtor receives a gift or payment worth €500 or more, they must surrender 50% of this to the Insolvency Service. If the Debtor’s income increases by €250 or more per month (excluding income tax and other levies), 50% of this amount must be surrendered to the Insolvency Service. Debtors must also not obtain credit for more than €650 from any individual without informing that individual that they are Debtors under the legislation. If they do so they commit an offence and the DRN can be terminated. If this occurs then all debts covered by the DRN will be due including any interest earned on the sums during the period of the DRN. Under the Bill, the Debtor can voluntarily pay a sum to the Insolvency Service. If the sum paid amounts to 50% of the total debts owed, then the DRN will automatically terminate and the Debtor will be discharged from the debts in full. This provision may make the DRN process more attractive to Debtors than the bankruptcy process which does not have this flexibility.
1.7 Discharge from debts:
At the end of the three year supervisory period, the Debtor is discharged in full from the debt specified in the DRN and all interest and penalties.
- Debt Settlement Arrangements
The second new debt resolution process introduced is the concept of Debt Settlement Arrangements (DSAs) which also cover unsecured debt. Although not specifically stated in the legislation, it is expected that this process will be triggered for unsecured debt of amounts greater than €20,000. A Debtor can go through a DSA once in their lifetime.
2.1 Eligibility criteria:
To obtain a DSA, the Debtor must meet the following criteria:
- be normally domiciled in the State or have lived or had a place of business in the State for one year before the application;
- be insolvent (unable to pay their debts in full as they fall due);
- has completed a Prescribed Financial Statement and a statutory declaration confirming that it is a complete and accurate statement of their liabilities and assets;
- a personal insolvency practitioner must confirm that there is no likelihood of the Debtor becoming solvent with a period of 5 years;
- the Debtor has made a statutory declaration that they have been unable to agree alternative payment arrangements with their creditors;
- the Debtor must not be an undischarged bankrupt;
- the Debtor must not be subject to a DRN or a PIA; and
- the Debtor must not have been the subject of a protective certificate within 12 months
In determining whether or not there is a likelihood of a Debtor becoming solvent with 5 years, the current liabilities of the Debtor, contingent and prospective liabilities of the Debtor and current and prospective assets and income of the Debtor are taken into account. In addition, the Debtor may not be eligible to apply for a DSA if he/she has during the 2 years prior either transferred assets to another at an undervalue or has preferred one of his creditors.
A DSA may be made with one or more of the Debtor’s creditors. The proposal is made on behalf of the Debtor by a personal insolvency practitioner. Personal insolvency practitioners will be authorised by a regulator appointed by the Minister at a later date. The personal insolvency practitioner notifies the Insolvency Service of the Debtor’s intention to propose a DSA and applies for a protective certificate on behalf of the Debtor. Relevant documentation relating to the proposal, including a Prescribed Financial Statement and the Debtor’s written consent to the process must be forwarded with the application. When the Insolvency Service is satisfied that the application is in order, it issues a Certificate and sends it, along with a copy of the application and supporting documentation to the Circuit Court and informs the personal insolvency practitioner of this. If the Circuit Court is satisfied that the applicant meets the criteria, it issues a protective certificate. The protective certificate is valid for 70 days and this can be extended for a further 40 days.
2.3 Effect of protective certificate:
The effect of a protective certificate is to prevent a creditor from initiating legal proceedings in relation to the debt, take any steps to pursue legal proceedings already initiated, execute or enforce a judgment in respect of the debt, take steps to recover goods in the Debtor’s possession, contact the Debtor, terminate or amend any other contract in place with the Debtor or initiate bankruptcy proceedings.
2.4 Proposal for DSA:
Following the issue of a protective certificate, the personal insolvency practitioner must invite and consider submissions from the relevant creditors regarding the manner in which the debts should be dealt with under the DSA. He may also require a creditor to prove their debt. Failure to engage by the creditor may disentitle them to a vote at a creditor’s meeting so the creditor needs to engage in the process immediately on notification of the process being underway. The terms of the DSA will be those agreed to by the Debtor and a majority of the Debtor’s creditors. The Bill contains considerable detail about the DSA itself. The most significant provision is that the DSA should not, if possible, require the Debtor to dispose of their interest in their principal private residence under the DSA. The Bill confirms that secured creditors may not participate in a DSA in relation to the secured debt. Once a proposal has been agreed, the personal insolvency practitioner will call a creditors’ meeting. More than 14 days notice of the meeting must be given along with a copy of the proposed DSA. In order to be approved, 65% in value of the creditors present and voting at that meeting must accept it. Once agreed by the creditors the personal insolvency practitioner then informs the Insolvency Service of the result, and must provide each creditor with that notification, a certificate setting out the result of the vote and a copy of the approved DSA itself. Creditors are entitled to make an objection to the coming into effect of the DSA but the grounds of objection are limited to procedural irregularities, unfair prejudice or where the Debtor did not meet the required eligibility.
2.5 Effect of a DSA:
The effect of the DSA is similar to that of a protective certificate outlined above. It continues for a maximum period of 5 years with a possible extension of a further year. While a DSA is in force creditors will be unable to take actions regarding their debts against the Debtor but can continue to recover the debts from say a guarantor.
2.6 Financial arrangements / clawback during DSA period:
A Debtor is obliged to disclose any material change in their circumstances, particularly any increase or decrease in their assets, liabilities or income which might impact on their repayment ability, to the Insolvency Service as soon as possible. Debtors may not obtain credit for more than €650 from any individual without informing that individual that they are subject to a DSA. Debtors may not transfer, lease, grant security over or dispose of any interest in property. No payments may be made to creditors outside of the payments agreed and set out in the DSA.
2.7 Discharge from DSA:
At the end of the DSA, the Debtor is discharged from the debts specified under the Arrangement.
- Personal Insolvency Arrangements
The third debt solution process outlined in the Bill is the Personal Insolvency Arrangements (PIA) procedure which is designed to cover secured and unsecured debt. It is therefore likely that it will be the most frequently availed of procedure given the problems of negative equity and mortgage arrears prevalent in the country at the moment. However the Bill is clear that a PIA will not involve an automatic writing down of negative equity and to be eligible, the Debtor will have to show positive engagement with his/her secured creditors in the period leading up to the application for an arrangement.
3.1 Eligibility Criteria
To obtain a PIA, the Debtor must meet the criteria outlined above for a DSA but in addition the PIA is to cover aggregate debts of up to €3,000,000. If the Debtor has in excess of €3,000,000 in total debts, the limit may be waived if all secured creditors agree.
- The Debtor must make a statutory declaration to the effect that he/she has co-operated with his/her secured creditors for a period of at least 6 months in relation to mortgage arrears on his/her principal private residence but has been unable to agree alternative repayment arrangements with those creditors or the creditor has confirmed unwillingness to enter into alternative arrangements.
- The Personal Insolvency Practitioner must issue a certificate to the effect that it is his/her opinion that there is no likelihood of the Debtor becoming solvent within a 5 year period. Factors to be taken into consideration in reaching this conclusion include the amount of current, prospective and contingent liabilities of the Debtor and the value of current and prospective assets. There is no requirement however to assess whether or not the value of the Debtor’s assets will increase within a 5 year period.
The procedure for applying for a PIA is identical to that of a DSA in that it must be done by a personal insolvency practitioner appointed by the Debtor and involves an application to the Insolvency Service for a protective certificate. Once satisfied with the application, the Insolvency Service then passes the matter to the Court for the Protective Certificate to be approved.
3.3 Protection Certificates
A Protection Certificate can be issued for a period of 70 days. This can be extended for a further 40 days where a court if satisfied that the proposal is likely to be accepted by creditors and is satisfied that the Debtor and personal insolvency practitioner is acting in good faith and with reasonable expedition. A creditor now has an opportunity to appeal the issue of a Protection Certificate to a Debtor within 14 days of receipt of the notification that a Protection Certificate has issued. The creditor can appeal to the Court for an order that the protective certificate shall not apply to that creditor. The Court will only grant such an order if it is satisfied that failing to give such a direction would cause irreparable loss to the creditor and that no other creditor would be unfairly prejudiced.
3.4 Effect of Protection Certificate
The effect of the PIA is similar to that granted under a DSA but in addition, a secured creditor will be unable to take any steps to enforce or recover its security during the period of the PIA so the impact of the PIA is a very significant restriction on the secured creditor’s rights. The PIA is to last for a maximum of 6 years with a possible extension of a further year.
3.5 Proposal for PIA
Once a protection certificate has been granted, the personal insolvency practitioner will write to all creditors informing them of the granting of the certificate and will invite submissions from all creditors regarding how the debts due to them may be dealt with in a PIA. There are a list of mandatory requirements set out in the Bill as to what is to be included in a PIA. The PIA shall not require the Debtor to sell his principal private residence unless the Debtor agrees to do so or the personal insolvency practitioner forms the opinion that the costs of staying are disproportionately large. The Bill specifies a detailed list of debts in respect of which a Debtor’s obligations will not be discharged unless consent by the relevant creditor has been obtained. Examples of such debts include liabilities under domestic support orders, amounts payable to local authorities and annual services charges owed to management companies. Another mandatory requirement is that a PIA shall not contain any terms that would prevent the Debtor from having a “sufficient income to maintain a reasonable standard of living”. There is a provision for further Codes of Practice to be published to provide guidance on interpretation of this requirement. There are a number of options set out in the Bill as to how the Debtor may make payments to creditors such as lump sum payments, a payment arrangement, and agreement to transfer or sell assets under supervision of the personal insolvency practitioner and arrangements for the treatment of security and restructuring of secured debt. Provisions in that respect could include making payments interest only for a specified time, extending the period of the mortgage and also could include changing the interest rates on a loan from fixed to variable etc. However these will all require the support of the secured creditor given the level of support needed to approve a PIA at a creditor’s meeting and are likely to be along the lines most mortgage providers are already discussing with customers in difficulty with mortgage repayments.
Secured creditors will be obliged to provide an estimate of the market value of the security to the personal insolvency practitioner. If the personal insolvency practitioner disagrees with the value furnished by the secured creditor there are provisions in the Bill to have an independent expert appointed for the purposes of valuing the security involved.
There is provision within the Bill that if a secured creditor agrees a restructuring of the debt under a PIA including the security over the principal private residence and then after the PIA has been concluded, property over which debt is secured is subsequently sold for an amount greater than originally provided for in the PIA, the secured creditor will benefit from any “uplift” in a subsequent sale either to the value of the security or the amount of the debt (whichever is the lesser). The obligation to repay any such “uplift” that may arise shall only cease upon the expiry of 20 years (presumably to coincide with the determination of any mortgage arrangements) or the full discharge of the amount owed by the Debtor. Where measures have been taken to improve the value of a property, any increase in the value that is attributable to such measures shall be disregarded.
3.7 Proportion of Creditors to Approve a PIA
The proportion of creditors required to approve a PIA is as follows:
- Majority of creditors representing not less than 65% in value of the total of the Debtor’s debt have voted in favour of the proposal;
- Creditors (entitled to vote) representing more than 50% of the value of the secured debts have voted in favour of the proposal; and
- Creditors (entitled to vote) representing more than 50% by value of unsecured creditors have voted in favour of the proposal.
3.8 Objections to the Approval of a PIA
Where a PIA has been approved, a personal insolvency practitioner is obliged to notify each creditor concerned and provide that creditor with a certificate of the results of the vote taken, a copy of the approved proposal and a notice that the creditor may object to the coming into effect of the PIA by lodging a notice of objection to the Court within 21 days. The Bill sets out the limited grounds of objection that can be made including unfair prejudice, material omissions by the Debtor, procedural irregularities and that the Debtor has in the three years prior to the PIA either transferred assets at an undervalue that has contributed to his / her insolvency or has preferred a person during that time.
3.9 Discharge from PIA
Where the Debtor complies with his obligations set out in the PIA, then at the end of the period, they shall stand discharged from all unsecured debts set out in the PIA but will only stand discharged of those secured debts as specified in the PIA. It is therefore not a complete discharge of all secured debts unless the secured creditor has agreed to same.
- Changes to the Bankruptcy Act
In addition to introducing the above processes, the Bill also proposes certain changes to the Bankruptcy Act 1988 as follows:
- automatic discharge from bankruptcy will be possible after 3 years, as opposed to the current 12 years.
- bankruptcies which have been in existence for more than 3 years at the time the Act is commenced will be automatically discharged following a further 6 month period.
- There is a new provision enabling the Circuit Court to make an order requiring a bankrupt to make payments to the Official Assignee or the trustee in bankruptcy from his / her income or other assets for the benefit of his creditors (a “bankruptcy payment order”) after the discharge from bankruptcy. This applies for a period of up to 5 years. In making this order, the Court must have regard to the reasonable living expenses of the bankrupt and his / her family and may have regard to guidelines on reasonable expenditure and essential income which will be issued in due course by the Insolvency Service.
- Next Steps
In the press release on Friday by the Minister, it was indicated that the Bill would need further development on a number of issues and the Minister intended to bring further proposals and amendments during the progress of the Bill through the Oireachtas. Given that the Oireachtas is due to rise for its Summer vacation in a number of weeks, it seems highly likely that the Bill will not be passed into law until the final quarter of the year at the earliest.