Yesterday the Minister for Justice, Alan Shatter, and Director of the Insolvency Service of Ireland (“ISI”), Lorcan O’Connor, launched the ISI’s public information campaign, which includes guides to the three new personal insolvency arrangements, its website and an information helpline for queries.
Speaking at the launch, Minister Shatter indicated that the purpose of the new arrangements was to help restore people who are insolvent to solvency “in a fair, transparent and equitable way”. Mr. O’Connor went on to confirm that the ISI was focused on making the personal insolvency arrangements available as quickly as possible. The ISI hopes to be in a position to begin accepting applications for arrangements at the end of June this year.
Anticipated Take Up of New Arrangements
Minister Shatter had previously indicated that his Department had estimated that there may be up to 15,000 applications for the two main debt resolution processes - Debt Settlement Arrangements and Personal Insolvency Arrangements - in the first year of their availability. He also estimated that there could be a further 3,000 to 4,000 applications for Debt Relief Notices and also expected some 3,000 bankruptcy applications during this time. He contrasted this with the fact that there were approximately 33 bankruptcy adjudications in 2011 and 35 in 2012.
It will be interesting to see if so many debtors will require insolvency arrangements. Much will depend on the attitude of creditors to their debtors and on levels of cooperation between creditors. For many, it is preferable for both debtor and creditor to come to their own arrangement, as they will retain control of the process, avoid public scrutiny and public registers and private arrangements should cost less. However, if creditors or debtors adopt inflexible positions or if multiple creditors cannot agree a common position, then voluntary deals are harder to achieve.
Regulation of Intermediaries
The new personal insolvency arrangements will all require the involvement of an independent third party, be it in the form of an Approved Intermediary (AI) for the Debt Relief Notice (unsecured debt of less than €20,000) or a Personal Insolvency Practitioner (PIP) for Debt Settlement Arrangements (unsecured debt over €20,000) or Personal Insolvency Arrangements (unlimited unsecured debt and secured debt up to €3 million).
The ISI has indicated that it will shortly put in place a countrywide network of AIs and PIPs who will work directly with debtors, with the first appointments of AIs and PIPs taking effect at the end of May this year. It is likely that these AIs and PIPs will be solicitors, barristers, accountants and qualified financial advisers, as well as those with a financial or legal background. Each adviser will have to successfully complete an approved insolvency course to be able to apply to become a PIP. The ISI will shortly publish regulations on the authorisation and supervision of these practitioners.
Reasonable Living Expenses
The ISI has also published a Guide to a Reasonable Standard of Living and Reasonable Living Expenses (“the Guidelines”). Fixing such guidelines and making them public is an innovation required by the legislation. Whilst there are similar personal insolvency regimes in other jurisdictions, such as the UK, these regimes do not envisage a public body providing such guidelines.
The apparent leaking of drafts of these guidelines caused much controversy over the past few weeks, particularly in relation to the amount that could be spent on childcare and the position of the second earner in a household, if the cost of childcare was to exceed that person’s income. To that end, Mr. O’Connor confirmed that some guidelines, including those referring to childcare costs, had been redrafted in recent weeks to provide for greater flexibility and to make it very clear that people would not be forced to give up work.
Obviously, such guidelines are key to the functioning of the new insolvency regime as they set out how much money people will be allowed to spend within the context of any of the regime’s three solutions. In the Guidelines, the ISI considers that a reasonable standard of living is one which meets a person’s physical, psychological and social needs and that it does not mean that a person should live at a luxury level, but neither does it mean that a person should only live at subsistence level. The Guidelines go on to try to define that level, by setting out the expenses necessarily and reasonably incurred in achieving that standard of living.
How do the Reasonable Living Expenses Guidelines Work?
The Guidelines seek to define reasonable living expenses, by the application of a four-step process, as follows:
- The Debtor’s situation should be examined, using the tables set out in Schedule 1 to the Guidelines, based firstly on his Household Composition i.e. Are there any other adults in the household and are there dependent children? Does the household need a car? The adequacy of public transport links are examined in determining this, but a car will be deemed necessary if a debtor needs it to travel to and from work. Where a car is not included, the Guidelines allow for the costs of public transport. The costs of such a household are calculated, by totalling the costs for each individual in the household, and are described as set costs.
- Childcare costs must be assessed and are examined within the Guidelines under “other costs”. The Guidelines note that childcare costs vary, depending upon factors such the age of the child and are a significant expense at the infancy and pre-school stages of childhood. These costs are not fixed, but rather the reasonable costs incurred for childcare are added to the total for set household costs to produce the final figure for reasonable living expenses. If an arrangement is to proceed, the PIP, and ultimately the creditors, must be satisfied such costs are reasonable and not excessive;
- Housing Costs i.e. rent or mortgage payments must be assessed. These costs are not set, but rather reasonable costs incurred for Housing are added to the total for set costs to produce the final figure for reasonable living expenses. The Guidelines set out criteria under which these costs are examined when considering what constitutes reasonable and sustainable accommodation expenditure in an individual case. The PIP, and ultimately the requisite majority of creditors, if an arrangement is to proceed, must be satisfied such costs are reasonable.
- Any Special Circumstances of the debtor / their household must be considered such as the differing needs of persons, and their age and health and possible disabilities.
Other variables may include contribution to the care of adult dependents, such as an elderly parent.
The Guidelines contain detailed tables that list 15 distinct areas, under which permitted household expenditure is set at certain limits, under the following headings, with the following monthly limits (for a single adult):
Click here to view table.
If the Debtor has a household with another adult and/or one or more children, then the monthly limits will correspondingly increase. For example, a single adult with a car will be permitted living expenses of €1,030 over and above any mortgage or rent payments, whereas a two adult household with a car will be permitted expenses of €1,359.67. An allowance of €204.88 is made for each child of primary school-going age.
The Guidelines set out various principles around each of the expenditure categories, such as generally, although not absolutely, excluding private health insurance on the basis that it is not a necessity. Additionally, the Guidelines do not factor in the cost of a holiday. Whilst fixed monetary allowances are made for each child, child benefit payments are deducted from each fixed allowance. The Guidelines include detailed illustrations to show how the level for reasonable living expenses is determined and how it is then used in calculating monthly net disposable income.
In addition, the ISI has very clearly stated that the Guidelines are intended to be flexible and would not see people’s finances micro-managed by their creditors or even by PIPs. Thus, the Guidelines note that so long as an applicant for one of the three personal insolvency arrangements comes within the overall headline figure for reasonable living expenses, the ISI will not be prescriptive in terms of what the applicant can or cannot spend their money on.
The ISI is required to review and update the guidelines at least once every year and make them publicly available.
Net Disposable Income
Net disposable income is derived by calculating the income available to the debtor, and deducting from that reasonable living expenses, as calculated in accordance with the Guidelines, as well as taxes, social insurance contributions, payments of excluded or excludable debts and other prescribed charges on the debtor’s income.
Net disposable income is that which can then be used to pay creditors. The Debt Relief Notice solution provides that to be so eligible, a debtor must have net disposable income of less than €60 per month. However, in Debt Settlement Arrangements or Personal Insolvency Arrangements, it is ultimately a matter for the PIP to determine an acceptable level of reasonable living expenses and for the requisite majority of creditors to agree to this on a case by case basis and vote in favour of it, in accordance with the voting thresholds. The Act, nonetheless, requires that the debtor have sufficient income to maintain a reasonable standard of living.
The Guidelines seek to strike a balance in expecting a qualifying debtor to make a substantial readjustment in their lifestyle in order to provide some level of recovery for creditors who will face a debt write down. When faced with any proposed arrangement, creditors will need to consider the economic alternatives. Essentially those alternatives are to force the debtor into bankruptcy, reach a private accommodation or do nothing. An evaluation of these options may persuade creditors that to support measured and appropriate arrangements is in their best interests.