It has been a very long time coming but yesterday, the Minister for Justice, Equality and Defence Alan Shatter introduced a new bankruptcy Bill for individuals in Ireland. In a country where one in seven mortgage accounts is either in arrears for more than 90 days or has been restructured with less than the contracted monthly mortgage payment being made, there is obviously a debt problem. In fact when former US president Bill Clinton addressed a business forum in Ireland last October 2011, he said that the biggest challenge facing this State was the mortgage crisis. Under the existing draconian bankruptcy rules which involve a bankruptcy period of five to 12 years, there are about 30 bankrupts per annum in a country of 4.6m, by comparison the UK has over 60,000 per annum in a country of 62m, a rate that is more than 500 times that of Ireland. The new Bill is aimed at modernising our bankruptcy laws and providing an efficient and humane system which balances the needs of debtors and creditors.
The verdict? Certainly the scheme for those with unsecured debts is comparable to the rules in the UK and should provide for a quick and easy means for those who can’t pay to have a quick resolution. However, all eyes have been on those with secured debts, particularly mortgages, and the provisions here are quite restricted.
There are two aspects of the bankruptcy legislation as it relates to secured debt which differ from other jurisdictions with which I am familiar, and which have the potential to undermine the promised potential of this legislation
Firstly, the person seeking bankruptcy must be able to demonstrate that they will not be able to pay their debts over a five-year period. According to the Bill “it is his or her opinion there is no likelihood of the debtor becoming solvent within the period of 5 years commencing on the date of the making of the declaration” So if you are a mortgage-borrower with six months of arrears today and a property which has declined 50% from peak, on what basis can you demonstrate that you will not be able to become solvent in five years. Obviously, it will depend on the future direction of house prices and there is no guidance given in the legislation as to how future asset prices might be determined.
Secondly, the person seeking bankruptcy must be able to demonstrate that they have co-operated with their mortgage lender for a period of at least six months and that they have not agreed to any alternative arrangement. The Bill says “the debtor has made a statutory declaration declaring that he or she has co-operated for a period of at least 6 months with his or her creditors who are secured creditors as respects the debtor’s principal private residence in accordance with any process relating to mortgage arrears operated by the secured creditors concerned which has been approved or required by the Central Bank of Ireland and which process relates to the secured debt concerned and that notwithstanding such co-operation the debtor has not been able to agree an alternative repayment arrangement with the secured creditor concerned, or that the secured creditor has confirmed to the debtor in writing its unwillingness to enter into an alternative repayment arrangement”
In other words, notwithstanding the fact that you are hopelessly insolvent with massive negative equity, your bank can seemingly stop your bankruptcy bid by providing you with temporary relief on your monthly mortgage commitments.
Interestingly if you are already a bankrupt like Sean Quinn or Anglo’s Sean Fitzpatrick, then you can’t seek bankruptcy under this legislation. And if you have debts in excess of €3m, again there is no change to your prospects as you will not be covered by this new Bill. The two exemptions are curious.
The Bill will now be subjected to debates in the Dail and Seanad, and the expectation is that it will be operational by the end of this year. It would seem from an initial review however that amendments will be needed if Ireland is serious about adopting a modern personal bankruptcy regime.