The Law Reform Commission published its “Report on Personal Debt Management and Debt Enforcement” on 16 December 2010. The report proposes wide ranging and welcome amendments to the existing bankruptcy laws and follows up on the Law Reform Commission’s “Interim Report on Personal Debt Management and Debt Enforcement” published in May 2010.   Existing bankruptcy procedures are not only cumbersome and costly, but they are outdated and inappropriate for the reality of a modern economy. The Law Reform Commission has advocated significant improvements to the existing regime and the addition of an out of court debt settlement system which would facilitate individual schemes of arrangement.  

Court Based Bankruptcy – Reform  

Following the Law Reform Commission’s interim report in May, the Government proposed amendments to the bankruptcy regime, including a reduction of the general period of bankruptcy to six years and an automatic discharge from bankruptcy after 20 years. The measures were significant, but minor in the context of the deficiencies in the system and were primarily aimed at providing short term solutions pending more major reform.  

The most significant proposal for reform advocated by the Commission is the automatic discharge of an individual from bankruptcy after three years. This differs hugely from the existing regime which provides for no automatic discharge (even after twelve years) and the current legislative proposals providing for automatic discharge after twenty years. In addition, the Law Reform Commission has proposed various procedural amendments which, if implemented, will remove some of the more cumbersome and costly aspects of the regime.  

Out of Court Bankruptcy – the Debt Enforcement Office  

The most radical element of the Commission’s proposal is creation of a Debt Enforcement Office which would oversee an out of court debt settlement system. This system has been devised to cater for individuals with consumer and business related debt.   

The out of court debt settlement system would include two new processes.  The first process is a Debt Settlement Arrangement which would be managed by a Personal Insolvency Trustee (who would be licensed by the Debt Enforcement Agency). This is similar to examinership for companies and involves the Personal Insolvency Trustee facilitating a repayment arrangement between the individual and all of his creditors. The arrangement can be spread over a period of up to five years and requires a full disclosure of the individual’s assets and liabilities and the agreement of 60% of the individual’s creditors. Provided the individual complies with the terms of the arrangement, his debts will be deemed repaid in full and the individual will be able to make a fresh start.  

The second process is for debtors who have no capacity whatsoever to pay their debts, the “no assets, no income” cases. The Law Reform Commission have proposed that the Debt Enforcement Office  would be able to make a once-off Debt Relief Order which would recognise the reality of the individual’s indebtedness and would in effect deem all of his debts to be discharged.  

The above processes are similar to the Individual Voluntary Arrangements (or IVAs) and Debt Relief Orders in the UK. However, they would be subject certain restrictions not least that mortgage debt would fall outside the processes unless the mortgage provider has crystallised the mortgage debt through enforcement proceedings.  

Modernising Debt Enforcement Processes and Penalties  

In addition to the above processes, the Commission has proposed that the Debt Enforcement Office would also have the power to make instalment orders, orders attaching to debts, orders attaching to earnings and goods seizure orders. The Debt enforcement Office’s mandate would be to make proportionate arrangements which are the least restrictive, but the most effective and which allow an individual (and any dependents) to maintain a minimum standard of living.  

The Law Reform Commission has also strongly recommended that the practice of imprisoning individuals for failing to pay debts (including fines) should be abolished. Whilst the Commission proposes that an individual should still be prosecuted for failure to pay, the sanctions for such a prosecution would be a community service order as opposed to a penal sentence.  

The Commission has also advocated the introduction of a system similar to the restriction & disqualification of culpable directors of insolvent companies as a means of sanctioning bankrupts who have been found to have acted dishonestly and/or irresponsibly in their affairs. As with directors of insolvent companies, it would mean that honest and responsible individuals would not be subject to such processes.  

Conclusion  

The report is a welcome development and the task now falls upon the Government to urgently implement these progressive and modernising reforms. Whilst the regulation of personal insolvency has lagged considerably behind the development of corporate insolvency regulation, it is clear that there is a pressing need for the law to catch up and facilitate individuals in difficult situations.  

The exclusion of mortgage debt from the above process is a significant deficiency in the proposal. However, this was unavoidable given the findings of the Mortgage Arrears and Personal Debt Review Group set up by the Government earlier this year.  

This article was authored by Ruairi Rynn.