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Column: How to navigate your personal insolvency

The Personal Insolvency Service is due to come into effect in the coming weeks, so what do you need to know about making an application? Stephen Curtis lets you know.

Stephen Curtis

THE INSOLVENCY SERVICE (ISI) was set up in March 2013 to provide debt relief mechanisms to those facing insolvency, or the inability to service their existing debts.

The new service was set up under the Personal Insolvency Act 2012 and while it’s yet to formally process any applications from struggling debtors it is expected to come into being in the coming weeks.

Pre-Insolvency

For any borrower considering an arrangement under the new legislation, they must comply with certain criteria before entering the process.

Firstly they must be insolvent. This means they cannot pay their debts as they fall due by any means. If, for example, you have a mortgage in difficulty but have equity in your home you may not be eligible for an arrangement as you could in theory sell your home, repay the debt, and have cash left over.

Secondly before approaching the ISI you must have sought to do a deal with your creditors yourself, or through your financial advisor, to deal with your difficulty. This must be evidenced and no application will be accepted by the ISI until a borrower shows that they have made all reasonable efforts to deal with the problem themselves.

Once you have complied with these requirements you are then eligible to seek an agreement with your creditors formally through the insolvency process.

Debts less than €20,000

For those with unsecured debts of less than €20,000 the route is simplified and you apply for what is known as a Debt Relief Notice.

This allows for unsecured debts up to €20,000 over a three year period. It is designed for those with relatively small income or assets and will be administered on a debtors behalf by an Approved Intermediary primarily though the Money Advice and Budgeting Service or MABS.

For those with debts greater than €20,000 (either secured or unsecured) they will need to appoint a Personal Insolvency Practitioner, or PIP. Once appointed the PIP will apply to the courts and the ISI for a Protective Certificate.

When issued this certificate effectively freezes a borrowers existing financial position for 70 days and allows the PIP discuss, negotiate and deal with a borrowers creditors. It is during this 70 days that a deal is proposed by the PIP and ultimately accepted or rejected by creditors.

Debt settlement arrangement

For borrowers with unsecured debt only, they will seek a debt settlement arrangement or DSA. This arrangement is designed for the settlement of unlimited unsecured debt over a period of five or, in some circumstances, six years.

The PIP will contact creditors with a proposal and then call a creditors meeting and seek to reach an agreement with all creditors. If an agreement is reached to repay a certain amount over a period the debtor will be free of the debt once the period expires and all payments are made.

However creditors have no obligation to agree to any deal. For a deal to proceed 65 per cent of all creditors must agree.

Personal insolvency arrangement

Finally, for debtors with secured debt (eg a mortgage) or a combination of secured and unsecured debt they will see a personal insolvency arrangement or PIA.

This arrangement is designed for the settlement of secured debts up to €3 million or unlimited unsecured debt over a period of six years, or in some circumstances, seven years. The level of secured debts can be increased with the agreement of all secured creditors.

Similar to a DSA the PIP will call a creditors meeting and seek to reach an agreement with all creditors. If an agreement is reached to repay a certain amount over a period the debtor will be free of the unsecured debt once the period expires and all payments are made.

Secured debt, as part of the arrangement may be written down to a manageable level to allow a debtor repay the debt over a longer period of time.

Again a creditor has no obligation to agree to any deal and for any deal to proceed it needs the agreement of at least 50 per cent of unsecured creditors, 50 per cent of secured creditors and 65 per cent of the overall creditors irrespective of whether they are secured or not.

Any deal which is agreed within the Insolvency Process will be placed on a public register. If any variations to the deal are required during its lifetime this will also be noted on the register and similarly the successful completion of the arrangement will be noted on the register.

Currently there is no mechanism for removing a deal from the register post-completion and given the public nature of the register careful consideration needs to be given to entering any arrangement.

Operation of deals

In both circumstances a PIP effectively replaces the borrower at the negotiating and decision-making table in dealing with the debt.

Should a deal be reached, the PIP will also administer the arrangement for its duration, make annual reports to the ISI on its progress and may interact on a borrower’s behalf with creditors.

Under both a DSA and a PIA debtors are required to adhere to reasonable living expenses as laid out by the ISI. These detail the amount a debtor will be allowed to spend for ordinary living expenses for the duration of the arrangement with the remainder of their income being made available for their creditors.

Certain items – for example a second car, health insurance or third level education fees – are not included in these standard living expenses and would need to be negotiated as part of any arrangement.

Bankruptcy

Should these solutions fail to reach an agreement, or in the event a debtor decides not to attempt one of these arrangements, they will remain liable for the full amount of their debt and the only alternative, if they cannot reach a resolution with their creditors, is to enter bankruptcy.

In declaring yourself bankrupt an Official Assignee is appointed to take over and control your affairs. All assets you have are sold and distributed to creditors along with a portion of your salary after reasonable living expenses for the duration of your bankruptcy.

The Bankruptcy Act of 1988 has been amended with the establishment of the ISI and persons entering bankruptcy may now be discharged after three years as opposed to 12 years as was previously the case. There is a facility for a further period of five years to be added to a bankruptcy should it be deemed appropriate by the Official Assignee.

Prior to making any decisions about seeking an arrangement through the ISI, or seeking to declare bankruptcy, it is always strongly advised to seek independent professional financial advice.

Decisions made in respect of these arrangements can have long-lasting consequences and you need to know all your options before proceeding.

Stephen Curtis is a B.Comm, Qualified Financial Advisor with the Irish Mortgage Holders Organisation.

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