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:
1. 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.
2. 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;
3. 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.
4. 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):
Category |
Single adult monthly total (€) |
Food |
247.04 |
Clothing |
35.73 |
Personal Care |
33.4 |
Health |
31.09 |
Household goods |
31.47 |
Household Services |
28.61 |
Communications |
43.45 |
Education |
24.50 |
Transport |
139.29 (public) |
Household energy |
48.87 (electricity) |
Insurance |
12.22 (home) 25.91 (car) |
Savings & contingencies |
43.33 |
Social Inclusion/Participation |
125.97 |
Childcare |
Variable |
Housing |
Variable |
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.
Conclusion
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.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.