Bankruptcy Or A Debt Settlement Arrangement?

13th February 2014

Bankruptcy applications and enquiries are increasing rapidly. Historically only very small numbers of people have become bankrupt voluntarily in Ireland. The increase is partly due to a relaxation of the rules and consequences of becoming bankrupt. It also appears to be a reaction against the discovery that the new personal insolvency options, like debt settlement arrangements, simply aren’t available to a lot of people in their current format.

This week The Independent reported that teachers, gardai, and bank officials in particular are making large numbers of enquiries about voluntarily becoming bankrupt. You might think that professionals with solid jobs such as these would be prime candidates for newly designed debts deals such as a DSA that could create a compromise resolution with their creditors.

What’s happening in reality is that personal insolvency practitioners are turning away many of those who are asking them for help. Some PIPs have estimated that this applies to as many as 90% of those that get in touch seeking assistance. Why would this be?

A PIP will work through the financial details of an enquirer to establish how much money they have spare to fund a debt deal like a debt settlement arrangement or a personal insolvency arrangement. They’re finding that many low and middle earners in fact have little or no money spare once allowances have been made for them to cover their bills and expenses.

For a DSA to work there needs to be enough spare money to pay the fees for managing the arrangement as well as a sufficiently high “dividend” that a sufficient number of creditors will accept to settle the debts. With relatively high PIP fees, and a lack of certainty about creditor expectations, only a small number of enquirers are deemed to be in a position of having a good chance to secure creditor acceptance of their proposals.

Given that the banks are also largely being ineffective at making realistic repayment arrangements directly with their own borrowers, it’s unsurprising that a growing number of people will simply conclude that bankruptcy is the only way to deal with their finances.

It’s feeding through into the statistics. The Irish courts have dealt in total with about twenty DSA or PIA applications. Recently a single court dealt with eleven bankruptcy applications in a single session. Sections of the public that have been crippled with debt are finally taking steps to deal with it but not in the way that was envisaged when the new personal insolvency regime was created.

Where does this end? Will hundreds of teachers, gardai and bank officials become bankrupt? Or will the relevant ministers and insolvency officials find a way to make debt settlement and personal insolvency arrangements available to greater numbers of people?

They’re trying to come up with a “protocol” this week that will boost certainty and access. Only time will tell whether the processes and understanding can be developed far and fast enough to prevent ever increasing numbers of people from entering the “last resort” of bankruptcy.