Protocol To Encourage Debt Settlement Arrangement Expansion

14th January 2014

With take-up of the new system of personal insolvency running at very low levels, the Irish government has begun a process to create a “protocol” between the interested parties. Covering new debt solutions including Debt Settlement Arrangements and Personal Insolvency Arrangements, the new protocol will be an attempt to smooth the way for greater numbers of the public to benefit from such arrangements.

To critics this announcement suggests that the original personal insolvency system, already subject to a number of revisions, simply isn’t working as it was intended to.

The introduction of a “protocol” between PIPs (personal insolvency practitioners) and the banks isn’t likely to require new legislation. The aim will be to bring the parties together to develop an understanding of how potential cases should be verified, proposed to creditors and approved. Such a process has been in place in the UK for some time covering IVAs (which share some common characteristics with a DSA or PIA in Ireland) and has resulted in an acceptance rate of around 90%.

Currently a PIP has little idea of the terms that creditors are likely to accept. For example, when proposing a Debt Settlement Arrangement for a client they cannot be sure if a bank has a minimum dividend requirement, an expectation of how frequently funds will be released to them, how much the PIP can fairly charge for their work and how the bank expects them to go about a number of administrative tasks connected to personal insolvency. This creates uncertainty for all of the parties, not least to a worried debtor who just wants to put his or her financial problems behind them.

The need for this protocol to proceed is obviously deemed to be high. The ISI (Insolvency Service of Ireland) is currently making arrangements for a stakeholder conference covering this subject next month.

If you’re considering starting a DSA what benefits could such a “protocol” bring to you?

1. You’ll be making payments into a Debt Settlement Arrangement but will they be enough for your creditors to want to accept the debt deal? At the moment there is no clear understanding on this subject, so your PIP may struggle to reassure you. A protocol might create an understood “minimum dividend” that creates greater certainty about the prospects for success.

2. Will your creditors consider the fees that your PIP intends to charge to manage your DSA reasonable? If they don’t this might become a barrier to them accepting your case. Creating an agreement in this area would remove a possible obstruction.

3. How can your creditors be reassured that the personal information that has been presented to them on your behalf is accurate? The creation of mutually agreed and understood mechanisms (such as reviewing a certain number of payslips and bank statements) will build the type of trust that encourages the acceptance of DSAs.

The establishment of a personal insolvency protocol in Ireland should be a good thing for debtors who want to deal with their debts in this way. A PIP should be able to tell you, very early in the process, whether you have a realistic prospect of setting up a Debt Settlement Arrangement that your creditors will support. This will help you to make decisions with much greater confidence and from a more informed position. The sooner that this change takes place the better for debtors, PIPs and the banks.