Will The Government Change Debt Deal Rules?

1st May 2014

Recently the Bank of Ireland made their position on personal insolvency arrangements clear. Where they are asked to write off mortgage debt, and they have the capacity to veto the deal based upon the current rules, they will do just that.

Taking this position has once again highlighted concerns about whether personal insolvency arrangements and debt settlement arrangements can truly get off the ground as it stands. Many observers continue to feel that the banks exercise too much power in this respect and that many simply aren’t willing to accept that they’ll need to write-off large amounts of money.

Concern about creditor reaction to such debt deals is one reason why so few PIA and DSA cases have been established so far despite the huge investment of resources into the new personal insolvency system in Ireland.

So if a major creditor like the Bank of Ireland refuses to play ball, will the government feel compelled to force them?

So far the answer is no. However, the Justice Minister has been clear on his position stating that in the long-term he will “introduce whatever amendments prove necessary” for the system to start producing the intended results.

He might be spurred into action by the Insolvency Service of Ireland at some point in the future. They’ve been clear this week that they’ll recommend the implementation of changes if there is too much bank resistance to personal insolvency applications.

Even if the Justice Minister chooses to try to change the rules, he may not be able to count on the support of all of his colleagues. Any change that led to large debt write-offs at Irish banks could leave the taxpayer on the hook again to provide further financial support to them.

The fact of the matter is that almost everyone agrees that no purpose is served by leaving families trapped in debt that they realistically never have any prospect of fully repaying. Debt problems translate into social problems and, when sufficiently widespread, stand in the way of economic recovery and progress.

What are the options to change the rules?

One idea might be to follow the lead of the Scottish Government’s “debt arrangement scheme”. Creditors choose whether or not to accept such an arrangement. However, where they reject one, the Scottish equivalent of the Insolvency Service of Ireland has the power to conduct a “fair and reasonable” test on the application. This can result in the application being successful even if it was originally turned down by a bank.

Taking this concept a stage further, efficiency and speed could be added to the process through the imposition of standard acceptance criteria for personal insolvencies such as a debt settlement arrangement. These have been negotiated informally (with the involvement of banks) in other states, but there’s little to stop the Irish government from imposing such criteria if agreement cannot be reached with the banks. Applications within the criteria boundaries could be “waved through” by the ISI, with the banks voting only on more marginal proposals.    

These would be radical developments. However, unless the number of Irish personal insolvency cases being approved begins to increase substantially in the coming months, such a radical change of direction might be deemed necessary.