The Government’s proposals to tackle consumer debt will involve three distinct voluntary debt settlement arrangements and a three year bankruptcy regime.
The 3 non-judicial proposals are part of a broader range of reforms to aid struggling borrowers.
1. The first measure will be a one year Debt Relief Certificate, which will cover unsecured borrowings of up to €20,000 such as short term credit card debit and overdraft debt etc. This would have to be approved by an insolvency service and an independent intermediary.
2. The second measure will be a Debt Settlement Arrangement lasting for five and in some cases six years.
It would cover unsecured borrowing of over €20,000. Secured debts would be excluded.
3. The third measure would be a Personal Insolvency Arrangement which would cover secured and unsecured debts of over €20,000.
This would last for six and sometimes seven years. This alternative would include mortgages.
It appears this option will cover secured and unsecured debt i.e. mortgages
The three options would all require agreement from banks and borrowers. They would require consumers to volunteer for the measures and would not involve the courts.
4. The final option is bankruptcy, which would involve a three year discharge period.
People would be able to avail of this under certain conditions and it would involve a legal process, unlike the other 3 options.
It is understood the heads of a bill will be discussed at Cabinet 24th January 2012 and progress is expected, however Ministers are unlikely to make a final decision this week.
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Adapted from the Department of Justice briefing papers
Step 1: Voluntary bilateral agreement between borrower and each creditor
– applies to unsecured and secured creditors
– suitable for all borrowers
if agreement cannot be reached
– Borrower engages Personal Insolvency Trustee
– Personal insolvency trustee advises borrower of options and assesses suitability for DSA or PIA
– Application to Insolvency Service for protection from creditors for specified period
Step 2: Debt Settlement Arrangement (DSA)
– applies to unsecured creditors only;
– suitable for borrowers with unmanageable short-term unsecured debt and long-term sustainable secured debt;
– unsecured loans completely settled over [5] year period;
– secured loans not affected by DSA but secured creditors can voluntarily provide ‘space’ outside of DSA to free up additional borrower repayment capacity to unsecured creditors under DSA.
DSA has been rejected / failed. Personal insolvency trustee proposes a PIA.
or
if the personal insolvency trustee forms view that DSA would not be viable to restore borrower to solvency and so proposes a PIA.
Step 3: Personal Insolvency Arrangement (PIA)
– applies to unsecured and secured creditors;
– suitable for borrowers with unmanageable unsecured debt and/or unsustainable secured debt;
– unsecured loans completely settled over [6] year period;
-flexibility as to treatment of secured loans – can be settled over [6] year period (e.g. where there is a sale of the property) or restructured and continue in existence beyond PIA period (e.g. to write-down some of the loan principal, ‘Keane report’-type solutions such as split mortgages, deferred interest etc.);
– specific protections for borrower in respect of principal private residence;
– specific protections for secured creditors in respect of the value of the security.
Step 4: Judicial Bankruptcy
– applies to unsecured and secured creditors
– suitable for all borrowers not dealt with pursuant to Steps 1 to 3 (amendments to Bankruptcy Act 1988 proposed to incentivise borrowers and creditors to make reasonable efforts to reach agreement under those earlier Steps);
– little or no flexibility: a court controlled process and all borrower’s property automatically vests in Official Assignee for disposition in accordance with Bankruptcy Act 1988;
– 3 year automatic discharge but provision for income payments order lasting up to 5 years post-discharge