The past few weeks have seen the issue of what is “reasonable expenses” and who is going to decide what they are, regularly debated over the airways when it comes to the new personal insolvency act which is coming into operation in June.
The current ‘spin’ is all around making people feel that they are going to be turned upside down and every penny that drops out will be taken and given to the banks. This is of course yet another story the banks love the public to hear so they get scared of thinking about using the insolvency act. However, though the guidelines for reasonable expenses have yet to be published by the Insolvency Service of Ireland (ISI), I do not expect that any such shakedown is going to happen to people who find themselves in such difficulty that they have to declare themselves insolvent.
There are a few things that need to be made clear about the new personal insolvency act that will hopefully put people at ease in relation to its use and what it is really intended for.
The first clue is in the name “personal insolvency act”. The act is intended for people who find themselves in debt, to be given a mechanism to get themselves out of debt in a reasonable time with some payments to creditors where possible. It is not intended for the banks to be able to shake down people for everything they have and a bit more (though the banks would like us to think that). Yes there is a kind of veto held by the bank who is owed more than 65% of the total debt. However, that will usually mean that the biggest creditor will have the most to lose if a deal is not done. How often have we heard the more you owe the banks the more they want to do a deal with you? Well this is finally going to reach the ordinary man in the street. So making reasonable expenses unrealistic for people to live will not do anything for the capacity of people to engage with the banks to come to an agreement.
The second thing is to look at the personal insolvency act from the banks point of view (not from the bank spin). It is an opportunity for them to clean up their act and balance sheet, come clean on the extra ordinary amount of bad loans which will have to be written off, get good PR by saying they are supporting the use of the act and most importantly it is an opportunity for them to generate a lot of very much needed cash (and looking at the most recent Bank of Ireland financials it is very very much needed cash!). They are going to generate cash from two sources where they would not otherwise. In the first instance where there are buy to let properties in a portfolio of a person using a personal insolvency agreement these properties will be sold therefore generating the banks immediate cash which otherwise would not be generated. This is the case even if the sale proceeds are lass then the loan amount. Generating 60% of a loan outstanding and in significant arrears is better than generating 0% which is what is happening right now. They will also benefit from the cash being paid by the Debtor over the lifetime of the personal insolvency agreement.
So it is in the bank’s interest to keep the debtor on side and not too squeeze the life out of them. The banks will not admit it but they need customers and ALL of the people who enter into personal insolvency arrangements will be their customers too.
The final point to consider is when a debtor looks at their position and is seeking to use the personal insolvency act it is likely that in reality they would be better off if they did just declare bankruptcy and not have any commitment to pay any amount over a 6 year period. Yes they would lose their family home and all other significant assets. However, they will lose their other assets anyway in a personal insolvency arrangement and considering the current property market if they do a deal with the banks on a write down on their family home they will possibly still be carrying a small portion of negative equity. So this is not a fantastic ‘get off the hook’ scenario for the debtor as being peddled in some quarters. The banks are very aware of the fact for most people bankruptcy could be a better option but a disaster for the banks and so in the end they will corporate with debtors going through the personal insolvency process because as much as it is seen as a mechanism for the survival of the debtor it is equally as important for the future of the banks.
The ISI is aware of the fine balance needed to engage all parties in the act and in reality it is the Debtor who is going to have to be kept on side for the recovery of the economy and banks. So reasonable will be reasonable!
Debtors need to keep in mind power is numbers and there are going to be very significant numbers going through the insolvency process so there is no need to give in to the shakedown!
Paul C Carroll Accountant
Personal Insolvency Expert