# Case study - How Personal Insolvency might work in practice



## Brendan Burgess (23 Nov 2009)

The LRC's proposals are fluid and open to consultation. But this is the rough shape of them.

  John is a taxi driver earning around €30,000 net a year. He is working 60 hours a week to get this.
  When he was an accountant earning €80,000 a year, he bought a house with a €500k mortgage, which is now worth €300k. 
  His wife, Mary, is minding their two small children and has no income of her own. Before having kids, Mary worked in a clerical job earning a gross salary of  €25k a year.  

  He owes €500k to Bank of Ireland. He has been in arrears for over 12 months and they have converted it to interest only but want a plan for paying off the arrears.
  He owes €20k on his credit card to MBNA who are ringing him and his wife continuously trying to get them to make payments.
  He bought his car on HP for €15k and Lombard Finance want to repossess the car.
  He has a €10,000 loan from his local credit union on which he has made no payments. They have initiated legal proceedings.
  He owes €5,000 in income tax for the tax year 2009.
  He is also behind with the ESB – and is desperately trying to pay that off. He has been cut off before but got reconnected.
  He has been a client of MABS for the last 6 months. MABS have written to his creditors but there is very little that they can offer to pay off his debts. 

*Current law*
  There really is very little John can do under the current law. Bankruptcy proceedings are not open to him as they are too expensive.  Even if he does file for bankruptcy, he would be barred from a greater proportion of economic life for at least 12 years. 

  They are suffering from depression from their financial problems. They are extremely worried about having their affairs discussed in public in the upcoming Credit Union case.

*How the Proposed Personal Insolvency System might work*

  John and Mary qualify because 
  They are genuinely indebted. He lost a well paying job in the recession.  
  He is not avoiding work – he is doing his best to earn a living.
  It’s not that he won’t pay his debts – he can’t pay them. 
  There is no reasonable prospect that he will be able to pay them off at any time 
            in the next ten years
  They have tried to sort out their problems through MABS 

_People would be excluded from the system_
·_if they are able to pay but are just trying to escape their debts or_
·_if they had recently transferred assets to relations to create an artificial insolvency or_
·_if they were turning down offers of work._

  John and Mary register with the Debt Enforcement Office. With their MABS advisor, they register all their assets and liabilities. Their meeting is held in private but the creditors are invited to attend. The bank and MBNA do attend. The others don’t.
_This might be all done by the MABS advisor and just registered with the Debt Enforcement Office._

  They have a friend who is prepared to buy their home for €300k and rent it back to them for €700 a month. 

  The MABS advisor comes up with a proposal and submits it to the creditors. Lombard objects to the initial proposal on the grounds that they are in a secured position in that they own the car and can repossess it. They want favourable treatment. 

  The final agreement is as follows and is imposed on the creditors. _This might require the consent of a majority of creditors before it can be imposed._

  The house is sold for €300k and the proceeds are given to Bank of Ireland.

  The MABS counsellor sets the net family expenditure at €400 per week, which is the same as they would get on Social Welfare. 

  The counsellor provides a certificate to the local authority saying that the family needs a home.(_This is my own idea – it’s not in the LRC proposals)_ In the meantime, they allow the family an extra €100 per week towards the rent of their own home.

  This leaves only €5,000 per year available to pay debts. As the only secured debt is the HP Finance they determine that this is a priority as without the car, he can’t earn a living. After that is paid off, then the remaining money will be allocated against their loans in proportion. All lenders to stop charging interest immediately. 

  The scheme is administered by a Trustee who ensures that the debtor agrees to the repayment plan_. (The Trustee could be the MABS counsellor)_ 

  If John and Mary stick to this deal for 5 years, then at the end of this period, their loans will be written off and they are free to start again. _The five years is open to consultation._

  If in the meantime, John gets a new job with a higher salary, payments to creditors will be increased. 

  If John does not stick to the agreed payment schedule, then his debts are not written off at the end of the period. The Creditors could get judgments against him which would hang over him for years. The creditors would have access to a revised Bankruptcy Act which would declare him bankrupt and place serious restrictions on him for many years. 

*Role of the Debt Enforcement Office*
  The Debt Enforcement Office would supervise the entire process. 
  They would have the power to stop enforcement proceedings by individual creditors.
  They would have the power to compel the creditors to accept the agreement. 

  They might even act as the Trustee to administer the scheme. 

*If John can make absolutely no repayments*
  In a case such as this one where there are few assets and where the surplus available to pay the creditors is so little, the creditor could be given a fresh start immediately without going through the five years.


----------



## Bronte (23 Nov 2009)

Brendan said:


> *If John can make absolutely no repayments*
> In a case such as this one where there are few assets and where the surplus available to pay the creditors is so little, the creditor could be given a fresh start immediately without going through the five years.


 
John would be better off in this scenario as he can start with a clean slate and would presumably be incentivised thereby into becomming a productive citizen.


----------

