Seanad debates

Wednesday, 21 November 2012

Personal Insolvency Bill 2012: Second Stage

 

3:30 pm

Photo of Alan ShatterAlan Shatter (Dublin South, Fine Gael) | Oireachtas source

I thank Senators for the detailed consideration they have given to the Bill. This is a complex piece of legislation that seeks to achieve a balance between the difficulties of debtors and the rights of creditors. It seeks to ensure that assistance is provided to people who are truly insolvent and genuinely cannot pay their debts while not allowing those who can pay a mechanism to either defraud creditors or evade payment. It also has to achieve a balance in a broad range of other areas.

Some Senators were rightly critical of the conduct of financial institutions during the boom years, when they were throwing money at people like confetti at a wedding without undertaking sensible due diligence or assessments of individuals' capacity to pay. They were frequently conflicted in their interests. Some of the financial institutions were throwing large sums of money at mortgage applicants to purchase homes or properties for investment and rental purposes while also funding the developers who were constructing the homes and apartments for which the mortgages were being created. There was never a declaration of interest on the part of financial institutions in those circumstances. They never explained to the individuals who were making decisions to purchase that they had a vested interest in, for example, the sale of a block of flats in order to recoup from developers the funds they lent for the acquisition of the land and the cost of construction. During the boom nothing was a flat and everything was an apartment, regardless of how minuscule the property may have been. However, many people also borrowed money on the assumption that property values always increase. They borrowed sums which they did not have a realistic capacity to repay in monthly payments because they hoped to make a capital killing. Those who bought early and sold early were successful. Those who bought wisely and carefully, and stayed away from boom prices, may also have been successful. A great many others are now in financial difficulties.

I listened to Senators who spoke generally. The legislation has, rightly, specific provisions aimed at protecting those who are in financial difficulties in their family homes by use of the personal insolvency arrangement. A provision allows for a debt settlement arrangement to be agreed with the assistance of a personal insolvency practitioner to allow individuals, either on their own or with families, to retain reasonably sized homes, be they apartments or family homes for themselves and their spouses or partners and children. The Bill also envisages that where a home is of substantial value or particularly expensive to run and where there are creditors, the arrangements entered into would ultimately provide for the sale of the home and some of the money would be used for discharge of creditors.

Where there are creditors, the arrangements that are entered into will provide for the ultimate sale of the home and for some of the money involved to be used to discharge debts relating to those creditors.

A question was posed about what would be the benefit of a personal insolvency arrangement and the suggestion was made that banks and financial institutions have some sort of veto. The benefit of the arrangement to a debtor who is truly insolvent is that instead of going into bankruptcy, he or she will have the opportunity to retain his or her home. It also provides light at the end of the tunnel and the possibility, over a period of years, that the individual involved can work through a portion of his or her indebtedness and that some of this will ultimately be written off. In such circumstances, the person will emerge from the arrangement after five or six years with his or her home still intact. Furthermore, these arrangements will provide people with protection by preventing the financial institutions to which they are indebted from obtaining orders for repossession before the courts and forcing the sale of homes. They also allow people to avoid the necessity of bankruptcy. These are particular, unique and direct arrangements which are designed to provide protection for the possibly many thousands of people throughout the country who are truly insolvent and experiencing real difficulties but who have an income stream and who, if arrangements are entered into with their creditors, have real hope for the future, without their families being unduly disrupted. Those are the benefits of the mechanism in question.

The banks do not have a veto. Senators must bear in mind the context of this. Both creditors and debtors have rights. Financial institutions are not singly and solely the only creditors in this instance. Most individuals who are in difficulty with their mortgages - some of whom are in negative equity and genuinely cannot meet their debts - are not in a position to make their repayments, but they may also be indebted to a variety of other creditors. There must be balance and fairness. As I explained in the context of the PIA, a weighted majority vote can take place among creditors in order to agree to a debt realignment or rearrangement. A financial institution or institutions must have the right to vote in those circumstances. Where someone's position may become viable after a period of years, thereby creating the possibility of some of their debts being repaid, not only would it be to their advantage to retain their home, it would also be an advantage to the financial institution involved. On entering an accommodation, a financial institution will have the advantage of not being obliged to deal with a bankruptcy situation or of not being obliged to watch the property involved being sold at a very low price. In addition, there will be a possibility that it will be able to recoup, over a period of years, a greater proportion of the loan than would otherwise be the case. If an individual exits a PIA in circumstances in which he or she is more financially sound and retains his or her home, mortgage repayments may go on for a considerable number of years. Those of us who have had mortgages have paid them over similar periods.

The key to all of this is that where people are genuinely insolvent and cannot make repayments, where they are in negative equity and where there is a substantial capital loan on a property, the value of which is significantly greater than that of the property and the person's other assets, banks will be obliged to put clear arrangements in place. The banks will finally have to accept that there are individuals in respect of whom there must be capital write-off of a portion of their loans.

One of the aspects we tend not to notice when debating this matter is that despite the fact that many people throughout the State are in financial difficulties and that any family confronted by a court order for repossession is a family in distress, extraordinarily few repossessions have taken place in the four years of the current crisis. There have been in region of 200 to 300 repossessions each year. If we examine the figures from the United States in proportionate terms, it is clear there have been many thousands of repossessions over the same period. The one thing the financial institutions in Ireland have done is to enter into debt forbearance and other arrangements with tens of thousands of people in order to try to keep them in their homes and to give them space to come to terms with rearranging their financial circumstances. One cannot permanently kick the can up the road. There will be arrangements under the PIA process which will involve debt forbearance. Arrangements involving debt forgiveness or some level thereof will also have to be put in place in respect of certain individuals because such arrangements will offer the only way to bring about change.

The financial institutions must realise that if they do not deal with this matter in a reasonable and considered way, some individuals may choose bankruptcy in order that they might exit all of their debts after three years. A question was asked with regard to why an appeals system is not being put in place. There is a good reason for that. In effect, what we are concerned with here are non-judicial debt settlement arrangements. What is the nature of such an arrangement? It is an agreed arrangement between debtors and creditors. There are constitutional constraints in the context of simply writing off debt arbitrarily. What we are trying to do is to create a mechanism that will not result in thousands of unnecessary court hearings which will give rise to the possibility of debtors and creditors spending tens of thousands of euro on legal representation in their pursuit of some form of court-ordered resolution. The mechanism we are putting in place is designed to provide an agreed arrangement. Such an arrangement will be brought about with the assistance of an intermediary, namely, the personal insolvency practitioner. It has been suggested that those who will act as personal insolvency practitioners will be drawn from the ranks of accountants and solicitors only. Clearly, there will be accountants and solicitors who will engage in this sort of work. However, a broad range of financial intermediaries have the skills to work in this area. There are people who work in mediation who would also possess such skills. I am loath to say it for fear of creating undue excitement but there are probably some retired bank managers who could move from being poachers to being gamekeepers in this regard. Having a knowledge of what they are dealing with could allow the latter to operate skilfully in this area.

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