2012 PERSONAL INSOLVENCY LEGISLATION
The Personal Insolvency Act 2012 has now come into operation. The Act offers three types of non-judicial arrangements which allow the write down or restructuring of secured and unsecured debts under certain conditions. A summary of the options is listed below.
1 Personal Insolvency Arrangements
These are an alternative to Bankruptcy and apply to secured debt up to €3 million and unlimited unsecured debt .The debtor must engage a Personal Insolvency practitioner to review his financial situation and make a proposal to creditors for payment of agreed amounts over 6 years.The proposals are put to a vote of the creditors of whom 65% of the total value of the debts must attend and vote and the vote must be passed by creditors representing 50% of the secured debts and 50% of the unsecured debts. The Insolvency Service then seeks Court approval of the proposals.
2 Debt Settlement Arrangements
These apply to unsecured debt only with no monetary limit. Again a Personal Insolvency Practitioner is engaged to make a proposal to unsecured creditors for payment over 5 years. Again 65% of creditors must attend and vote at the creditors meeting. Court approval is then sought on the proposals.
3 Debt Relief Notices
These apply only to unsecured debt and subject to a limit of €20,000. The debt can be written off if the debtor proves a very restricted ability to pay and that he is insolvent and unlikely to be solvent within 3 years. An Approved Intermediary (such as MABS) will review the debtor’s financial situation and make a report to the Insolvency Service who may issue a notice which effectively wipes out the debts. The debtor can only apply for this relief once in his lifetime.
What can creditors do to reduce the risk of their debts being written off/reduced?
If a creditor gets a judgment and registers it as a judgment mortgage on the debtor’s property, this converts an unsecured debt to a secured debt under the Act and therefore means options 2 and 3 above will not affect the debt, provided the judgment mortgage is in place 3 months before the debtor applies for relief. The debtor can still avail of option 1 above but as the judgment mortgage holder is a secured creditor, their voting will be in line with that of other secured creditors , e.g. lenders who have a mortgage, rather than with the unsecured creditors. Lenders with prior charges will still have priority over sale proceeds and it is never certain that there will be sufficient equity to pay a subsequent judgment mortgage creditor, but it does give a better chance of securing some payment if there is equity, and before that equity is distributed to unsecured creditors.