Debtors forced to pay upfront for insolvency

PROFESSIONAL debt negotiators will be allowed to set their own rates and charge upfront fees from struggling debtors going through the State's new insolvency process.

According to confidential draft regulations to be published later this month, personal insolvency practitioners (PIPs) can charge initial consultation or assessment fees and the actual rates will be left to the practitioners themselves.

The Insolvency Service of Ireland says the rates will be dictated by the "market" and it won't be issuing guidelines on how much PIPs should charge. It expects fees for the debt arrangement will average €5,000, in line with rates for a similar insolvency process in the UK.

The only stipulation in the draft regulations is that PIPs must disclose a written schedule of fees upfront with potential debtors.

It has been widely claimed that the regulations on PIPs will be so onerous that only larger solicitors and accountancy practices will have the resources to qualify.

The cost of availing of the debt solution service has raised concerns that poorer people won't be able to afford it. Noeline Blackwell, director of Free Legal Advice Centres, said: "If people are on low incomes and a lot of debt, and they do not have a lot of money to repay over the course of the insolvency each year, there is no money in it for the PIPs and the PIPs just won't do it.

"The very fact that they can charge an initial assessment fee means the PIP won't lose out at all. The PIP can tell whether the debtor is suitable for the insolvency service, and can also tell whether it will make it worth their while to take it on."

She said there was a need for a "public insolvency practitioner" for people with low incomes who wanted to avail of the scheme. "They are still insolvent, they still need the scheme, but private PIPs won't touch them," she said.

The Insolvency Service of Ireland was established last month to tackle the growing number of people burdened with unsustainable debt. Debtors can apply to enter the service by going to Personal Insolvency Practitioners, who must have a legal or financial qualification. Around 19,000 people are expected to avail of the process in its first year.

Debtors can then avail of three options to come to an arrangement with their creditors on debts such as bank loans, mortgages and credit card bills.

In many cases, debtors will pay a portion of their income into a creditors' pool over time, leaving them with just enough money to meet the "reasonable standard of living" set in the Insolvency Service's guidelines. The PIP's fee will be deducted from the final settlement, with a VAT rate of 23 per cent further hiking the cost of the arrangement. Creditors can veto the PIP's final fee if they think it is too high.

Grant Thornton, one of the larger accountancy firms poised to move in on the insolvency business, says that its fees will average around €5,000 per debt settlement.

Brian Walker, a barrister and expert in company law who has been giving seminars on the new insolvency legislation, said that those applying to become personal insolvency practitioners would have to invest around €15,000 on training and software in order to be approved by the panel, and would have to pay for professional indemnity insurance of at least €1.5m.

He said that PIPs may want an "upfront" payment from debtors, to cover costs, and advised debtors applying to the scheme to "do as much research with their own accountants" before going to a PIP, to keep the fees down.

Irish Independent