The Personal Insolvency Bill that was published in June of last year and enacted just before Christmas has been held out as the solution to Ireland's chronic levels of personal indebtedness. The new regime is designed to break the logjam that exists between banks and other creditors who have been reluctant to recognise potentially substantial write-offs and debtors who are unable to move forward, shackled as they are by unsustainable levels of debt.

Yet opinions on how the new regime will work in practice have differed widely with many skeptical over the Minister for Finance's prediction that some 15,000 individuals will avail of one of the three schemes on offer in the first year of operation. Until now, in the absence of credible research, industry commentators have been unable to gauge the likely demand for the new service.

StubbsGazette is pleased to issue the findings of the first detailed research into the forthcoming regime conducted in association with Red C. We polled some 762 individuals over 18 who represented a representative sample of the population and the finding of this survey are set out herein.

Results

Nearly a quarter of a million households qualify for one of the three schemes on offer under the provisions of the Personal Insolvency Act, which is scheduled to come into force over the next few months, yet nearly two-thirds of people are still unaware of the existence of the legislation.

On the basis of the poll findings, StubbsGazette predicts that the number of individuals applying for Personal Insolvency schemes in the first year of operations will comfortably surpass the estimations of Minister for Justice, Alan Shatter. The Minister’s estimation of 18,000 such applications in year one was greeted with skepticism in some quarters but StubbsGazette estimates put this at closer to 25,000. This does not include some 6,900 expected bankrupts, who will have their period of bankruptcies reduced from 12 years to three under the new laws.

On the basis of the poll findings, StubbsGazette predicts that the number of individuals applying for Personal Insolvency schemes in the first year of operations will comfortably surpass the estimations of Minister for Justice, Alan Shatter. The Minister’s estimation of 18,000 such applications in year one was greeted with skepticism in some quarters but StubbsGazette estimates put this at closer to 25,000. This does not include some 6,900 expected bankrupts, who will have their period of bankruptcies reduced from 12 years to three under the new laws.

Discussion

Perhaps the most striking feature of the debate on the new personal insolvency regime since the Bill was first published has been the lack of agreement on just how many individuals and households would seek to avail of its measures. All kinds of interested parties have talked up and down its likely popularity. Now, with the publication of the findings of the first detailed survey on the subject, we have for the first time something concrete.

The findings present a fascinating vista that throw up all kinds of issues.

For some time various industry commentators have countered the government prediction that some 18,000 individuals will choose to avail of the scheme in the first 12 months of operation. All kinds of reasons are being presented in support of this view, including:

• Proposed schemes will be effectively stymied by the application of the bank veto.
• Banks will pursue informal arrangements with creditors in order to head off the formal arrangements.
• Personal Insolvency Practitioners will not be able to command sufficient fees for their work.

But in fact the StubbsGazette findings and predictions show that, if anything, the Government and the Central Bank have underestimated the likely demand. Indeed, our predictions in relation to the total number of individuals qualifying for the various schemes could be said to be rather conservative.

One figure to which the Minister will certainly pay close attention is the predicted level of bankruptcies. At 6,900 for year one, this is well ahead of rates in England & Wales and Northern Ireland. But there are a number of factors in support of this view, outside of the sheer levels of debt of the survey respondents.

First, because of its draconian nature with its 12-year discharge period, Ireland traditionally has had minimal levels of bankruptcies. With the new laws offering a three-year discharge that will likely push historically hopeless cases over the line.

Second, anecdotal evidence (and indeed our own experience as a debt collection agency) indicates that many individuals, particularly in the DE socio-economic group, will simply have no disposable income in excess of the minimum substance income levels with which to make a meaningful payment on their debts.

Evidence in the UK indicates that banks will not accept a net realisation on unsecured debts of less than 40% (although over time this has fallen to about 30%). If, for example, an individual is proposing a Debt Settlement Arrangement over 5 years in respect of debt of €40,000, that means a monthly payment of around €250 per month. This may simply not be feasible for many.

Bankruptcy Trend Analysis

2012 was a record year for Irish relocations to England for bankruptcies with 129 former Irish residents relocating to England to declare themselves bankrupt versus 69 in 2011.

The latest quarterly figures for Irish relocations to England for bankruptcy indicate a slowdown in the rate of increase: figures for Q1 2012 versus Q1 2011 show a 131% increase in the number of Irish residents relocating to England for bankruptcy but figures for Q4 2012 show the increase over Q4 2011 was only 39%.

Some of these bankruptcies will undoubtedly have involved genuine relocations but most will simply have shopped around for the most favourable bankruptcy regime that suits their personal circumstances in terms of speed of discharge, or protected pension rights. However, it isn’t working for all applicants and a number of high profile UK bankruptcy applications by Irish developers, have been turned down on the grounds that the centre of main interest remained in Ireland. Despite this difficulty, there were still 3.5 times as many Irish residents relocating to England to declare themselves bankrupt than those who opted to apply for bankruptcy in Ireland. This is despite the fact that under the new bankruptcy regime, soon to take effect, all of the debtors declaring themselves bankrupt in Ireland will be eligible for the new rules on discharge which will reduce the discharge period from 12 to 3 years.

However, it isn’t working for all applicants and a number of high profile UK bankruptcy applications by Irish developers, have been turned down on the grounds that the centre of main interest remained in Ireland.

Bankruptcy Legislative Changes

There has been much disparity to date on the numbers. This was the main motivator for StubbsGazette, who are always at the forefront of business insight, to engage the services of Red C, to conduct a survey and to then report to the general public on the likely uptake of the various arrangements on offer under the new Personal Insolvency bill. Their findings showed that following the changes to the Bankruptcy legislation (resulting in a reduced period from 12 to 3 years), there are likely to be 200 times as many bankruptcies in the first year compared to 2012; a 20,000% increase. In other words, when the newly reduced period comes into effect, 6900 Irish people will apply.
What does this mean for people embedded in the current 12 year Bankruptcy system?

There are 153 serving Irish Bankruptcy and yet to be discharged. When the new discharge period comes into effect:

• 71 Irish People currently in Bankruptcy will be discharged early when the new legislation takes effect
• The remaining 82 will have their periods shortened but will have to serve until the 3 year period elapses

   

Download the full survey here.