Brendan Burgess
Founder
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Submission from Brendan Burgess on reducing the bankruptcy term
17th June 2015
Background
I am a consumer advocate and founder of the consumer forum askaboutmoney.com. I have a particular interest in mortgages and mortgage arrears. I chaired the Consumer Panel of the Financial Regulator from 2004 to 2007. I was a member of the Expert Group on Mortgage Arrears – The Cooney Group. Askaboutmoney.com has a variety of forums on personal financial issues including:
Mortgage arrears & negative equity case studies
Personal Insolvency, bankruptcy, etc
Mortgage arrears - policy issues
Issues arising from joint mortgages
My main concern is how bankruptcy affects the small borrower, and their home in particular.
While this is a personal submission, and these are my own views, some of the ideas have come from the contributors to askaboutmoney.com and in particular from the first-hand experience of people who are currently going through the bankruptcy process.
Summary of recommendations
Leave the default term for bankruptcy at 3 years.
The Official Assignee should be given the right to apply to the High Court to discharge the bankrupt earlier where the bankrupt has cooperated and where there is nothing further to be gained by waiting for three years.
When applying for an Income Payments Order, the Official Assignee should give consideration to the behaviour of the bankrupt prior to being adjudicated bankrupt and the extent to which they had cut back their expenditure to the equivalent of the Reasonable Living Guidelines.
The bankruptcy period should be no longer than that necessary to allow the Official Assignee to quickly and efficiently deal with the assets and liabilities of the bankrupt.
Bankruptcy should not be seen as a penalty. It should not be regarded as similar to a criminal conviction where the sentence should be appropriate to the crime.
The sole determinant of the term should be the time taken for the Official Assignee to sort out the assets and liabilities of the bankrupt. This will be determined by the size and complexity of the bankrupt’s affairs and by the co-operation of the bankrupt.
That could 3 months where there are no assets and only unsecured creditors or it could be 6 years where the bankrupt does not cooperate.
The default term should be three years, but the legislation should be changed so that the Official Assignee has the right to apply to discharge the bankrupt earlier. Alternatively, the default term could be one year, with the Official Assignee having the right to apply to extend it. However the former would result in fewer court appearances.
The Official Assignee's job is a lot simpler when there is no property and there are only unsecured creditors. A borrower facing bankruptcy may well reach agreement with their lender prior to bankruptcy to dispose of all secured assets, thus making the bankruptcy simpler and shorter for everyone.
Leaving the duration at the discretion of the Official Assignee would encourage people to behave responsibly. If a borrower were to quit their job to reduce their income or if they were to dissipate their assets prior to bankruptcy, the Official Assignee would take that into consideration.
There is a danger in reducing the bankruptcy period to a fixed one year, that people may game the system as the term is so short.
The duration and amount of the Income Payments Order are more important than the term of the bankruptcy
The main restrictions of bankruptcy have little impact on most people. They don’t want to be company directors or auditors. They don’t want to be public representatives. Unless they are a member of a particular profession, their employment or trade will not be affected.
The duration of bankruptcy does not seem to be a factor in whether or not a person retains their family home.
What affects people much more is that they must live within the Insolvency Service’s Reasonable Living Expenses for 4 or 5 years.
While living within the Reasonable Living Expenses for 5 years might be considered to be an appropriate price to pay for having one’s debts wiped out, it must be remembered that anyone going bankrupt, has probably been living on the breadline for a number of years before bankruptcy.
Typically a home owner who loses their job will struggle for around 5 years trying to keep their family home before they opt for bankruptcy. If they then face an Income Payments Order for 4 years, they will be living a meagre life for a total of 9 years. That is a huge chunk out of anyone’s life. In most cases, this is happening while they are raising children.
The maximum period anyone would have to live on the equivalent of the Reasonable Living Expenses should be five years, including the period prior to bankruptcy. Where a borrower has been struggling for some years before bankruptcy, the Official Assignee should not seek an Income Payments Order which would oblige the person to live a further period on the Reasonable Living Expenses.
Of course, a very high earner should not be allowed to enjoy their full income after a short bankruptcy term. So it might be better to have the ordinary Reasonable Living Expenses for a total of 5 years, followed by a period where the RLEs are doubled. This would not affect most people. But if someone were earning €200,000 a year, they would live on twice the RLEs and pass the surplus to their creditors.
Reducing the Bankruptcy/IPO term is unlikely to change the behaviour of mortgage lenders
One of the arguments used in favour of reducing the bankruptcy term is that it “would put manners on the banks” and make them more flexible in dealing with mortgage holders. There doesn’t seem to be any merit in this argument.
In some circumstances, bankruptcy may be beneficial to both the borrower and the mortgage lender in that it wipes out the borrower’s obligations to their unsecured creditors and so leaves more money available to pay the mortgage lender. So making bankruptcy easier, may help keep people in their homes. But it will be at the expense of other creditors and not at the expense of the mortgage lender.
While most people want to retain their family home, many are happy to get rid of it, if it means getting rid of the associated mortgage as well. Making bankruptcy less onerous, will encourage a lot of people with unsustainable mortgages to take the bankruptcy option much earlier. Again, this probably suits the lenders as much as it suits the mortgage holders.
It should be borne in mind that the current widespread existence of deep negative equity is unusual and will not persist forever. With house prices recovering and with more conservative lending, it will probably be rare in a few years’ time to find a borrower in deep negative equity. It’s important to design legislation for the long term and not just for today’s problem.
Scenario 1 - Unsecured debts only. Reducing the term would be of great benefit to the borrower.
The ideal solution for this borrower and his creditors is that they realise that the debt is not sustainable. The lender should write off the mortgage shortfall. The credit union should realise that the debt will not be repaid and should write it off.
There should be no need for a Debt Settlement Arrangement. However, if the credit union does not agree to write off their debt, the lender should propose a DSA and use their majority as an unsecured creditor to write off all unsecured debt instantly. There should be no need for a 5 year workout.
If the mortgage lender does not agree, then the borrower should go bankrupt. There is nothing to be gained by a three year bankruptcy and a 5 year Income Payments Order.
The Official Assignee would advise the court that there is no purpose to be served by extending the bankruptcy period and that that the bankrupt should be immediately discharged. Of course, a creditor would be able to object if they had grounds for objection.
Scenario 2 - Home owners with unsustainable mortgages. Reducing the term would help them face up to reality earlier.
This is the same as Example 1, except that the home has not been sold yet. The lender and the borrower should agree to a voluntary sale as part of a Personal Insolvency Arrangement. If the lender does not agree, then the borrower should be able to go for bankruptcy and get a fresh start immediately.
Reducing the term would allow borrowers face up to the reality that their mortgage is unsustainable a lot earlier. The threat of a short term bankruptcy would make the mortgage lender and the unsecured creditors much more likely to negotiate a write-down of debt without the need for a PIA or bankruptcy.
Scenario 3 Sustainable mortgage but unsustainable other creditors
Reducing the bankruptcy term will help people to retain occupation of the family home where getting rid of the unsecured creditors will help make the mortgage sustainable
Case Study 3
In this case, the mortgage would be sustainable if the borrower were not under pressure from the business creditors.
By going bankrupt, the home will vest in the Official Assignee. If the bankrupt is able to meet the mortgage repayments, the mortgage lender will be happy to leave the property in the name of the OA and so the borrower gets to retain occupation of the family home. Of course, the bankrupt loses legal ownership of it, but could regain legal ownership if their financial situation improves in time.
This would happen under a three year bankruptcy term as well. So it might be argued that shortening the term would make no difference.
Shortening the term makes bankruptcy more attractive to the debtor. It means that they can get the stigma of bankruptcy removed much sooner. A three year term with a potential further 5 years of an income payments order is daunting. The possibility of a shorter term would make it a more attractive option
17th June 2015
Background
I am a consumer advocate and founder of the consumer forum askaboutmoney.com. I have a particular interest in mortgages and mortgage arrears. I chaired the Consumer Panel of the Financial Regulator from 2004 to 2007. I was a member of the Expert Group on Mortgage Arrears – The Cooney Group. Askaboutmoney.com has a variety of forums on personal financial issues including:
Mortgage arrears & negative equity case studies
Personal Insolvency, bankruptcy, etc
Mortgage arrears - policy issues
Issues arising from joint mortgages
My main concern is how bankruptcy affects the small borrower, and their home in particular.
While this is a personal submission, and these are my own views, some of the ideas have come from the contributors to askaboutmoney.com and in particular from the first-hand experience of people who are currently going through the bankruptcy process.
Summary of recommendations
Leave the default term for bankruptcy at 3 years.
The Official Assignee should be given the right to apply to the High Court to discharge the bankrupt earlier where the bankrupt has cooperated and where there is nothing further to be gained by waiting for three years.
When applying for an Income Payments Order, the Official Assignee should give consideration to the behaviour of the bankrupt prior to being adjudicated bankrupt and the extent to which they had cut back their expenditure to the equivalent of the Reasonable Living Guidelines.
The bankruptcy period should be no longer than that necessary to allow the Official Assignee to quickly and efficiently deal with the assets and liabilities of the bankrupt.
Bankruptcy should not be seen as a penalty. It should not be regarded as similar to a criminal conviction where the sentence should be appropriate to the crime.
The sole determinant of the term should be the time taken for the Official Assignee to sort out the assets and liabilities of the bankrupt. This will be determined by the size and complexity of the bankrupt’s affairs and by the co-operation of the bankrupt.
That could 3 months where there are no assets and only unsecured creditors or it could be 6 years where the bankrupt does not cooperate.
The default term should be three years, but the legislation should be changed so that the Official Assignee has the right to apply to discharge the bankrupt earlier. Alternatively, the default term could be one year, with the Official Assignee having the right to apply to extend it. However the former would result in fewer court appearances.
The Official Assignee's job is a lot simpler when there is no property and there are only unsecured creditors. A borrower facing bankruptcy may well reach agreement with their lender prior to bankruptcy to dispose of all secured assets, thus making the bankruptcy simpler and shorter for everyone.
Leaving the duration at the discretion of the Official Assignee would encourage people to behave responsibly. If a borrower were to quit their job to reduce their income or if they were to dissipate their assets prior to bankruptcy, the Official Assignee would take that into consideration.
There is a danger in reducing the bankruptcy period to a fixed one year, that people may game the system as the term is so short.
The duration and amount of the Income Payments Order are more important than the term of the bankruptcy
The main restrictions of bankruptcy have little impact on most people. They don’t want to be company directors or auditors. They don’t want to be public representatives. Unless they are a member of a particular profession, their employment or trade will not be affected.
The duration of bankruptcy does not seem to be a factor in whether or not a person retains their family home.
What affects people much more is that they must live within the Insolvency Service’s Reasonable Living Expenses for 4 or 5 years.
While living within the Reasonable Living Expenses for 5 years might be considered to be an appropriate price to pay for having one’s debts wiped out, it must be remembered that anyone going bankrupt, has probably been living on the breadline for a number of years before bankruptcy.
Typically a home owner who loses their job will struggle for around 5 years trying to keep their family home before they opt for bankruptcy. If they then face an Income Payments Order for 4 years, they will be living a meagre life for a total of 9 years. That is a huge chunk out of anyone’s life. In most cases, this is happening while they are raising children.
The maximum period anyone would have to live on the equivalent of the Reasonable Living Expenses should be five years, including the period prior to bankruptcy. Where a borrower has been struggling for some years before bankruptcy, the Official Assignee should not seek an Income Payments Order which would oblige the person to live a further period on the Reasonable Living Expenses.
Of course, a very high earner should not be allowed to enjoy their full income after a short bankruptcy term. So it might be better to have the ordinary Reasonable Living Expenses for a total of 5 years, followed by a period where the RLEs are doubled. This would not affect most people. But if someone were earning €200,000 a year, they would live on twice the RLEs and pass the surplus to their creditors.
Reducing the Bankruptcy/IPO term is unlikely to change the behaviour of mortgage lenders
One of the arguments used in favour of reducing the bankruptcy term is that it “would put manners on the banks” and make them more flexible in dealing with mortgage holders. There doesn’t seem to be any merit in this argument.
In some circumstances, bankruptcy may be beneficial to both the borrower and the mortgage lender in that it wipes out the borrower’s obligations to their unsecured creditors and so leaves more money available to pay the mortgage lender. So making bankruptcy easier, may help keep people in their homes. But it will be at the expense of other creditors and not at the expense of the mortgage lender.
While most people want to retain their family home, many are happy to get rid of it, if it means getting rid of the associated mortgage as well. Making bankruptcy less onerous, will encourage a lot of people with unsustainable mortgages to take the bankruptcy option much earlier. Again, this probably suits the lenders as much as it suits the mortgage holders.
It should be borne in mind that the current widespread existence of deep negative equity is unusual and will not persist forever. With house prices recovering and with more conservative lending, it will probably be rare in a few years’ time to find a borrower in deep negative equity. It’s important to design legislation for the long term and not just for today’s problem.
Scenario 1 - Unsecured debts only. Reducing the term would be of great benefit to the borrower.
The ideal solution for this borrower and his creditors is that they realise that the debt is not sustainable. The lender should write off the mortgage shortfall. The credit union should realise that the debt will not be repaid and should write it off.
There should be no need for a Debt Settlement Arrangement. However, if the credit union does not agree to write off their debt, the lender should propose a DSA and use their majority as an unsecured creditor to write off all unsecured debt instantly. There should be no need for a 5 year workout.
If the mortgage lender does not agree, then the borrower should go bankrupt. There is nothing to be gained by a three year bankruptcy and a 5 year Income Payments Order.
The Official Assignee would advise the court that there is no purpose to be served by extending the bankruptcy period and that that the bankrupt should be immediately discharged. Of course, a creditor would be able to object if they had grounds for objection.
Scenario 2 - Home owners with unsustainable mortgages. Reducing the term would help them face up to reality earlier.
This is the same as Example 1, except that the home has not been sold yet. The lender and the borrower should agree to a voluntary sale as part of a Personal Insolvency Arrangement. If the lender does not agree, then the borrower should be able to go for bankruptcy and get a fresh start immediately.
Reducing the term would allow borrowers face up to the reality that their mortgage is unsustainable a lot earlier. The threat of a short term bankruptcy would make the mortgage lender and the unsecured creditors much more likely to negotiate a write-down of debt without the need for a PIA or bankruptcy.
Scenario 3 Sustainable mortgage but unsustainable other creditors
Reducing the bankruptcy term will help people to retain occupation of the family home where getting rid of the unsecured creditors will help make the mortgage sustainable
Case Study 3
In this case, the mortgage would be sustainable if the borrower were not under pressure from the business creditors.
By going bankrupt, the home will vest in the Official Assignee. If the bankrupt is able to meet the mortgage repayments, the mortgage lender will be happy to leave the property in the name of the OA and so the borrower gets to retain occupation of the family home. Of course, the bankrupt loses legal ownership of it, but could regain legal ownership if their financial situation improves in time.
This would happen under a three year bankruptcy term as well. So it might be argued that shortening the term would make no difference.
Shortening the term makes bankruptcy more attractive to the debtor. It means that they can get the stigma of bankruptcy removed much sooner. A three year term with a potential further 5 years of an income payments order is daunting. The possibility of a shorter term would make it a more attractive option
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