Time on your side

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When you are bankrupt or facing bankruptcy, the concept of time takes on a new significance as you count the days that remain until it is officially over. In the current debate over whether the bankruptcy term should be cut from three years to one it is important to consider what it would mean to people to have only 365 days on a calendar to tick off instead of more than 1,095.

Albert Einstein had a simple way of explaining his theory of time and relativity: “Put your hand on a hot stove for a minute, and it seems like an hour. Sit with a pretty girl for an hour, and it seems like a minute. That’s relativity.”

Undoubtedly time weighs heavy when you are in difficult circumstances. Much has been done already to move forward from a difficult past concerning bankruptcy in Ireland which was characterised by a legacy of shame and an onerous 12 year term which persisted for many years while other jurisdictions cut theirs to three, including most of Europe. There is now an opportunity to follow the example of the UK, US and Canada and reduce it further to just one year.

Reducing stigma is a good thing

There are many issues involved in bankruptcy and different parties with a stake in the argument over how long it should last – and it is prudent to consider all potential consequences. The debate should not however overlook the stigma many people feel about bankruptcy – if cutting the term from to one year can lessen that, it is a good thing on a purely human level.

The other side of the emotional coin is that for some people, bankruptcy is the only option and they are relieved when they finally have a plan to sort their debts and a date by which they know they will be discharged from them.

An ISI case study describes the experience of an electrician who had struggled with debts when he lost his job back in 2008 and after failing to reach a deal with his creditors on an alternative insolvency solution, entered bankruptcy in 2014. He described a sense of relief that he had an opportunity for a fresh start – six long years after his problems began.

‘Bankruptcy tourism’ argument misleading

The actual bankruptcy term should not be considered in isolation – other important factors include the total amount of time people must continue to make payments to creditors after the official term ends, how it is administered and also the costs involved.

The concept of ‘bankruptcy tourism’ has been bandied about, with some arguing that Ireland needs to introduce a one year term to stop Irish people seeking to be declared bankrupt in the UK or US. There have of course been high profile and controversial examples of people including former bank chiefs who have opted to be declared bankrupt overseas for questionable reasons involving many millions in outstanding debt - but this is far from the norm for Irish citizens.

There have even been suggestions that people from overseas will be encouraged to travel to Ireland to be declared bankrupt if the term is reduced to one year, swamping courts. This is both unlikely and a red herring in the debate.

Look at the bigger picture

For people who have little money, cost is an important consideration and it was a good move by the ISI to cut bankruptcy fees to €270 from €1400 last year – that compares to a far heftier fee in England and Wales of around €987 and is almost identical to the Scottish fee.

Scotland is used by some as an example of how Ireland should operate in terms of its bankruptcy regime but important legislative changes are taking place that have largely gone under the radar in Ireland. A key one is that while the official bankruptcy (or sequestration as it is known in Scotland) term remains unchanged at one year people in Scotland may now have to continue paying creditors for four years instead of three previously – that is a major consideration. Also the practice of automatic discharge from bankruptcy is being abolished and people will now have to apply for an official discharge.

However, one UK practice which might be good for Ireland to consider along with other proposed changes is permitting Insolvency Practitioners to deal with bankruptcy, bringing more expertise and capacity into the system.

One year term won’t solve mortgage arrears or repossession

Some contend that a one-year bankruptcy will help stem the flow of repossessions, citing data showing that 70% of people declared bankrupt had their homes repossessed. However, in and of itself, the bankruptcy time period can have little direct effect.

It takes creditor willingness to enter meaningful discussions on mortgage debt writedown and restructuring to achieve a reduction on repossessions. It also requires a willingness on the part of creditors to consider other insolvency solutions that enable people to retain their homes – notably Personal Insolvency Arrrangements.