WHERE ARE ALL the bankruptcies? Grant Thornton estimated that up to 7,000 self-declared bankruptcies would occur in the first year following the commencement of new bankruptcy laws. That would be at least 145 per week. So far there have been approximately 30 over the last eight weeks. So, why so few?
The head of the Insolvency Service of Ireland, Lorcan O’Connor at the recent ISI conference explained the reason why so few formal insolvency arrangements have been put in place to date. The main reason is that both debtors and creditors have not wanted to deal with the problem. There has been a stand-off.
According to Lorcan Connor, this is now changing and he is seeing the number of applications doubling every week. We believe we should see the same happening with the number of bankruptcies. In various aspects of different businesses we have seen that opinion reign true, why would a person opt for a rigid insolvency when informal negotiation has gotten them through the last five years?
The Central Bank has tried to break the stalemate by introducing resolution targets, these targets – if effective – will ultimately crystalise losses for both sides, something that perhaps should have happened years ago.
This is behind the estimations of higher bankruptcies. As more and more people are declared bankrupt, the stigma of bankruptcy will disappear which will in turn lead to more bankruptcies, which will in turn result in a more efficient system and reforms for better outcomes.
One issue that we are seeing is that the High Court judge won’t grant a bankruptcy unless the person can show that they have made some proposal to settle their debt with their creditors. This could delay a person been declared bankrupt. Yesterday’s practice determination by Justice McGovern also means that you can’t simply sign and affidavit saying ‘I tried and considered personal insolvency but it doesn’t suit’ you’ll have to pay a visit to an actual PIP or ‘personal insolvency practitioner’ which may increase the costs of going bankrupt.
Therefore we have debtors offer the costs of their bankruptcy which tend to be between €900 and €3,000 (depending on the provider and whether they take legal advice or not) to settle their debts. What does this mean? It means creditors accepting a minor sum in full and final settlement or the person pulls the plug, the idea being maximum writedowns in the most rapid manner possible.
It also works – creditors are taking hits they would never publicly admit to because of it.
Why do they agree when we do this? In the first instance it allows greater than nil recovery which is where they often tend to be prior to the offer. Secondly, the official assignee will take time to pay creditors and when they do they (the official assignee) take a chunk of any payment for themselves thus reducing the return possible.
Evidence of having made this last-ditch attempt can be provided in court to support the bankruptcy application. While this approach works best with people whose only income is welfare or close to the minimum income thresholds, a similar approach can be taken for people of better means; an offer that beats bankruptcy should, in a commercially sensible world, gain acceptance despite it being unpalatable.
The argument about losing a family home in bankruptcy is often highlighted and primarily put forward by banks who want to keep people afraid, as well as others working in debt solutions areas where an anti-bankruptcy stance serves their agenda as negotiators paid by either client or creditor.
Family homes are not protected with guarantee in any debt mediation outcome, that is the brutal and simple truth. Bankruptcy is no different, in particular if there is equity in the property, and that trade-off is one that requires careful consideration, albeit weighed against oft-failed alternatives and creditors unwilling to accept economic reality.
In particular, the informal solution operators push this point insisting instead that insolvent tenure and trust in the banks to make deals is superior, a deeply misguided direction to people looking for finality, many bank-led answers are merely the undertaking of a lifetime of austerity or where the only write-down occurs due to the devaluation of money over time.
The open-ended nature of some of the documentation also means people may feel they have a ‘long-term solution’ that later becomes ‘long-term solution 2.0′ and acts as a repeated bite from the same dog.
Bankruptcy doesn’t come with many bells and whistles, but it does come with virtually guaranteed closure – the calls, the harassment, the stress and many other things that wear people down all cease.
There is no magic pill to resolve our private debt overhang, and some of the debt medicines can have devastating effects, but some wounds need to be cauterised to save the patient and when insolvency isn’t working and where debt negotiation will leave a person facing a lifetime of uncertainty and austerity, bankruptcy is often the least worst answer.
Anthony Joyce and Karl Deeter are directors of BankruptcyAdvice.ie a debt solutions site that specialises in Irish and UK Bankruptcies. Follow on @IrishInsolvency, @KarlDeeter and @_AnthonyJoyce
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