Making bankruptcy regime more humane

Major reform of our insolvency laws has gone some way towards removing the stigma that attaches to business and financial failure. But more needs to be done, as Minister for Justice Alan Shatter readily acknowledged in his address to the Insolvency Service of Ireland this week. The previous 12-year bankruptcy term was excessive. The term was longer in duration than in most other countries, and far more punitive in its effect. The bankruptcy law served to reduce the status of the bankrupt to one of social outcast. And the law also blighted the bankrupt's career prospects, by not offering a realistic second chance to recover from a financial setback, and to start again. For many individuals and families, caught as Mr Shatter said, between "income collapse and spiralling debt", the new insolvency laws offer a helpful solution. The bankruptcy term has been cut to three years – bringing Ireland into line with the European norm – and the other insolvency provisions offer those in financial distress a modern and humane way of resolving their financial difficulties.

But why have these major legislative changes been so long delayed? For the new laws have come into full effect some six years after the onset of the financial crisis. And why also did pressure to change the insolvency and bankruptcy laws first come from outside rather than from within the country? The EU/IMF/ECB troika of international lenders made insolvency reform one of the requirements of the bailout agreement. Mr Shatter, in 2011, inherited a problem that should have been addressed earlier.

For many years the need for legislative reform of insolvency had been apparent. In Britain in 2004, an existing three-year bankruptcy term was reduced to one year. This failure to reform much sooner, for which blame lies with the previous government, has prolonged and compounded the difficulties of those in financial distress. It denied them a fair means of resolving their debt problems, by reaching equitable settlements with their creditors.

What we did see, as reform of insolvency laws finally began three years ago, was increasing evidence of bankruptcy tourism, with property developers and others opting for bankruptcy procedures in Britain, to take advantage of the one-year bankruptcy term. However, a recourse open to some – those with financial means – is not open to most others: those who are in acute financial distress, and therefore unable to finance the cost of a year in the UK.

The Insolvency Act has forced financial institutions to take a more realistic attitude to resolving debt issues. As a result Mr Shatter has noted a change in approach, with signs that financial institutions are now more concerned to achieve “long term sustainable debt resolution, rather than short term debt amelioration”. A long overdue change, and one that many distressed debtors will greatly welcome.