Those who cannot pay their debts in full as they fall due are insolvent. In Ireland, for too long, too many borrowers have been unable to repay their debts, and too little has been done to address the problem - one that affects borrowers and lenders and that has greatly impeded economic recovery. Five years after the onset of the financial crisis, an insolvency regime is finally in place, though not yet in operation. The Insolvency Service of Ireland (ISI) has outlined how distressed borrowers can seek debt relief under three different insolvency arrangements, and the Government has issued guidelines on the income limits that those using the insolvency process must accept. Minister for Justice Alan Shatter expects that from next June, the service will be ready to receive applications from debtors seeking relief from their creditors.
For those who enter the debt relief process, the necessary adjustment in income and lifestyle will be painful and hard to accept. The spending constraints imposed by tight monthly income limits will mean hardship for individuals and their families, and involve some loss of social status. Many in insolvency arrangements may find themselves without the benefit of a car or private health insurance, and also unable to take holidays or to pay school fees. The necessities of life in better times have in austere times become unacceptable luxuries for distressed debtors. Nevertheless, the guidelines will be operated in a flexible manner, with discretionary spending allowed to those who do not exceed their monthly income allocation. The Government, in setting the income guidelines, had to strike a difficult balance, which it has managed to achieve. It had to give distressed borrowers, mainly mortgage account holders in substantial arrears, every encouragement to settle their debt problems while giving their creditors - the banks - an equal incentive to reach an agreement with them. How the insolvency regime will work in practice remains to be seen.
Undoubtedly, the greatest challenge ahead lies in tackling the high level of arrears among mortgage account holders. In December, some 95,000 holders of residential mortgages were over 90 days in arrears on their repayments. Many of these casescan be dealt with between the banks and the account holders, and without recourse to the insolvency process. Above all the new insolvency regime offers some real hope for the future, by providing distressed borrowers a clear pathway out of debt and within a defined period. That prospect removes uncertainty. It enables the indebted to deal with their financial problems and, ultimately, to recover their solvency status. A broad-based economic recovery is unlikely until the level of personal debt is first reduced to more sustainable levels. The new insolvency regime represents a step in that direction.