A chink of light but the banks still hold veto on debt divorce

The State holds the monopoly of organised violence over its citizens. We normally assume this violence is physical, but it need not be. The State can also injure its citizens by instituting legislative processes that damage the long-term interests of large sections of society by favouring smaller sections. This is violence by another route, and potentially more damaging because of the withering effects on the polity such laws create.

I have argued for years that, after unemployment, the largest policy problem in the State is the excessive level of personal debt held by the public. I'm not alone. In a recent speech to the Institute for International and European Affairs discussing the problems Ireland has, the Governor of the Central Bank Patrick Honohan wrote: "high public debt and the working out of the banks' distressed loans remain central."

The ratio of disposable income -- what you've got left over after all the bills -- to outstanding debt in Ireland is one of the highest in the world. More than 10pc of residential mortgages in the State are in some form of distress.

An estimated 59,437 mortgages are in arrears for more than 180 days. Recent research from the Central Bank suggests that Irish households have lost more net wealth through the housing market collapse than any other European nation. The reaction of Ireland's households has been typical: when things go wrong, rational people pay down debt faster. In fact, Irish households have decreased their debt levels more than any other country since 2008. And tens of thousands of households are still in deep trouble. There has to be recognition on the part of policymakers and the bankers who enjoy the public's largesse that many of these households will never be able to pay off their debts.

The route for many citizens out from under an unsustainable burden of debt is an efficient and humane personal insolvency regime.

The creation of a new approach to personal insolvency was never going to be easy. The legislators had to balance the obvious need for a workable solution with the fact that, in the end, other taxpayers would foot the bill.

There really is no such thing as a 'debt writeoff'. It's more accurate to call it a 'debt transfer'. If household A can't pay its debts, then Bank B has to take the hit, which will soak up some of its funds by making a provision for the bad debt. AIB and Bank of Ireland have received €25.4bn from the taxpayer and are still not in great shape.

(Other banks, such as Ulster Bank, are not covered by the bank guarantee and so any losses they incur are not the taxpayers' problem.)

Many households won't ever pay off their debts. Once we recognise this, we need to do something about it.

I think divorce is the appropriate metaphor to help understand the problem. The banks are, in a sense, married to these households through the mortgage contracts they signed together. Now the arrangement hasn't worked out. There needs to be a divorce where each party agrees to abide by an agreement made by an independent third party, so that both parties can start again. The agreement must be careful to balance the rights of both parties, it must ensure fairness and it must make sure that there is a sufficient 'filter', where spurious cases don't get treated in the same manner as genuine ones.

But imagine this scenario: a husband and wife enter into divorce proceedings with an independent mediator. They work it out with the mediator. But the husband has a final veto on any agreement the wife might reach.

Put in those terms the failure of the Bill is obvious: it privileges the banks' (or creditors') interests above the households' (or debtors').

The Personal Insolvency Bill is quite an involved piece of legislation, about 118 pages in all. It does not make for easy reading. The Bill is in four main parts. The first part details the establishment of an insolvency service, a new government agency designed to implement the Bill. The second part of the Bill details the various insolvency arrangements, such as debt relief notices, debt certificates, debt settlement arrangements, personal insolvency procedures and a list of the various offences one might be found guilty of by abusing the service. The third part of the Bill describes the various laws that are going to be amended and the fourth describes the regulation of a new industry: the personal insolvency practitioner.

Most of the second part of the Bill details a series of 'filters' or eligibility criteria to make sure spurious cases don't make it through to the service for consideration. For example, in section 23 (2), on page 25 of the Bill, we have the rules governing who is eligible for a debt-relief notice. The person must have qualifying debts of €20,000 or less of unsecured debt, like credit card debt, they need to have a net disposable income of less than €60 a month, they must have assets worth €400 or less and they must have (this is crucial) no likelihood of repaying these debts in the next five years.

There is a lot going on here. First off, to be eligible the person must be essentially penniless. That's to be expected -- you don't want people taking a chance that some of their debts can be written off, they must need this service. But how do you calculate an asset's worth at €400 or less today? And who decides whether you don't have a hope of repaying your debts? Ah yes, the personal insolvency practitioner. It will come down to a judgment by a class of person who doesn't exist yet.

And if the bank doesn't like the arrangement, you are still stuck with your debts, despite essentially being in penury.

But it gets worse. Move on to section 83 (1) on page 72, to the reasons why the creditor can challenge a debt settlement arrangement. Section 83 (1) part e is one of those 'fine print' rules that can mean anything. The debt settlement arrangement can be challenged when it 'unfairly prejudices the interests of the creditor'. Or in other words, if the judgment hurts the bank.

Return to the divorce metaphor. The husband and wife secure a settlement, but the husband says "no, I don't like it, do it again until it suits me". No one would view this as fair in any way. I agree the bank's interests do need to be considered -- as a taxpayer I've a large stake in many banks -- but not to the exclusion of those persons the Bill is supposed to help, the debtors.

The implementation of this Bill rests on the judgment of a class of people we don't know yet. The Bill contains wrong filters and eligibility criteria, has creditors' interests ahead of debtors' interests in several places and represents a lost opportunity.

Published in the Irish Independent