Thousands of distressed borrowers are being let down by new insolvency protections that were supposed to provide some relief from their debts. Many will be forced into bankruptcy because they are too broke to benefit from insolvency protection, which became available in the past month. Without further reforms, though, bankruptcy could be unaffordable for many —leaving them in a fix without enough money to pay their creditors or to go bankrupt.

Insolvency protection, available since September 9, is offered only to those who can afford to pay something to their creditors. However, after reviewing 1,000 sample cases, Grant Thornton Debt Solutions, an adviser, found that 43% did not earn enough to cover even reasonable living expenses — leaving nothing for creditors under debt settlement or personal insolvency arrangements. Reasonable living expenses, as defined by the Insolvency Service of Ireland (ISI), allow for a meagre existence with enough for essentials only. Individuals would be expected to make do with €933 a month or €1,045 if they needed a car for work. Families with two children at school would have a budget of €1,800 a month or €1,821 with a car. Michael McAteer, a personal insolvency practitioner at Grant Thornton, said: “The Irish League of Credit Unions says 493,000 adults have nothing left at the end of the month once bills have been taken care of, so it’s not surprising that 43% of debtors who contacted us are not in a position to make a contribution to their creditors.”

Bankruptcy is the last resort for those who do not qualify for insolvency protection or who fail to negotiate voluntary debt relief with their banks. Ross Maguire, a barrister with New Beginning, which represents those threatened with repossession of their homes, said: “The threat of bankruptcy is a powerful card to play in dealing with creditors — but you have to be prepared to use it if necessary. When debtors grasp the benefits of bankruptcy, banks will start to offer deals they wouldn’t have considered otherwise. If you’ve no card to play, you can’t expect mercy from your creditors.”

Bankruptcy is rarely used in Ireland — only 143 cases were in progress by last April—because it used to take 12 years to be free of the restrictions involved. The discharge period has been reduced to five years and will shortly fall to three years. The reforms should make bankruptcy a better option for the hopelessly indebted — Alan Shatter, the justice minister, forecasts 3,000 bankruptcies a year — but only if they can afford it. Anthony Joyce of Anthony Joyce & Co solicitors said: “Bankruptcy is extremely expensive in Ireland: €5,000-€7,000 if you use lawyers and that’s on a shoestring. You will need to have a strategy, such as halting mortgage payments in advance of bankruptcy, to help pay for it. Most of the people who come to use it have an asset such as property that they sell to finance their bankruptcy.” We tell you what to expect from bankruptcy.

WILL I BE AN OUTCAST?
Insolvency experts say bankruptcy will lose much of its social stigma when more borrowers avail of it, especially those with modest debts. Stephen Tennant, a personal insolvency practitioner at Grant Thornton, said: “We estimate there will be 5,000 cases a year because bankruptcy will be the only option for many.” Joyce said bankruptcy would make little impact on the daily lives of those struggling with debt, although solicitors, accountants and politicians must give up their professions while bankrupt. “All it means for most people is that they can’t be a company director or borrow money, which wouldn’t be an option anyway because they’ve already got too much debt,” he said. Bankruptcy will cast a shadow over your creditworthiness even after you have been discharged, but you may still be able to borrow again. “Banks don’t have long memories,” Joyce said. “If you can afford to repay a loan in future, they will lend to you.” Singer Shane Filan, formerly of boy band Westlife, filed for bankruptcy in the UK, where bankrupts are discharged after a year, compared with the three years proposed in Ireland

WHAT DOES BANKRUPTCY INVOLVE?
Chris Lehane, the official assignee appointed by the courts, has the power to seize all the assets of bankrupt individuals, sell them and distribute the proceeds among creditors — apart from personal possessions worth up to €3,100. He can also take investments in approved retirement funds, although he cannot touch other pension assets. The assignee must be notified before travelling abroad to ensure debtors are not trying to escape the consequences of bankruptcy. “The assignee has very wide discretion over how to use his powers in practice,” said Maguire. “If you’ve got a brand new car, a share portfolio or an art collection, he’ll take them. You’ll be allowed to keep possessions that are necessary for the normal exigencies of life, however.”

WHAT DOES IT COST?
Debtors need at least €2,500 to go bankrupt. This includes stamp duty, the cost of advertising the bankruptcy in national and local newspapers, and a contribution of €650 towards the costs of the official assignee. They also need to pay a personal insolvency practitioner for a confirmation that they are unsuitable candidates for a personal insolvency agreement (PIA). Bankruptcies are dealt with by the High Court, involving an outlay of at least €3,500 for those who engage solicitors and barristers. Costs are set to fall dramatically, however. The ISI has indicated its website could be used to publicise bankruptcies, doing away with the need for costly advertising. There will also be less need for lawyers when bankruptcy cases are transferred from the High Court to the Circuit Court, which will appoint specialist insolvency judges. “The cost of going bankrupt will probably end up being similar to Britain — about £1,000 [€1,200],” said Maguire.

CAN I CONTINUE TO WORK?
There is little incentive to work during the discharge period for bankruptcy, and professionals such as solicitors and accountants are barred from practising while bankrupt. “Why work when the official assignee will take anything there is to spare beyond the living expenses he has allowed you?” said Joyce. Those who want to work to keep a career on track after exiting bankruptcy should consider minimising their earnings by reducing their hours or working part-time.

WILL I LOSE MY HOME?
Ownership of a bankrupt individual’s share in the family home passes to the official assignee. If the house is in nega- tive equity, the assignee’s share will have little value. Lehane said on radio last month he would consider selling it for about €5,000 plus his legal costs to the solvent spouse, who would also take responsibility for the entire mortgage. “If you’re insolvent, you’ve a better chance of holding on to your home by going bankrupt,” said Maguire. “The bank is more likely to do a deal on the mortgage because all of your other debts will be gone. If you are working, your earnings can go towards the mortgage rather than other creditors. Bizarrely, you become a better credit risk for the mortgage provider.” If there is equity in the house, the assignee may be willing to sell his share to the solvent spouse at a discount. Otherwise, he would have to ask permission to sell the property from the courts, which would be reluctant to leave a solvent spouse and children homeless. “If the house is worth €200,000, the assignee might sell his share for €80,000-€85,000,” said Joyce. “He would also give the spouse time to come up with the money.” There is nothing to be gained by transferring ownership of your home or other assets to a spouse before going bankrupt. The courts will undo any asset transfers in the past five years if they believe the motive was to protect them from creditors.

SHOULD I GO TO BRITAIN?
Bankruptcy in Britain is discharged after a year, compared with three years due to come into effect in Ireland in the coming weeks. You must live there for at least six months before applying, however, to establish a centre of main interests (COMI) in the UK “Going bankrupt in the UK is probably an easier solution if you’re free and single,” said Joyce. “The procedure is much more straightforward.” Ireland is leading efforts by the European Union to stamp out “bankruptcy tourism”, where debtors move temporarily to Britain or another member state to take advantage of a more favourable bankruptcy regime. “UK bankruptcy is under scrutiny, with reports that judges there are looking at COMI very closely and rejecting many applications,” said Tennant.