Following on the announcement last week that the government has sought to further delay the issue of the personal insolvency legislation, and amid rampant speculation on the shape of that legislation, legal rights organisation FLAC has warned of the danger of handing banks a veto on which debts will qualify for resolution under the new law.
FLAC argues that only an independent debt settlement agency will be equipped to fairly and equitably handle such a fundamental issue and protect the interests of consumers.
According to government, further time is needed to deal with the complex issues that arise.
Among those issues is the question of who is to be permitted into an insolvency arrangement. The banking sector has argued that mortgage debt ought to be excluded from any scheme. Even if it is to be included, a scheme suggested by the Law Reform Commission suggests that the debtor who is owed the most – at a level of perhaps 60% or 75% of the debt – should be able to veto any proposals for debt resolution.
FLAC notes that given the level of personal debt that relates to mortgage debt on people’s family home, the biggest debtor for many families will be their mortgage lender.
FLAC argues that if mortgage debt is not included, then any new scheme will be of little value to a large number of those who need a mechanism to deal with their severe over-indebtedness. Similarly, if a mortgage lender is to have a veto on who can or cannot enter an insolvency scheme, it will be deeply unfair in the organisation’s view.
FLAC therefore argues that there must be an objective and independent arbiter for any personal insolvency scheme so that creditors will have to accept reasonable and realistic repayment proposals from debtors.
Otherwise, says FLAC Director Noeline Blackwell, “we risk a situation where people are entering into arrangements that they cannot sustain financially simply because it is looks more palatable for the bank.”
“Banks will continue to pick and choose which cases will be settled, as is currently the situation. This denies consumers and people in debt a fair, objective legal process to settle debts,” says Ms Blackwell.
FLAC warned that other possible consequences of excluding mortgage debt from personal insolvency include a surge in repossessions leading to a massive rise in the need for social housing and related supports; and a deluge of applications for bankruptcy, as people have no other alternative when their applications for debt settlement under personal insolvency legislation are rejected.