The Government today launched a personal insolvency service which introduces new arrangements for struggling borrowers to reach agreement with their creditors. Insolvency Service of Ireland (ISI), the new State agency, will be in a position to begin accepting applications at the end of June this year. Debtors will face spending limits.

There will be three different debt solutions that will depend on the amount of debt involved, individual circumstances, whether there is a mortgage, and whether the debt is secured or unsecured: The Debt Relief Notice (DRN) is for debts up to €20,000; the Debt Settlement Arrangement (DSA) is for unsecured debts of no limit; and the Personal Insolvency Arrangement (PIA) is for unsecured and secured debt.

Speaking about the Guide to a Reasonable Standard of Living and Reasonable Living Expenses, Lorcan O'Connor, ISI director, said that that the guidelines are a modified version of the model developed in Ireland by the Vincentian Partnership for Social Justice, and were not designed for the micro-management of people’s expenditure or lifestyle by either the Insolvency Service or by creditors.

"A reasonable standard of living does not mean that a person should live at a luxury level" O’Connor said. "But nor does it mean that people should be punished and live only at a subsistence level. These guidelines are meant to be flexible. They are a baseline for negotiations and discussions. Our objective is to help people in genuine distress, and to allow them their dignity as they work their way out from under their financial burdens."

Under the ISI guidelines a single adult with no car will be permitted expenditure of €898.96 in set cost over and above any mortgage or rent payments. The set costs will rise to €1,030 if that adult has a car. They will be given €126 a month - - or €29 a week to cover social inclusion. An allowance of €204.88 is to made for each child of primary school-going age. Private medical insurance, holiday costs, having more than one car and payment of discretionary items (such as voluntary donations) are excluded.

Guidelines on a reasonable standard of living and reasonable living expenses [pdf]

Liz Hughes, head of ACCA Ireland, an accountancy institute, said: “It has been reported that some vulnerable borrowers were having excessively strict budgets and conditions imposed by lenders renegotiating repayment of loans. The standard Cost of Living Tables ensure that all borrowers will have to be treated equally from now on. We have been told of cases where the borrower was told to ‘get rid of the dog’ and cancel all school trips. Borrowers can now point to the tables and insist on getting a basic standard of living before repayments to the lender are made.”

A small minority of borrowers were expecting a debt forgiveness bonanza from the personal insolvency legislation; the cost of living tables reveal that there will be no such thing. The tables reveal that there will be five or six years of living on very meagre levels of disposable income, and then recommencing one’s life at the end of this period still encumbered with a mortgage, however the mortgage will be limited to the value of one’s home. All that will be forgiven is the negative equity in a mortgage and in return the borrower will be, not quite in penury but not far off it either, for six years.

Before entering into a formal Personal Insolvency Arrangement (PIA), a borrower must go through the Mortgage Arrears Resolution Process with their bank. ACCA encourages borrowers to engage positively with their bank in this process. This process is less legalistic, there is greater scope for flexibility in the arrangement, it will be a private arrangement between the bank and the borrower and the borrower will be entitled to independent advice on the merits of the scheme offered, from a qualified accountant with the advice paid for by the lender."

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