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A matter of life and rising debt
Sunday, November 09, 2008 By Emma Kennedy
Irish people continue to clock up mountainous debts, and some may even face prison for failing to pay up due to an antiquated legal system.

For many years, lobby groups have been calling for a change in the way people who don’t pay their debts are treated by the legal system. And for many years, their calls have fallen largely on deaf ears.

However, changing economic fortunes mean that debt is becoming an increasingly common problem. Outstanding indebtedness on credit cards - one of the most accessible forms of credit, and often an easy way to find yourself with mounting debts - increased for the second month in a row in September.

At the end of that month, Irish people owed a total of €3.1 billion on their credit cards, according to statistics from the Central Bank. That level of indebtedness looks set to grow because new spending on credit cards continued to exceed payments in September.

So it is timely that a review of the legal treatment of debt is being considered by the Law Reform Commission (LRC) as part of its third programme of reform, which runs until 2014.

A person can still end up in prison for non-payment of debts. About 1,000 Irish people served a prison sentence between January 2002 and September 2006 for ‘‘offences relating to debt’’, according to Paul Joyce, senior policy researcher at the Free Legal Advice Centres (FLAC). In 2003, Joyce published a report for FLAC examining how the Irish legal system treated consumer debt cases and considering alternatives and proposals for reform.

Five years on, Joyce is putting the finishing touches to another report, due for publication next year, looking at the same broad area. But little has changed in the interim.

‘‘We are at a loss as to why the Department of Justice, Equality and Law Reform shows no inclination to move on this,’’ Joyce said.

But the LRC decision to consider this issue means change is more likely now. Raymond Byrne, director of research at the LRC, said the legal treatment of debt had come up repeatedly during a public consultation process to select areas for consideration under the reform programme.

‘‘We found it to be a very live issue,” he said. ‘‘There is this question about whether the courts are the appropriate forum for these cases. The commission has to explore the rules about how debt enforcement works.”

Ending up in prison for failing to pay your debts may seem more appropriate to the Victorian era than to 21st-century Ireland.

‘‘Some of the legislation dealing with this is 19th century stuff,” Byrne said.

The antiquated rules are no big surprise when you consider that one of the main laws dealing with penalties for debt, the Enforcement of Court Orders Act, dates back to 1926 and was last revised in 1940.

Joyce said there were a number of problems with the current system. First, conducting sensitive hearings about a debt-related matter in open court can be daunting to people embarrassed by their financial situation.

He said the onus was on debtors to prove that non-payment of their debts was ‘‘not due to wilful refusal or palpable neglect’’. Debtors who do not satisfy the judge can ultimately be imprisoned.

‘‘The gardai, in my experience, are reluctant to enforce this,” said Joyce. ‘‘They don’t see it as part of their criminal justice work.”

He added that creditors, such as banks, were often reluctant to bring cases to court due to concerns about bad publicity and the fact that a prison sentence did not necessarily mean the debt would be repaid.

The government is on record as saying it will end the possibility of imprisonment for debt, but those hoping for a massive overhaul of the current rules may be disappointed.

‘‘There might not be enormous change in that, if you owe money, you must pay it back, but the processes around this certainly need to be examined,’’ Byrne said.

Bodies such as FLAC, the Irish Banking Federation (IBF) and the Money Advice and Budgeting Service (MABS) have welcomed the LRC decision to review the area, but there are concerns about whether the review will actually result in real changes.

‘‘The LRC has an excellent reputation and anything it produces is taken seriously,” Joyce said. ‘‘However not everything it recommends is done, Byrne said: ‘‘In general terms, the LRC has an implementation rate of 70 per cent, so you would be hopeful.”

For some, the treatment of debt needs to be removed from the courts altogether. A recent submission by MABS to the LRC said that an out-of-court alternative to the existing dispute resolution process was needed to address the ‘‘overindebted person’s situation in a holistic fashion’’.

The independent organisation, which provides help for people with debt problems, said that the legal process should ‘‘support, facilitate and strengthen voluntary negotiated debt settlements’’.

This type of system was tested six years ago. A pilot scheme for debt settlement - a joint initiative between MABS, FLAC and the IBF - was launched in 2002. It was designed to help debtors against whom legal action by creditors was likely or pending, to formulate an affordable repayment plan.

‘‘The pilot scheme was designed to test whether cases of multiple debt could be resolved successfully without recourse to the legal system,” said Felix O’Regan, a spokesman for the IBF. He said the scheme also aimed to improve the working relationship between debtors and creditors.

Working out the terms of the pilot scheme was a lengthy process. ‘‘It took a long time to agree,’’ O’Regan said.

He said this was not due to one party dragging its heels, but to the difficulty in striking an acceptable balance between the differing expectations of creditors and debtors.

Initially, the pilot scheme’s organisers hoped to have about 100 test cases, but ended up working with a smaller sample as it was hard to find suitable cases.

‘‘It was not so much about the amount of debt the people had, but that they had multiple debts from any number of creditors,” O’Regan said.

Overall, the pilot showed there was scope to develop this type of system on a broader basis. ‘‘It did show that there would be a basis for addressing multiple debt cases outside the courts,’’ O’Regan said.

It remains to be seen what changes the LRC will recommend and whether an out-of-court system for debt settlements is likely to materialise. Byrne said it usually took up to two and a half years for the LRC to produce a report on an area of review.

Based on that, it will be late 2010 before the LRC’s full findings and recommendations are published.

In the meantime, the level of debts continues to rise, and appearing in court for debt-related issues is a reality for a small, but significant, number of Irish people. ‘‘The big problem at the moment is that there isn’t a process that looks at someone’s financial situation in its totality,” said Joyce.

He said it was likely that money advisors, lawyers and the credit industry would disagree on the details of any new system of debt enforcement, but all parties were convinced of the need for reform and the need to set up a system that dealt with the growing problem.

‘‘Taking risks and taking on debt is one of the key features of economic growth,’’ Joyce said. ‘‘But if we say ‘go ahead and borrow because it is great for the economy’, then I think there is a responsibility on the other side to deal with the fallout.”

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