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Irish bill based all but exclusively on E&W model
Unique E&W model likely not best for Ireland
Other models in Europe (and US) enlightening
Expert Recommendations and the Evolution of European Best Practices for the Treatment of Overindebtedness, 1984-2010 (Deventer: Kluwer, 2011), ssrn.com/abstract=1663108
World Bank, Insolvency and Creditor/Debtor Regimes Task Force, Report on the Treatment of the Insolvency of Natural Persons (forthcoming 2012)
Consumer insolvency policy: What goals are we pursuing?
Lessons from empirical observation:
(1) weaknesses of negotiated solutions
(2) negotiating in shadow of key alternative
Why now? Why is IMF interested?
How to evaluate proposed solutions
Pandemic of crushing debt
Structural problem
Allowing this problem to persist unaddressed undermines national economic development, international competitiveness
Tired slogans versus systemic goals
Bi-lateral versus multi-lateral, societal view
Broad benefits of safety release valve versus narrow (illusory) virtues of pacta sunt servanda
The FACT of debtors’ insolvency creates losses, “deprives creditors of their rights”—an insolvency system compels creditors to accept this truth and find a productive way
forward . . .
. . . for themselves and SOCIETY.
Internalizing negative externalities of loose underwriting
Internalizing negative externalities of loose underwriting
Facilitating proper account valuation
Internalizing negative externalities of loose underwriting
Facilitating proper account valuation Reducing waste in fruitless enforcement
Internalizing negative externalities of loose underwriting
Facilitating proper account valuation Reducing waste in fruitless enforcement Reducing costs from illness, crime,
welfare
Internalizing negative externalities of loose underwriting
Facilitating proper account valuation Reducing waste in fruitless enforcement Reducing costs from illness, crime,
welfare Increasing production of taxable income
Internalizing negative externalities of loose underwriting
Facilitating proper account valuation Reducing waste in fruitless enforcement Reducing costs from illness, crime, welfare Increasing production of taxable income Enhancing economic activity,
entrepreneurialism
Insolvency system functions as a backstop, safety net for inevitable
casualties
. . . still chasing chimeras . . .
economic cycles—unemployment
currency swings—asset devaluation
globalization—exported banking risk (RMBS US → Europe)
health, divorce, childbirth . . . life is risky!
Dividing the costs of expected tragedy
Dispersing the burdens of expected tragedy
Insolvency SystemUnfair penalty on “responsible” debtors who would never default?
Insolvency SystemUnfair penalty on “responsible” debtors who would never default?
Auto Insurance SystemUnfair penalty on “safe” drivers?
Insolvency SystemUnfair penalty on “responsible” debtors who would never default?
Auto Insurance SystemUnfair penalty on “safe” drivers?
. . . accidents happen
with and without driver fault . . .
Insolvency SystemUnfair penalty on “responsible” debtors who would never default?
. . . and default occurs
with and without debtor fault . . .
Auto Insurance SystemUnfair penalty on “safe” drivers?
. . . accidents happen
with and without driver fault . . .
Keep egregious credit abusers out of system
Keep egregiously bad drivers off the road
Keep egregious credit abusers out of system
Keep egregiously bad drivers off the road
Over-reaction & over-deterrence
are undesirable in both cases
o Insolvency relief is a trade-offfor deregulation of consumer lending
o Insurance for restoring equilibriumin “open credit society”
o Moral hazard = inevitable slippage
o Don’t sacrifice the many good benefitsfor want of unattainable perfection!
The long, frustrating quest for alternatives to bankruptcy
Business is businessvs.
moralistic judgment
What’s the alternative?
The tri-partite Irish approach in light of comparative experience
PIA PIA DSADSA
BankruptcyBankruptcy
One creditor easily has > 50% secured debt
That creditor thus has absolute veto, with no review for “reasonableness” or “good faith”
No change from status quo: banks CAN agree to voluntary modifications NOW—do they?
US experience reveals inevitable failure
20 years of wrangling with unsecured creditors
E&W, Sweden, France, Germany, Netherlands
20 years of wrangling with unsecured creditors E&W, Sweden, France, Germany, Netherlands
Few assets, limited income, large debts, and moralistic creditor judgments = negotiation proved “pure formality” in all but a few cases
Distracts counseling resources/attention from truly negotiable cases!
Sweden first to scrap mandatory stage in 2007
Trusted intermediaries
France•More than 50% “success,” but trending down•Not just for “insolvent” debtors► more and more “insolvent” Ds = immediate discharge!
•KEY: Banque de France pressure on creditors► rise in plan acceptance from 40% → 65%+
Netherlands•NVVK long history of plan negotiation•Sharp downward trend to 9% after new Wsnp•Reversal, back to ≈ 30%, on 2 NVVK fronts:
Netherlands•NVVK long history of plan negotiation•Sharp downward trend to 9% after new Wsnp•Reversal, back to ≈ 30%, on 2 NVVK fronts:
(1) hopeless cases routed immediately to Wsnp - concentrating resources on good candidates
(2) structural negotiation with key creditors - (CJIB—fines and penalties bureau)
MABS as trusted intermediary?
No compulsion for creditors
The alternative is no “stick behind the door”…
Debtors will agree to unworkable plansthat will eventually fail
Overwhelming majority of Ds will have no realistic option other than bankruptcy► expect cries of debtor “moral hazard” when creditors reject reasonable proposed plans . . .
KEY: reasonable, consistent, uniform application of “income payment orders”► bill’s guidelines seem sensitive, but† 5 years following 3-year “recovery” is too long† “reasonable needs” per court discretion = disaster
Half-measures ignore societal goals of insolvency
Why parrot unique E&W system?
Why leave public policy to banks—look where that has gotten us.
One portal; one solution, but . . .. . . fool’s errand to expect substantial returns to
creditors—pounds of expense for pennies of gain
