BANKRUPTCY’S BROKE – SO FIX IT

Few will shed any tears for Sean Fitzpatrick on his recent bankruptcy. His case does not invoke much sympathy but it highlights the need for reform of the law when a huge personal debt crisis for many has a bearing on the ability of the country to get back to anything that might be described as normality.

The decision to insist on bankruptcy in Fitzpatrick’s case appears to have been partially driven by a desire on the part of the bank to ensure that he was pursued to the financial death. It appears from media reports that bankruptcy was only proceeded with after a deal between creditors was blocked by Anglo Irish Bank who held a sufficient majority of his debts to be able to veto such a deal. It has been suggested that such a deal between creditors might have resulted in a better outcome; that is that those owed money might have gotten more out of it if they had run things themselves rather that allow the state mechanism of bankruptcy to do so.

On the other hand, I do not think that anyone could have expected Anglo to do otherwise. Had Anglo allowed Fitzpatrick to escape the ignominy of bankruptcy one can only imagine the hue and cry that would have followed any decision which might have been seen as giving him an easier ride.

Therefore, to some degree as least, Sean Fitzpatrick’s bankruptcy was all about the optics; to make sure that it looked right for the public that he was seen to suffer the ultimate penalty in commercial life. His bankruptcy had a penal element and was perceived as a punishment. Fair enough, there don’t seem to be many arguing that he didn’t deserve all he got. I’m not.

However, my point is different. The decision to punish Fitzpatrick by making him bankrupt means that our legal system is using the wrong tools for the wrong job.

Those responsible for breaching the rules in commercial life should be punished not by bankruptcy, but by the criminal law. Let’s be clear, Fitzpatrick has not been charged, never mind convicted, of any crime. But where it does occur, white collar crime should be prosecuted via the criminal justice system and anyone who has been found guilty should face penalties that reflect the gravity of their offences. Where our laws are inadequate to provide a sanction for the type of gross financial recklessness that has bankrupted the country, those laws should be reviewed and strengthened.

On the other hand, bankruptcy should not be penal in nature. Our bankruptcy law derives from a Victorian system. While the current law was updated in 1988, that legislation did not involve any radical change in the underlying concepts and it remains a process that no one in their right mind would submit to voluntarily.

So, bankruptcy is no walk in the park for people who owe more than they can ever expect to be able to repay. So what? Why should we make it easy for people who are swamped in debt to walk away from what they owe? Well I’m not suggesting making it easy but you have to ask: apart from providing some small level of public satisfaction in an extremely limited number of cases, what good is the current system to anyone?

It certainly is of little practical use to creditors or people that are owed money. It is there as a threat and a very remote possibility but it is extremely rarely used. The rate of bankruptcies doubled last year: to a total of 17!

Bankruptcy arose in another high profile case when RTE was pursuing Beverly Cooper Flynn for their legal costs in her failed legal action against the state broadcaster.

An application to have Cooper Flynn declared a bankrupt was brought by RTE in that case in an effort to apply maximum pressure to get her to pay. As a TD Cooper Flynn would have had to have vacated her seat if made bankrupt. She threatened to bring a legal challenge to the legislation at the last minute on the basis that the law was unfairly harsh. She may have had a case. We will never know because RTE settled with her shortly afterwards.

A recent challenge to the law arose also in the context of the related area of debt collection. That case involved an extremely tragic situation in which a mother borrowed money from a credit union to pay for the funeral of her child. She didn’t pay the money back, the credit union brought proceedings to recover payment of the debt and they obtained an order that the debt be paid in installments. When no installments were paid the credit union successfully brought proceedings to have the lady sent to prison

It subsequently transpired that this lady never appeared in court at any stage and had never had legal advice or representation on an issue that could ultimately lead to her imprisonment. A successful challenge to that aspect of our system of debt collection lead to an amendment to the law which means that people must now appear in court in person before they can face the prospect of imprisonment and they must also be afforded adequate legal representation. While this amendment was a basic necessity, the system as a whole needs much wider reform.

If you think that someone being imprisoned for their debts is some kind of legal curiosity that only applies in the harshest of cases, think again. Go down to your nearest District Court any day and you will see the court list full of cases involving banks, credit unions and other creditors looking for orders to have people jailed for failing to make installment payments on debts.

Again, no one is suggesting that people shouldn’t pay what they owe but routinely jailing people isn’t the answer. We had this system for the payment of fines which ended up with bizarre outcomes like grannies ending up in prison for not paying for their dog licences. The fines system has just had a radical overhaul which has now introduced sensible systems such as enabling the authorities to seize goods of sufficient value to pay the fine.

And like bankruptcy, the system of jail as the ultimate sanction for failing to pay debts is no good for creditors either. It may have its uses in getting the odd tough nut to cave in at the last minute, but it’s a very blunt instrument. There is no flexibility; it’s jail or nothing. Jail is a punishment which arguably has no place in the enforcement of civil debt. District Court judges are human beings and they have very wide discretion in this area. In the case highlighted above, the lady was not represented and her story was never heard. When judges are made aware of all the facts, they will not be slow to exercise their discretion and to act with compassion in appropriate cases. Therefore a creditor may often find himself having exhausted all avenues only to find that a court refuses to make any order because the outcome would be unacceptably harsh or completely unproductive.

There is no system in this country enabling a court to order a person’s future earnings be earmarked to repay debt. A system that would enable a creditor to go after the source of the debtor’s repayment capacity or which allowed debts to be restructured in such a way that creditors would at least get back some of what they’re owed at an acceptable cost would be vastly preferable to the current system.

The Interim Report of the government Expert Group on Mortgage Repayments and Personal Debt published in July focused quite properly on the area of mortgage arrears in its first report and only made passing reference to personal debt which it said it aims to deal with in more detail by September. However, it felt it sufficiently important to state that the bankruptcy and debt collection system was in need of urgent reform. It advocated the government to give “urgent consideration … in the shortest possible timeframe … [to] measures for the comprehensive reform of both judicial bankruptcy proceedings contained in the Bankruptcy Act 1988 and the establishment of an effective and cost efficient non-judicial debt settlement process.” A Final Report from The Law Reform Commission on Personal Debt Management and Enforcement is also expected later this year.

Our country is in a debt crisis and our legal systems in this area are totally inadequate. Our legislators have been causing consternation in many quarters by their radical and urgent reforms in the area of country pursuits when their efforts might well be applied in other areas that are far more pressing, particularly if we are to move to an economic recovery. Oscar Wilde described fox hunting as the unspeakable in pursuit of the uneatable. Debt collection in this country can sometimes feel like trying to use the unenforceable to recover the impossible.