Ireland Overhauls Bankruptcy Laws

February 6, 2012

By: John Clark

Reuters.com reports that the Republic of Ireland has announced plans to overhaul its bankruptcy laws to make them more consumer friendly and less oppressive to those who seek bankruptcy protection. Current laws in Ireland dictate that a bankruptcy filer is not eligible for discharge from the bankruptcy system for 12 years after filing a petition.

Under the new laws, though, that number will drop to three years.

It seems that a number of factors have prompted the change, the most prominent of which is the current state of the Irish economy, which was sledge-hammered by the implosion of the housing market and is currently struggling with high levels of debt and unemployment, especially among the nation’s young adults.

The bankruptcy law overhaul will also introduce an option for relieving mortgage debt that does not involve going through the court system. The non-judicial option will offer an alternative to bankruptcy and mortgage foreclosure that is more flexible and less costly and time-consuming for lenders and banks.

Whether or not the mortgage foreclosure alternative will produce results, though, remains in question. It seems that Ireland’s new laws will "encourage" banks and other mortgage lenders to voluntarily allow mortgage borrowers to modify the terms of their loan payments; however, a number of such programs have been attempted in the United States, with unimpressive results.

Still, the country badly needs some form of financial succor. During the Irish boom period, when the country was referred to as the Celtic Tiger, average Irish household debt exploded, as more and more people took on loans for mortgages, cars and other expenses.

When the housing market collapsed, Ireland was left with debt that comes to 129 percent of the country’s GDP, which is proportionally the highest in the developed world.

The overhaul of the bankruptcy laws should help ease this debt burden and address the problem of bankruptcy tourism, which occurs when residents of Ireland file for bankruptcy protection in the U.K., where bankruptcy laws are much more lenient. In the U.K., bankruptcy filers can receive a bankruptcy discharge in as little as one year.

In order to file for bankruptcy in the U.K., Irish citizens merely have to establish residency somewhere in the United Kingdom, which includes Northern Ireland. When the new bankruptcy laws take effect, however, it’s likely that more Irish citizens will file for bankruptcy in their homeland. Sources note that the government estimates total bankruptcy filings will increase by as much as a factor of 100.