I thank members for the opportunity to address them today.
The background to this area from our perspective is that a booming economy and increased prosperity in recent years have brought with them some unpleasant side effects, one of which is spiralling consumer debt. Tracking the increases in the extension of credit through the Central Bank quarterly bulletins has become a spectator sport for financial journalists in recent years, with regular warnings that the dangers of over-extension are very real. Consider, for example, the Central Bank's warning in its financial stability report of 21 September that mortgage rates, which currently stand at 3.5%, could rise as high as 6% in the coming years, leaving mortgage borrowers exposed to high risks of default.
The culture relating to lending and borrowing has changed dramatically in the past decade. Interest rates have been low, so financial institutions have sought to maintain their profit levels with saturation lending. Many borrowers, particularly those who are young, regard access to credit and the maintenance of their credit records as a fundamental right. The development of this consumer credit market arguably has been encouraged by the State since consumer spending stimulates economic growth, creates jobs and fuels the economy. However, not everyone can manage to keep a straight course. Some consumers over-extend and avail of credit facilities that are beyond their capacity to repay. Many more suffer deterioration in their financial situation caused by illness, separation or unemployment. At that point, consumers may come into contact with debt collection and the legal system. It is how the system deals with inability to pay that is the issue of concern and that brings us here today.
The Money Advice and Budgeting Service was first established in 1992 as five pilot projects to assist persons who got into debt with moneylenders. It has now grown to a service with more than 50 officers throughout the country, funded to the tune of €11.4 million annually by the Department of Social and Family Affairs, and dealing with debt to a vast array of creditors, not just moneylenders. It is estimated that MABS has an existing client base of approximately 25,000, with at least 12,000 new clients in 2003. The free legal advice centres, FLAC, have worked closely with MABS since its inception, providing legal advice and training to money advisers to assist their clients, all of whom have financial problems ranging from cases that can be managed relatively well over time to increasingly severe cases of multiple and chronic over-indebtedness. Through this work it has become increasingly clear that the legal system in regard to the collection of debt does not serve well debtors, creditors or taxpayers.
This work culminated in the publication of FLAC's report, An End Based on Means, in May 2003. The report examines how the legal system treats consumer debtors. It examined UK and international practice and proposed a root and branch reform and updating of the system to reflect the reality of living in a modern European state at the beginning of the 21st century. It notes that the legislation for enforcing money judgments in Ireland has not been altered in a substantial way since 1940 and that Irish bankruptcy legislation, even though it was amended as recently as 1988, does not contain a specific consumer option, unlike its European neighbours, and still takes a punitive approach more reminiscent of the 19th century. It notes also that imprisonment for non-payment of court orders relating to civil debt or fines for minor criminal offences is still a reality in Ireland in 2004.
A number of recommendations are made in the concluding section of the report. Some of the issues addressed include the following. Many people in debt coming into contact with the legal system have more than one debt. The debts are usually uncontested in that borrowers accept the money is owed but are not in a position to pay contractual instalments and are seeking to make an arrangement to repay on a phased basis. At the earliest possible stage, therefore, a person's ability to repay needs to be assessed. There is nothing to be gained by a variety of creditors individually pursuing a person in debt through the courts. An assessment of ability to pay should be based on sound money advice principles involving the assembly of a detailed and verifiable financial statement with which creditors can take issue. A State funded infrastructure, namely, the Money Advice and Budgeting Service, is already in place to achieve this.
At present, applications to enforce judgments take place in open court. This can result in many debtors not responding to court summonses to examine their means, given the stigma involved. With debtors not present to account for their circumstances, unrealistic instalment orders are often made. When these in turn result in default, creditors will often initiate committal proceedings. By this stage debtors are often in denial and do not appear to explain the fact of non-payment in open court. An order for arrest and imprisonment often follows. It is conservatively estimated that more than 200 people are imprisoned on an annual basis for non-payment of an instalment order. In our view, this is an unacceptable sanction in a European state at the beginning of the 21st century.
Enforcement in consumer debt cases should not be in open court. There is no legal question to be dealt with at this point, only the question of how repayments are to be made. The option of setting up an alternative forum to deal with enforcement based on current ability to pay must be pursued. In cases of persistent default, attachment of earnings should be examined as an option but only as a last resort and with substantial safeguards for debtors.
An increasing number of clients presenting to MABS are in a position of chronic debt in that there is no prospect in the short to medium term of the debts being repaid. A more radical solution is needed in this type of situation. The majority of member states of the European Union have faced this problem by introducing debt settlement or debt rescheduling legislation. In brief, debt settlement involves debtors repaying a portion of unsecured debt over an agreed repayment period, often three to five years and sometimes longer, with the prospect of a write-off of the remainder of unsecured debt at the conclusion of that period — the so-called principle of a fresh start. Debt settlement acknowledges the reality that chronic indebtedness occurs in a small minority of cases. It steers a middle course between the right of creditors to recover unpaid debt and the right of debtors and their dependants to have a second chance and regain control of their finances. Debt settlement is not an easy ride for debtors. It involves sacrifices on all parts. A voluntary debt settlement pilot scheme negotiated between MABS, FLAC and the Irish Bankers' Federation is currently in operation with some success. However, this is no substitute for legislation.
Despite promises of legislation dating back to 1998, there is still no system in place in Ireland for paying fines by instalment. While helpful developments have taken place recently, such as taking into account a person's means when imposing a fine, these are totally undermined by the absence of an instalment system. It does not take a genius to realise that the likelihood of default is great when a lack of means may often have been one of the reasons for the minor offence in the first place, for example, failure to pay a TV licence fee. In 1996, more than 1,600 people went to prison for failure to pay a fine. The effects of this on dependants and dependent children in particular are obvious. In addition, the resources of the State expended in this process are enormous. The ultimate irony is that the term of imprisonment served purges the fine.
This is but a cross section of the kind of difficulties that MABS clients and those in debt and poverty in general face when they encounter the civil side of the legal system. What we are proposing is a more ordered, considered and humane response to indebtedness. It is now a fact of life in modern Ireland and this is unlikely to change.
