[Home] [Databases] [World Law] [Multidatabase Search] [Help] [Feedback]
	Irish Law Reform Commission Papers and Reports
You are here: BAILII >> Databases >> Irish Law Reform Commission Papers and Reports >> Personal Debt Management and Debt Enforcement (Consultation Paper) (LRC CP56-2009) [2009] IELRC CP56 (September 2009) URL: http://www.bailii.org/ie/other/IELRC/2009/cp56.html Cite as: [2009] IELRC CP56

[New search] [Printable PDF version] [Help]

Consultation paper

PERSONAL DEBT MANAGEMENT AND

DEBT ENFORCEMENT

(LRC cp 56 - 2009)

© Copyright

Law Reform Commission

FIRST PUBLISHED

September 2009

ISSN 1393-3140

LAW REFORM COMMISSION’S ROLE

The Law Reform Commission is an independent statutory body established by the Law Reform Commission Act 1975. The Commission’s principal role is to keep the law under review and to make proposals for reform, in particular by recommending the enactment of legislation to clarify and modernise the law. Since it was established, the Commission has published 150 documents (Consultation Papers and Reports) containing proposals for law reform and these are all available at www.lawreform.ie. Most of these proposals have led to reforming legislation.

The Commission’s role is carried out primarily under a Programme of Law Reform. Its Third Programme of Law Reform 2008-2014 was prepared by the Commission following broad consultation and discussion. In accordance with the 1975 Act, it was approved by the Government in December 2007 and placed before both Houses of the Oireachtas. The Commission also works on specific matters referred to it by the Attorney General under the 1975 Act. Since 2006, the Commission’s role includes two other areas of activity, Statute Law Restatement and the Legislation Directory.

Statute Law Restatement involves the administrative consolidation of all amendments to an Act into a single text, making legislation more accessible. Under the Statute Law (Restatement) Act 2002, where this text is certified by the Attorney General it can be relied on as evidence of the law in question. The Legislation Directory - previously called the Chronological Tables of the Statutes - is a searchable annotated guide to legislative changes. After the Commission took over responsibility for this important resource, it decided to change the name to Legislation Directory to indicate its function more clearly.

Membership

The Law Reform Commission consists of a President, one full-time Commissioner and three part-time Commissioners.

The Commissioners at present are:

President:

The Hon Mrs Justice Catherine McGuinness

Former Judge of the Supreme Court

Full-time Commissioner:

Patricia T. Rickard-Clarke, Solicitor

Part-time Commissioner:

Professor Finbarr McAuley

Part-time Commissioner:

Marian Shanley, Solicitor

Part-time Commissioner:

Donal O’Donnell, Senior Counsel

Law Reform Research Staff

Director of Research:

Raymond Byrne BCL, LLM (NUI), Barrister-at-Law

Legal Researchers:

Chris Campbell B Corp Law, LLB Diop Sa Gh (NUI)

Siobhan Drislane BCL, LLM (NUI)

Gemma Ní Chaoimh BCL, LLM (NUI)

Bríd Nic Suibhne BA, LLB, LLM (TCD), Diop sa Gh (NUI)

Jane O‘Grady BCL, LLB (NUI), LPC (College of Law)

Gerard Sadlier BCL (NUI)

Joseph Spooner BCL (Law with French Law) (NUI), BCL (Oxon)

Dip. Fr and Eur Law (Paris II),

Ciara Staunton BCL, LLM (NUI), Diop sa Gh (NUI)

Statute Law Restatement

Project Manager for Restatement:

Alma Clissmann, BA (Mod), LLB, Dip Eur Law (Bruges), Solicitor

Legal Researchers:

John P Byrne BCL, LLM, PhD (NUI), Barrister-at-Law

Catriona Moloney BCL (NUI), LLM (Public Law)

Legislation Directory

Project Manager for Legislation Directory:

Heather Mahon LLB (ling. Ger.), M.Litt, Barrister-at-Law

Legal Researchers:

Margaret Devaney LLB, LLM (TCD)

Rachel Kemp BCL (Law and German), LLM (NUI)

Administration Staff

Head of Administration and Development:

Brian Glynn

Executive Officers:

Deirdre Bell

Simon Fallon

Darina Moran

Peter Trainor

Legal Information Manager:

Conor Kennedy BA, H Dip LIS

Cataloguer:

Eithne Boland BA (Hons), HDip Ed, HDip LIS

Clerical Officers:

Ann Browne

Ann Byrne

Liam Dargan

Sabrina Kelly

Principal legal researcher for this CONSULTATION PAPER

Joseph Spooner BCL (Law with French Law) (NUI), BCL (Oxon)

Dip. Fr and Eur Law (Paris II)

CONTACT DETAILS

Further information can be obtained from:

Head of Administration and Development

Law Reform Commission

35-39 Shelbourne Road

Ballsbridge

Dublin 4

Telephone:

+353 1 637 7600

Fax:

+353 1 637 7601

Email:

[email protected]

Website:

www.lawreform.ie

ACKNOWLEDGEMENTS

The Commission would like to thank the following people who provided valuable assistance:

Courts Service:

Mr. Noel Rubotham, Director of Reform and Development

Mr. Noel A Doherty, Directorate of Reform and Development

Department of Finance:

Mr. Graham Swarbrigg, Financial Services Regulation

Mr. David Byrne, Financial Services Regulation

Ms. Mary Carrick, Consumer Credit Legislation

Eugene F. Collins Solicitors:

Mr. Barry O’Neill, Partner

Free Legal Advice Centres:

Ms. Noeline Blackwell, Director General

Mr. Paul Joyce BL, Senior Policy Researcher

Irish Banking Federation:

Ms. Eimer O’Rourke, Head of Retail Banking

Mr. Shane Martin, Retail Banking Adviser

Mr. Felix O’Regan, Head of PR and Public Affairs

Irish Credit Bureau:

Mr. Seamus Ó Tighearnaigh, Chief Executive

Mr. Gerard O’Neill, Executive Director

Irish Financial Services Regulatory Authority:

Ms. Mary O’Dea, Acting Chief Executive

Mr. George Treacy, Head of Consumer Protection Code Department

Mr. Adrian O’Brien, Deputy Head of Consumer Protection Codes Department

Ms. Cathy Clarke, Market and Competition Issues

Irish Institute of Credit Management:

Mr. Declan Flood, Chief Executive

Mr. Seán Mac Mahon, President

Irish League of Credit Unions:

Ms. Breege Anne Murphy, Legal and Secretariat Department Supervisor

Ms. Fiona Cullen

Mason Hayes and Curran Solicitors:

Mr. Colman Curran, Head of Debt Recovery Department

Mr. Jason Harte, Senior Associate

Money Advice and Budgeting Service:

Mr. Michael Culloty, Social Policy and Communications

Ms. Anne-Marie O’Connor, Business Manager

Mr. Liam Edwards, former National Co-Ordinator

Queen’s University Belfast:

Dr. David Capper, Reader

Revenue Commissioners:

Mr. Gerard Harrahill, Collector-General

Mr. Gerard Cunningham, Collector-General’s Division

Sheriff of the City of Dublin:

Mr. Brendan Walsh

Sixty Plus Finance:

Mr. James C Wyse, Managing Director

Society of Saint Vincent de Paul:

Prof. John Monaghan, Vice President

Mr. John Mark McCafferty, Head of Social Policy

Ms. Gwen Harris

Ulster Bank:

Mr. Noel Gaughran, Head of Group Legal, Retail

Ms. Noreen Daly, Head of Recoveries

Mr. Barry Rojack, Regulatory and Operational Risk

Mr. Alan Henderson, Assistant Credit Manager

University College Cork:

Dr. Mary Donnelly, Senior Lecturer

University of Wales, Bangor:

Mr. Michael Green, Research Fellow

Waterford Institute of Technology:

Mr. Donal Keating, Lecturer

Full responsibility for this publication lies, however, with the Commission.

TABLE OF CONTENTS

Table of Legislation xiii

Table of Cases xvii

TABLE OF LEGISLATION

TABLE OF CASES

Introduction

ABackground to this Project

This Consultation Paper forms part of the Commission’s Third Programme of Law Reform 2008-2014,1 and involves an examination of the law related to personal debt, in particular the relevant debt-related enforcement processes. In 2007, during the public consultation process that preceded the drafting of the Third Programme of Law Reform, the Commission received a significant number of submissions which drew attention to the need for reform in this area of Irish law. The Commission’s decision to include it in the Third Programme, and to give priority to it, reflected the widespread view expressed in these submissions that this area of law required examination.

The submissions received by the Commission in 2007 suggested in particular that current legal procedures concerning personal debt claims and the enforcement of judgment debts against consumers required a major review. The core subject matter of this Consultation Paper, therefore, is on the law concerning the enforcement of money judgments and the pre-judgment procedures in claims for the recovery of a contract debt. While the Commission recognises that procedures for the enforcement of judgments other than money judgments could also be examined, this Consultation Paper concentrates on the enforcement of money judgments because high-volume, low-value personal debt claims account for the majority of enforcement proceedings. The Commission also emphasises that this Consultation Paper deals primarily with the enforcement of judgments obtained against individual debtors, rather than corporate debtors. This reflects the concerns raised during the public consultation which preceded the Commission’s Third Programme of Law Reform on the need to review debt enforcement procedures involving consumers.

BThe Law on Personal Indebtedness in Context

The Commission was also aware, when drafting the Third Programme of Law Reform, that important work by other bodies in this area of the law and the wider context of personal indebtedness had already been undertaken, or was planned. This included work by the Free Legal Advice Centres (FLAC) on the existing law of debt enforcement.2 In the wider context within which this project must be considered, the Commission was aware that, in 2006, the Government had already initiated a major review of financial services legislation, which would include a review of the relevant regulatory framework in Ireland.3 For these reasons, the Commission noted that there was a specific need to be aware of the work of these other bodies and to consult with them in carrying out this project.4

The Commission also recognises that the Consultation Paper’s focus on debt enforcement involving individuals raises the wider context of personal indebtedness generally. In this respect, the Commission has had the benefit of the analysis of the Commission of the European Communities5 and of the Committee of Ministers of the Council of Europe6 outlining overarching approaches to personal over-indebtedness. These approaches have identified the need to review legal proceedings concerning debt recovery and procedures for the enforcement of judgments as part of a wider approach to addressing over-indebtedness. Notably, the European Commission has highlighted the following six key “building blocks” as forming part of an effective response to consumer over-indebtedness:

Responsible borrowing

Responsible lending

Responsible arrears management

Debt counselling

Personal insolvency law, and

Holistic court procedures.

The six-point framework is based on the twin goals of preventing the problem of over-indebtedness and alleviating the problem for those households who are already over-indebted. This framework provides an authoritative and extremely helpful basis on which to analyse the reform of debt recovery and judgment debt enforcement procedures, and the Commission has used it as a reference point throughout this Consultation Paper. The Commission fully appreciates, however, that not all of the six “building blocks” contain subject-matter that are appropriate for review by the Commission; this is because some involve very broad questions of economic and social policy. While the Commission describes the extent to which, and whether, Irish law currently corresponds to international best practice in these six major areas, the Commission has made provisional recommendations for law reform in only some of these areas. The Commission now turns to explain how it has approached this.

CThe Commission’s General Approach to this Project

1. In preparing this Consultation Paper, the Commission is fully aware of the importance of having in place a modern and comprehensive legal framework to deal with personal indebtedness; it is a vital matter of interest for many individuals in Ireland who face pressing financial worries. The Commission, in carrying out its statutory mandate to keep the law under review, is conscious that some projects, such as this one, require it to engage in a wide-ranging examination of the existing legal setting in order to place any recommendations for reform in a proper context.

Indeed, as is clear from the length of this Consultation Paper, the range of issues that need to be addressed are exceptionally wide and varied. They include: preventative measures to address personal indebtedness at an early stage; interventions to resolve debt problems in an efficient way; the need to bring debt enforcement processes into line with international best standards; to question the utility of imprisonment as a means of enforcement; and to place this in the context of relevant changes to the financial services regulatory framework.

It is clear that, since 2008, a number of important initiatives have already been put in place under the existing regulatory framework, such as the Code of Practice on Mortgage Arrears developed by the Irish Financial Services Regulatory Authority. In the context of debt enforcement, the Enforcement of Courts Orders (Amendment) Act 2009 was enacted in response to unconstitutional procedural defects in the legislation that authorises imprisonment for those who “won’t pay” (as opposed to “can’t pay”) their debts. In approaching the need to recommend further – and wide-ranging – reform in this area, the Commission is therefore mindful of the responses already made to the pressing problems arising from personal indebtedness.

In addition, the Commission is conscious that a number of legislative solutions to indebtedness will arise in the context of the planned reform of the financial services legislation. Many of these involve choices of a regulatory nature to which the Commission draws attention in this Consultation Paper but which are either required by EC law, such as the requirements in the 2008 Consumer Credit Directive,7 or are more appropriately considered in the overall context of the new financial services legislation. Thus, while the Commission highlights these matters here, it considers that these should primarily be brought to final decisions by other bodies and, ultimately, the Government and the Oireachtas. This is in keeping with the Commission’s statutory mandate under the Law Reform Commission Act 1975 to identify, where appropriate, the elements of a law reform project that can be carried out by the Commission and those that could suitably be carried out by another body.8

As a result, the Commission has prepared this Consultation Paper on the basis that it should provide, to the greatest extent possible, a wide-ranging examination of the current law on personal indebtedness. The Commission has also had the benefit of hearing the insights and views of many key organisations and individuals with an interest in this area, and has had regard to the wide literature that exists. In approaching the question of legislative and other solutions, the Commission has attempted to identify those which should be addressed by other bodies and those which could suitably be dealt with by the Commission. It will be apparent from a number of matters addressed in this Paper that the line between these two categories is not always completely clear, and the Commission will particularly welcome views and submissions on this in the consultation period after the publication of this Consultation Paper.

DCategorisation of Issues Used in this Consultation Paper

As already mentioned, the Commission has adopted the categorisation of issues concerning indebtedness developed by the European Commission.9 This involves six major areas: responsible borrowing and money management; responsible lending; responsible arrears management; debt counselling services; personal insolvency laws; and legal debt enforcement proceedings. It is clear from these headings that the Commission’s primary focus in the Consultation Paper is on the fifth and sixth areas, personal insolvency laws and legal debt enforcement proceedings. Nonetheless, as already mentioned, proposals for reform in these areas can only be understood in the wider setting of the other four areas, while it must equally be borne in mind that many of the solutions may need consideration by bodies other than the Commission.

EOutline of the Consultation Paper

The Commission now turns to outlining briefly the main contents of the Consultation Paper.

(1)Chapter 1: Debtors and Creditors: Putting the Law of Debtors into Context

In Chapter 1, the Commission discusses some of the important issues raised by the problem of debt and over-indebtedness so as to place the law on debt enforcement in its proper context. Part A of the Chapter outlines the role of debt and credit in modern economies and societies, before describing the consequential problem of over-indebtedness. The causes of debt difficulties are then explored in Part B, with a view to illustrating the approach which the law should take to questions of debt enforcement. Part C continues by illustrating the crucial distinction between debtors who cannot pay their debts and those who refuse to pay (the important distinction between those who “can’t pay” and those who “won’t pay”). Part D then outlines the various attitudes and approaches of creditors to debt management and enforcement. As this Consultation Paper concentrates on the legal aspects of personal debt, a detailed study of the causes and effects of over-indebtedness is outside its scope. Thus, when considering the options for reform of the law on debt enforcement, this Consultation Paper does not extend to the social and political measures which might assist in alleviating the problem of over-indebtedness.

(2)Chapter 2: A Framework for Reform

In Chapter 2, the Commission discusses the principles that have informed its approach in making provisional recommendations for the reform of the law on personal debt. This has involved an analysis by the Commission of the respective rights of creditors and debtors, as well as the interests of society, which are at issue in this area of the law. The analysis pays particular attention to the rights and interests recognised by the Constitution of Ireland and the European Convention on Human Rights.

Part A of the Chapter discusses the rights of creditors. These include the right of access to a court and property rights. Part A concludes that these rights must be adequately respected by providing effective mechanisms for enforcing court judgments, while noting that these rights are not absolute. Part B outlines the rights of debtors, which equally must be protected, including the rights to fair procedures, liberty, privacy and property. Part B draws two important conclusions: the law on debt enforcement must strike an appropriate balance between the rights of creditors and debtors; and the law on debt enforcement must be based on the principle of proportionality, so that while restrictions on debtors’ rights are necessary they must always be appropriate.

Part C discusses the general interests of society that must be considered by the law in this area. In this Part the Commission notes that the rule of law, the protection of basic principles of contract law, and the objective of an efficient economy all demand that the mechanisms for the enforcement of judgment debts should operate efficiently. The public interest in the prevention and alleviation of over-indebtedness is also recognised as a legitimate aim which may justify restrictions on the rights of creditors.

Part D of Chapter 2 draws conclusions from this discussion and presents a list of fundamental principles that have guided the Commission’s provisional recommendations for reform in the Consultation Paper. The Commission notes that the law on debt enforcement must be balanced, proportionate and clear. It is also fundamental that the law recognises the distinction between debtors who cannot pay and those who refuse to pay (those who “can’t pay” and those who “won’t pay”), and that procedures must be introduced to obtain more information about the means of debtors so that this distinction can be made in individual cases. Finally, the Commission concludes that those who cannot pay should not be subject to enforcement proceedings and that a system of debt settlement must be introduced to provide a solution to the difficulties of the over-indebted.

(3)Chapter 3: Debt and Over-indebtedness: the Current Law

In Chapter 3, the Commission outlines the current legal position concerning personal debt and over-indebtedness in Ireland, in order to identify the areas that are appropriate for reform. The Commission’s suggestions and recommendations as to the problem of over-indebtedness should be seen within the context of its primary focus on reform of the law on debt enforcement. As already indicated, Chapter 3 follows the framework proposed by the European Commission, which is based on the twin goals of preventing the problem of over-indebtedness and alleviating the problem for those households who are already over-indebted.

In response to an analysis of the causes of over-indebtedness, the European Commission has proposed that the law should focus on three main areas in seeking to prevent this social problem.10 The law must thus ensure responsible practices in lending, borrowing and arrears management. This Chapter discusses the position in Irish law under each of these subject headings, and identifies some problems (possible solutions are suggested for further consideration in Chapter 4).

Part A of Chapter 3 discusses the subject of responsible borrowing. It identifies two aspects to this subject: financial education and the provision of information to consumers under consumer credit law. Part A examines how financial education is currently provided, and discusses how, through a variety of instruments, the law requires that certain information be provided to consumers about credit agreements. The Commission then discusses the limitations of the current Irish position on financial education and the provision of information to consumers. Part B discusses the subject of responsible lending. It first outlines the justification for the principle of responsible lending, and describes its importance in preventing over-indebtedness. The Commission then describes the current legal measures which seek to ensure that responsible lending standards are observed, before continuing to highlight certain issues for consideration in this area. Part C discusses the principle of responsible arrears management, and describes how this principle is advanced both through legislation and through voluntary codes of practice. The need to consider mechanisms to reinforce the principle is then discussed.

It is widely recognised that, in addition to legal measures which seek to prevent over-indebtedness from arising, further measures are also needed to provide relief and rehabilitation for those individuals who have become over-indebted.11 It is unrealistic to think that preventive measures, no matter how successful, can eradicate over-indebtedness completely, especially when the need to protect the supply of credit is considered.12 It must be recognised that one consequence of a credit society is that some individuals (admittedly a minority of those who use credit facilities) will become over-indebted, so that some method of what is often described as debtor rehabilitation must be put in place.

Chapter 3 therefore also describes the position in Irish law concerning debtor rehabilitation methods. This begins in Part D with a discussion of debt counselling. The current state of debt counselling in Ireland is outlined, and issues which should be considered in this area are identified. Part E presents an outline of the law on personal insolvency. The Irish bankruptcy system, based on the Bankruptcy Act 1988, is discussed and flaws in this system are highlighted. The Commission also discusses various methods, outside the terms of the 1988 Act, which are used to remedy the difficulties of over-indebted individuals in Ireland.

Part F of Chapter 3 describes current debt enforcement procedures under Irish law, some of which are based on legislation from the 19th Century, such as the Debtors (Ireland) Act 1872. Indeed, even the legislation enacted in the 20th Century required amendment, through the Enforcement of Courts Orders (Amendment) Act 2009, because of unconstitutional procedural defects in the provisions that authorise imprisonment for those who “won’t pay” (as opposed to “can’t pay”) their debts. This is a key area of focus for this Consultation Paper and Part F provides, therefore, a detailed account of the various methods of enforcing a judgment debt, and describes the procedural steps involved in each method. The Commission describes the general process for the execution of a debt in the courts system. The Commission also identifies the specific enforcement mechanisms, notably: execution against goods by Sheriffs and County Registrars; instalment orders; garnishee orders; judgment mortgages; possession orders; and the appointment of a receiver by way of equitable execution. The Commission identifies and discusses several failings of the system of debt enforcement as a whole and of the specific enforcement procedures in particular. It is clear that this system and the specific processes involved are in need of comprehensive reform.

In Chapter 4 of the Consultation Paper, the Commission turns to make suggestions for further consideration (primarily by other bodies) concerning the wider setting of indebtedness, while Chapters 5 and 6 make provisional recommendations for reform of the law, especially the law on debt enforcement. In Chapter 4, the Commission deals with the first four areas identified by the European Commission in its analysis of indebtedness. In Chapter 5, the Commission addresses personal insolvency law and provisionally proposes a non-judicial debt settlement system for Ireland. In Chapter 6 the Commission deals with provisional recommendations for the reform of judgment debt enforcement procedures.

(4)Chapter 4: Debt Management: Suggestions for Further Research

As indicated, Chapter 4 discusses the subjects of responsible borrowing, responsible lending, responsible arrears management and debt counselling services. In Part A, the Commission notes that the issue of financial education is largely one of social policy, which in general does not fall within the Commission’s law reform remit. This Part therefore describes the reforms to the system of financial education which are currently being made in Ireland and at European Union level. The Commission also notes the reforms which are due to be made to Irish consumer credit law when the 2008 Consumer Credit Directive is implemented.

Part B discusses the subject of responsible lending. The Commission refers to developments under EU law and analyses the credit reporting systems in a number of countries. The Commission suggests that consideration be given to whether the system of credit reporting in Ireland should be expanded or otherwise improved. Part B also suggests some measures which could be adopted to curb irresponsible lending practices, and examines whether the law of contract (notably the principles concerning unconscionable contracts) could provide remedies for cases of irresponsible or unjust lending practices. Finally, consideration is given to whether special rules on responsible lending are needed for specialist lenders and to the impact of any proposed reforms in this area on the problem of financial exclusion.

Part C of Chapter 4 discusses the question of responsible arrears management. The reform of existing rules on arrears management in relation to mortgage loans is considered, followed by a discussion of the possible introduction of legislation to regulate arrears management practices in cases of non-mortgage loans. The Commission also considers whether a system for the regulation of debt collection agencies should be introduced into Irish law. Part D discusses debt counselling, and the Commission recognises that this is primarily a matter of social policy, but nonetheless identifies some specific matters that warrant law reform, notably, the possibility of introducing a system for regulating commercial debt advice agencies.

(5)Chapter 5: Personal Insolvency Law: Provisional Recommendations for Reform

In Chapter 5 the Commission makes provisional recommendations for the creation of a new system of personal insolvency law in Ireland. In particular, the Commission proposes that a statutory non-judicial debt settlement scheme should be introduced, which would supplement (though not necessarily replace completely) the court-based scheme in the Bankruptcy Act 1988. The section examines comparative models of personal insolvency law, and uses these to present a detailed model of the proposed debt settlement system. The key principles which should inform this system are also discussed, notably the concepts of: earned debt discharge; open access for honest and long-term insolvent debtors; legally binding debt settlements as opposed to voluntary debt rescheduling arrangements; the preservation of a reasonable standard of living for debtors; and a discharge period of reasonable duration.

(6)Chapter 6: Enforcement Procedures: Provisional Recommendations for Reform

In Chapter 6, the Commission sets out a number of detailed provisional recommendations for reform of debt claim and judgment enforcement procedures in Ireland. The Commission examines systems of debt enforcement in a number of other countries, and provisionally recommends that the Irish system needs fundamental reform. The proposed new system would be based on the introduction of a central Debt Enforcement Office (which could build on the current arrangements) and the removal of much (but not all) of debt enforcement proceedings from the courts. The key principles which should underpin this new system are then identified, in particular: proportionate, balanced and appropriate enforcement in each individual case; improved access to information on the means of debtors; clear and simplified enforcement procedures; increased efficiency and accountability in enforcement; a holistic approach to enforcement through interaction with the proposed debt settlement system; and the encouragement of increased participation of debtors in enforcement proceedings. The Chapter concludes by discussing potential reforms of the individual enforcement methods, and by considering how these individual enforcement methods could operate under the proposed new system.

Chapter 7 contains a summary of the suggestions for consideration made in the Consultation Paper (primarily those matters which would most likely be dealt with by bodies other than the Commission) and a summary of the provisional recommendations (those matters which the Commission will deal with in the Report which will follow from this Consultation Paper).

This Consultation Paper is intended to form the basis for discussion and therefore all the recommendations made are provisional in nature. The Commission will make its final recommendations on the subject of personal debt management and debt enforcement following further consideration of the issues and further consultation with interested parties. This will include, in particular, further consideration of those areas which other bodies are best placed to address and those which the Commission should address in the Report which will follow from this Consultation Paper. Submissions on the provisional recommendations included in this Consultation Paper are welcome. To enable the Commission to proceed with the preparation of its final Report, those who wish to do so are requested to make their submissions in writing by post to the Commission or by email to [email protected] by 31 December 2009.

1. DEBTORS AND CREDITORS: PUTTING THE LAW OF debtors into context

1. This chapter discusses some of the important issues raised by the problem of debt and over-indebtedness so as to place the law on personal debt management and enforcement in its proper context. Part A outlines the role of debt and credit in modern economies and societies, before describing the consequential problem of over-indebtedness. The causes of debt difficulties are then explored in Part B, with a view to illustrating the approach which the law should take to questions of debt enforcement. Part C continues by illustrating the crucial distinction between debtors who cannot pay their debts and those who refuse to pay. Part D then outlines the various attitudes and approaches of creditors to debt management and enforcement. A detailed study of the causes and effects of over-indebtedness is beyond the scope of this Consultation Paper, which aims to concentrate on the legal aspects of personal debt.13 Thus, when considering the options for reform of the law on debt enforcement, this Consultation Paper does not suggest social, political and regulatory measures which could assist in alleviating the problem of over-indebtedness.

FIndebtedness and Over-Indebtedness

2. The following section seeks to outline some key issues in relation to the role of debt in society and the problem of over-indebtedness.

(1)Over-Indebtedness

3. It has been stated that the people of Europe now live in the era of the “Credit Society”.14 In a 2007 Recommendation, Member States of the Council of Europe acknowledged that the use of credit has become an essential part of their economies.15 The provision of consumer credit has become a vital tool in the promotion of economic growth,16 and the development of the consumer credit market also benefits the well-being of private individuals.17 This has the consequence that any reforms of the law on debt enforcement must respect the important and beneficial role which credit, and so debt, plays in the economy of a society.18 The majority of credit agreements are beneficial to all parties involved and do not end in default. In 2008-2009, while the total level of private sector credit in the economy was approximately €395 billion,19 only approximately €350 million of unpaid civil debt was pursued through court proceedings.20 The pie-chart below, based on statistics from the UK21, illustrates this point that the majority of credit agreements are repaid without difficulty.

   

4. In this context it is important to distinguish between a situation of indebtedness and one of over-indebtedness.22 Indebtedness can be said to refer to a commitment to repay moneys which a debtor has borrowed and used.23 In this regard indebtedness can be seen as a necessary and healthy consequence of the provision of credit which is beneficial to society as a whole and to individuals.24 The majority of credit agreements are repaid without difficulty and result in benefits for all parties to the agreement.

5. In contrast, a situation of over-indebtedness arises where the borrowing commitments of a debtor cannot be satisfied from the debtor’s income within a reasonable time in the future.25 Over-indebtedness leads to negative economic and social consequences, which will be outlined in more detail below.26

6. There has been a huge growth in the provision of personal credit in Ireland in recent years. During this time, lending to the personal sector grew at rates much faster than the increase in personal disposable income over the same period.27 While the majority of credit contracts operate without difficulty, and while studies show that a high level of consumer credit use does not necessarily lead to debt problems,28 this rise in consumer borrowing has led to serious financial difficulties for some individuals and families, as the problem of over-indebtedness has emerged.29 The increased marketing of and easy access to credit, over-commitment by borrowers and unforeseen adverse economic events have resulted in the problem of over-indebtedness becoming an increasingly widespread phenomenon.30 This has raised concerns that many households and individuals are arriving at a situation of indebtedness whereby they are unable to repay sums borrowed. Such a situation arose in the past, at least in the UK, at the end of the 1980s, following a credit boom similar to that which has been witnessed in Ireland in recent times.31

7. There is no single standard definition of what conditions satisfy the term “over-indebtedness”, nor on how this should be measured.32 Various studies of the problem at European level have however attempted to propose a workable definition of the characteristics of over-indebtedness. Thus, the Council of Europe has proposed a non-exhaustive definition whereby over-indebtedness includes, but is not limited to: 33

“the situations where the debt burden of an individual or a family manifestly and/or on a long-term basis exceeds the repayment capacity, resulting in systematic difficulties, and sometimes in failure, in paying creditors.”

8. A recent study conducted by the European Commission has sought to establish a single European definition of over-indebtedness.34 This report notes that in economics, the term over-commitment (which is used interchangeably with over-indebtedness) describes a situation of a temporary or permanent disequilibrium in the budget of a household resulting from expected or unexpected expenditure increases or from the household’s income decreases. Having discussed the conceptions of over-indebtedness in the various Member States, the report draws together crucial elements which are commonly present in the majority of definitions of over-indebtedness. These are:

   1. Household: The household is the primary unit by which over-indebtedness is measured and discussed.

   2. Contracted Financial Commitments: Most definitions of over-indebtedness take into account all contractual commitments into which the household has entered, including mortgage repayments, consumer credit commitments, rent payments as well as utility and telephone bills. Informal commitments, such as those entered into within families, are excluded.

   3. Payment Capacity: This refers to the ability of the household to meet the expenses associated with the contracted financial commitments. The core element of over-indebtedness is that there is an inability on the part of the household to meet recurring expenses.

   4. Structural Basis: This factor requires the existence of a time dimension in any definition of over-indebtedness. This means that an assessment of over-indebtedness should consider only persistent and ongoing financial problems and ignore exceptional occasions of indebtedness that may arise due to forgetfulness or other once-off occurrences.

   5. Standard of Living: This criterion means that for a household to be classed as over-indebted, it must be unable to meet its contractual commitments without reducing its minimum standard of living.

   6. Illiquidity: This element recognises that an over-indebted household is unable to remedy the situation by recourse to assets and other financial sources such as credit.35

   Following this approach, the Combat Poverty Agency proposed a definition of over-indebtedness for Ireland which stated that:

“People are over-indebted if their net resources (income and realisable assets) render them persistently unable to meet essential living expenses and debt repayments as they fall due.”36

9. As the above statements illustrate, households which fit the over-indebtedness description have fallen into debt and have no way of escaping their problems.37 A situation of over-indebtedness will usually involve multiple debts, with one Irish study showing that approximately 84% of the debt counselling clients surveyed possessed two or more debts.38 Generally such households will not owe large amounts, but will possess insufficient surplus income after essential expenses to make repayments to their creditors. Also, often such debtors will not possess assets of value which could be sold to meet their debts.39

10. The over-indebted debtor poses particular problems for the law of debt enforcement. As such debtors simply lack the means to repay monies owed, traditional enforcement mechanisms are wasted if applied to such debtors. Also, as enforcement proceedings are brought by one creditor to recover payment of one debt, they fail to deal with the overall over-indebtedness of the debtor. For this reason, this Consultation Paper advocates a nuanced approach and advances recommendations which seek to provide solutions to the problematic situation of the over-indebted individual.

(2)Negative Social Consequences of Over-indebtedness

11. Over-indebtedness can generate significant social problems for households.40 As well as long-term economic difficulties, these can include the social exclusion of families and a risk of jeopardising children’s basic needs.41 Other negative social consequences for the lives of debtors and their households can include psychological and physical health problems.42

12. Recent research based on data from the European Community Household Panel has outlined the adverse long-term effects of over-indebtedness on households, showing how over-indebtedness can have a negative effect on home-ownership, employment, self-employment and health.43 Over-indebtedness was shown to have a very significant impact on employment, with arrears increasing the likelihood of unemployment even up to four years after arrears first occurred.44 The study showed both that householders who are currently employed are much less likely to remain employed if they have recently incurred arrears and that repayment arrears increase the difficulty of finding a job for those workers not currently employed. The existence of arrears also has a negative effect on a household’s chance of owning its own home. While the study surprisingly indicated that indebtedness does not have a significant effect on the likelihood of an individual starting a business and becoming self-employed, the existence of debt problems among those already self-employed was shown to make such entrepreneurs less likely to remain self-employed.45

13. Indebtedness has also been shown to have a detrimental impact on health, with debt problems almost doubling a household’s likelihood of experiencing health difficulties within the next year.46 Irish research has highlighted both the negative mental and physical implications of debt.47 Over-indebtedness was shown to lead to intense pressure and stress. This burden was shown to lead to sleeping problems and mental health difficulties such as depression. In a joint study by the Women’s Health Council and MABS, two-thirds of the women surveyed suffered from stress and 38% experienced depression. Of those surveyed, 19% reported insomnia and 8% had experienced panic attacks.48 Other Irish research has also highlighted how the stress of debt difficulties can even increase the risk of suicide in some cases.49

14. The following tables, taken from the MABS/Women’s Health Council study, serve to indicate the impact of debt difficulties on a debtor’s health50.

    
    

15. The negative effects of over-indebtedness are not only detrimental to indebted households themselves, but also to society in general, which suffers financial loss. The cost to society includes increased social welfare expenses, losses in income tax receipts, higher medical costs, and the costs of accommodating evictees.51 Furthermore, it was estimated in the early 1990s in the UK that debt-related stress and mental health problems cost approximately £5bn in lost work days alone, a figure which undoubtedly has risen significantly in line with inflation.52 The decline of productivity resulting from over-indebtedness in the UK has been conservatively estimated to be 30% of salary, which could translate to costs of up to 1% of GDP when figures for the total number of the population experiencing debt difficulties are considered.53 Furthermore, the economy suffers from reduced participation by over-indebted individuals, with studies illustrating that the over-indebted household presents a lower consumption/income ratio than other comparable households.54 This drop in spending among the over-indebted can be attributed to fact that these debtors tend to make sacrifices and reduce consumption in order to repay their debts.

(3)The Extent of the Problem

(a)Recent Surges in the Level of Borrowing

16. Recent years have seen huge increases in the levels of personal debt in Ireland.55 Credit has become much more widely available, and has been aggressively marketed. Thus while in 1995 the ratio of household debt to income stood at 48%, in 2004 this figure jumped to 113%56 and had grown to approximately 176% in 2009. This is illustrated in the following table57.

    

17. The greatest part of this increase in borrowing can be attributed to the increased number of households taking residential mortgages, but other consumer borrowing for consumption has also risen at a steady pace.58 The combination of this increased level of debt and straitened economic conditions has in turn led to an increased level of over-indebtedness among Irish households in recent times. This growth in the levels of credit present in the economy coupled with recent changes in economic conditions has led to increases in the level of debt difficulties and default in Ireland. As is discussed below, the primary causes of debt difficulties include job loss, and the growing levels of unemployment in Ireland have meant that the level of default and over-indebtedness is growing rapidly.59 This is reflected in the fact that as the seasonally adjusted annual average standardised unemployment rate rose from 4.6% in 2007 to 6.3% in 2008,60 the level of debt enforcement proceedings in Irish courts increased, as can be seen from the following statistics.61

    High Court	2008	2007
    Execution Orders	1, 601	1, 208
    Renew Execution Order	71	52
    Default judgment	1, 186	881
    Judgment Mortgage Affidavit	643	471
    Judgment on Foot of Master’s Order	241	196
    Registered High Court Judgments	419	296
    Circuit Court	2008	2007
    Execution Orders	6, 844	4, 911
    Judgment Mortgage Affidavits	1, 571	1, 266
    Judgments Marked in the Office	10, 244	8, 291
    District Court	2008	2007
    Summary Judgments	24, 873	23, 389
    Summons for attendance of debtor	13, 079	13, 459
    Instalment Orders	9, 271	10, 842
    Committal Orders	4, 620	6, 425

18. Figures provided by the Money Advice and Budgeting Service also indicate the rising levels of over-indebtedness in recent times, showing a rise in the number of new clients contacting the service from 14, 551 in 2006 to 19, 041 in 2008. Also, the amount of total initial arrears owed by new clients rose from €92million in 2006 to €210million in 2008.62 A 2009 report of the Combat Poverty Agency notes that a European study in 2005 found that 8% of Irish households reported arrears on at least one commitment, and concludes from this study and others that approximately 7-10% of Irish households were over-indebted in the years up to 2007.63 The report also notes that this figure is likely to have increased substantially due to recent economic conditions, a view which is supported by the statistics discussed above. This personal debt takes many forms and affects many different groups in society, as is shown from the following discussion.

(b)Types of Borrowing

19. The following statistics compiled by the Money Advice and Budgeting Services provide an insight into the types of credit used by Irish consumers, and the types of debt difficulties experienced. This in turn illustrates the types of debts with which this Consultation Paper is primarily concerned.64

    Active Debt Types	Q1	Q2	Q3	Q4
    Personal loans with financial institutions	1999	2287	2581	2286
    Utilities	1675	1968	1886	1632
    Credit Card	823	959	1161	994
    Money Lender	429	460	440	341
    Mortgage	258	328	409	347
    Hire Purchase Loan	193	224	315	250
    Rent	243	313	286	248
    Overdraft	132	178	230	168
    Fine	96	101	89	58
    Sub Prime	1165	46	78	77
    Catalogue	74	65	77	65
    Waste Charges	34	40	53	41

20. Studies have shown that for low-income households, one of the main sources of debt will be the running up of arrears on utility bills.66 One survey showed this to account for up to 40% of the debt difficulties presented by women whose only income was from social welfare payments.67 Delaying the payment of bills is the primary manner in which low-income families tend to borrow in times of need.68

    M
    oneylenders provide another source of credit to low-income households. Moneylenders usually provide credit at rates far exceeding those of other mainstream lenders, and for this reason some debtors seek alternative less expensive forms of credit where possible.69 Nonetheless, moneylenders remain popular due to a variety of factors. These include the fact that a borrower may have difficulties obtaining credit elsewhere due to a past default on a loan owed to another institution such as the credit union; the fact that a borrower’s family may traditionally have used a local moneylender; and the lack of formalities and scrutiny involved in obtaining a loan from a moneylender as opposed to a mainstream lender.70 Thus ease of access is a major advantage of the moneylender as a source of credit. A survey of the moneylending industry conducted by the Irish Financial Services Regulatory Authority in 2007 provided the following statistics on the reasons why Irish consumers use licensed moneylenders, and the purposes for which moneylending loans are used.71

21. Those households in receipt of higher incomes tend not to incur arrears on bills, but instead incur debt difficulties in relation to personal bank loans and credit card borrowings.72 Debt outstanding on credit cards has increased significantly over recent times due to an increase in the number of credit cards issued and the amount of debt outstanding per card.73 This growth has been generated by an increased market penetration of credit cards across Europe and a move towards electronic retail payment methods.74 There has also been a connection between increasing affluence and the growth of credit card use, and credit cards are linked to increased consumption.75 These developments of increased affluence and consumption in Irish society over recent years has seen “lifestyle-related” debt rise also among both middle and low-income households, as households struggle to satisfy the pressure to live at a standard of living which may be beyond their means, particularly in the context of child-related expenditure.76

22. Personal bank loans were traditionally more associated with those in employment and on relatively higher incomes, while credit unions were the main personal loan provider for those on low-incomes. While this largely remains true,77 recent developments have shown changes in these trends. Thus mainstream banks remain perceived as primarily focused on middle and higher-income borrowers, but prime as well as sub-prime lenders have developed to increasingly target low-income groups.78 At the same time, there are indications that credit unions may have begun moving towards a middle-income market, which would raise concerns as to access to credit for those on low incomes due to the recent reduction in credit supply.

    Category of Loan Amount	% of Total Loans
    €1 - €1,000	32.35%
    €1,001 - €5,000	43.53%
    €5,001 - €10,000	14.05%
    €10,001 - €25,000	1.38%
    €50,001 - €100,000	0.26%
    €100,000+	0.06%

23. The above table illustrates that the largest categories of credit union loans are for small amounts, with over 75% of loans for less than €5000.79 This suggests that credit unions continue to primarily lend comparatively small amounts. This may indicate that the role of credit unions in serving the needs of low-income, small scale borrowers remains significant.

24. Residential mortgage lending grew at a rapid pace over recent years. Statistics released by the Central Bank in 2008 show that the total value of residential mortgages provided to Irish residents rose from approximately €34 billion in December 2001 to over €120 billion in June 2008. The increased availability of mortgages can explain to a certain extent the huge increases in the total amount of debt being presented by those now facing debt difficulties when compared to the situation of the traditional over-indebted debtor of the past. The following table of mortgage lending statistics published by the Central Bank in June 2009 provides a clear illustration of the growth in mortgage borrowing and lending during the years 2004 to 2008, with levels of mortgage credit only beginning to fall during late 2008 and 2009.80

(c)Typical Debtor Descriptions

25. Traditionally, credit use has been highest among families with children, especially among lone parents.81 The most prevalent group affected by debt remain young families from mid-20s to mid-40s.82 In terms of gender, women appear to be more vulnerable to debt problems than males, with women contributing to over 60% of the client base of the MABS.83 A study of female clients of the MABS described the typical woman presenting debt problems as a forty-year-old single parent with two financially dependent children, living in local authority housing. Her income is a weekly social welfare payment and her main debt issue is utility bills, with rent or mortgage arrears, bank loans and credit union loans also problematic. Living on a low income is the main contributory factor to her debt difficulty.84 The results of this study have been supported by a recent report of the Irish Financial Regulator, which states that those individuals surveyed who had difficulties in keeping up with bills and commitments were more likely to be lone parents with dependent children.85 It must however be emphasised that not all individuals fitting this typical debtor profile will experience debt difficulties. Issues of money management skills and responsible conduct on the part of both debtor and creditor mean lead to different outcomes in different cases, and it is important not to categorise debt situations too widely. It should be recalled in this regard that the majority of consumer debts are repaid without difficulty, even by those sharing characteristics with the average debtor profile.86

26. The increase in recent years in the availability of credit has led to growth consumer borrowing and in the number of residential mortgages granted by both prime and sub-prime lenders. This has in turn led to a newer type of client presenting at the MABS, whose borrowings were not incurred in order to provide for necessities, but instead were lifestyle-related.87 This client is employed or has only recently lost his or her job, and his or her debts include a mortgage and “middle-class” forms of credit such as personal loans, credit cards, overdrafts and mortgage top-ups. This type of client may possess multiple debts in each of these categories, especially multiple credit cards due to the difficulty for credit card lenders of identifying those potential borrowers who have previous borrowings with other companies.88 The causes of debt in the case of a client such as this can be attributed to either a sudden change in income, over-commitment or irresponsible lending, or a combination of some or all of these factors. The recent economic downturn and accompanying surge in unemployment has increased the number of debtors of this category. The following statistics of the MABS illustrate that while “traditional” debt problems such as utilities and moneylender loans have remained at fairly constant rates from 2008 to 2009, the number of clients presenting difficulties with mortgage loans and credit card debts has increased89.

GCauses of Debt – Why are debts unpaid? Why are legal enforcement mechanisms needed?

(1)Attitude of the Law to Debt Enforcement – The Delinquent Debtor

27. It has been noted that any system of debt enforcement will mirror the view of a society towards debt and the role of credit in society.91 In particular, the law in this area reflects assumptions about the characteristics of those involved. If society regards defaulters as immoral or dishonest it will create a strongly coercive system of debt enforcement. In contrast, if society views defaulters as “inadequate” or as having insufficient means to deal with debt problems, a less coercive and more rehabilitative system will be preferred.

28. In the past, the debtor was traditionally viewed by the law as feckless, immoral or inadequate.92 Indeed, it is the assumption of willing and active default by debtors that necessitates a system of enforcement, which is designed to extract money from those able but unwilling to pay.93 The idea of the “cunning” debtor, dishonestly evading his or her obligations was a major factor in the retention of imprisonment for debt in many jurisdictions,94 and is most likely the reason for the retention of the power of the court to commit a debtor under s6 of the Enforcement of Court Orders Act 1940 (re-enacting with modifications s18(a) of the Enforcement of Court Orders Act 1926).95 This is reflected in some of the language used in the Dáil debates on the 1940 Act, which called for the proposed Bill to “penalise” “professional defaulters”.96

29. Recent research has, however, subjected this traditional view to scrutiny, and the analysis below will show that in the majority of cases the failure to repay monies owed can be attributed to factors other than the debtor’s misconduct.97

(2)The Main Causes of Debt

30. Research has consistently shown that the large majority of people who fall into arrears with their contractual commitments do so because they are in financial difficulty.98 Only a minority of debts go unpaid as a result of a refusal to pay by a debtor who possesses the means to do so, with some research suggesting the number of deliberately evasive debtors may be as low as one in twenty.99 Greater awareness of this fact is now prevalent among creditors, and several industry codes of practice refer to the principle that creditors should assume that non-payment arises from financial difficulty rather than from an unwillingness to pay.100

31. It is now generally accepted by research conducted in this area that changes in circumstances or adverse events are the most common cause of arrears.101 Such changes in circumstances can, for example, involve unemployment, relationship breakdown or ill health. As well as such financial shocks, other factors which contribute to the accrual of debt include irresponsible borrowing, irresponsible lending practices and poor money management skills. It must be noted when discussing these factors that it is unlikely that there will be one single cause of a given debtor’s inability to meet his or her commitments, and the factors below should be seen as a mixture of risk factors which combine with each other and with certain triggering events to cause financial problems.102 This has been confirmed by a recent Irish study conducted by the Women’s Health Council and MABS, where 84% of the MABS clients surveyed attributed their debt difficulties to two or more contributory factors.103

(a)Change in Income

32. A change in income is consistently cited as one of the principal reasons why debtors become unable to make repayments, both in Ireland and in other jurisdictions.104 Almost half of debtors surveyed in a relatively recent UK study named a drop in income, usually due to redundancy, as the main cause of financial difficulty.105 For this reason, large increases in debt problems are almost always related to economic downturns.106

33. Research drawn from the data of the European Community Household Panel shows that a household which has recently suffered a redundancy or loss of employment is significantly more likely to be in arrears over the next year, with the figures for Ireland illustrating that almost 16% of households in this category fall into arrears.107

34. Other causes of a drop in income are the breakdown of relationships, and the giving up of work due to ill health.108 Nonetheless these individual circumstances trail well behind unemployment as the main cause of over-indebtedness, with some studies stating that these factors are responsible for approximately ten per cent of the cases of over-indebtedness.109

35. Overall, a loss of income or “income shock” can make a household over four times more likely to fall into arrears when compared with a household which has experienced an improvement in income.110 The table below, drawn from data of the European Community Household Panel, illustrates that the level of households experiencing arrears difficulty is much greater among households which are subject to a negative income shock.111

    Status of Borrowers	Percentage of Borrowers in Arrears
    	Any arrears	Mortgage arrears	Other arrears
    Overall	6.64%	1.39%	1.93%
    No job loss	6.44%	1.35%	1.88%
    Job loss	12.77%	2.64%	3.39%
    No drop in income	6.12%	1.25%	1.81%
    Drop in income	7.94%	1.73%	2.25%
    No health problems	6.49%	1.36%	1.90%
    Health shock	12.81%	2.26%	3.09%

36. While this table is useful in illustrating that much higher levels of arrears occur among those who have been subject to an income or health “shock”, the number of debtors within these categories who fall into default still constitutes a minority. Therefore it is important to note that not all individuals who suffer one of the adverse events described above become over-indebted. This indicates that over-indebtedness can be attributed to wide range of factors, and that money management skills on the part of the debtor and responsible arrears management on the part of the creditor have a part to play in preventing or contributing to over-indebtedness.

(b)Persistently Low Income

37. Studies conducted across the Member States of the European Union have shown that a low income of itself, as opposed to a fall in income, is frequently presented as a reason for financial difficulty.112 Indeed, one recent Irish study named “living on a low income” as the most commonly cited cause of debt difficulties.113

38. Households with the lowest incomes are generally most likely to incur financial problems and are significantly more likely to miss scheduled debt payments.114 There are two main reasons for this link between low income and debt repayment difficulties.115 First, as we have seen above, households encounter repayment problems when some unforeseen adverse event occurs. Households with low incomes will be less financially equipped to cope with such adverse events due to a lack of an ability to amass “rainy day” savings. Secondly, since households will only accrue arrears if they have borrowed money in the first place, households with low incomes are more likely to encounter debt difficulties because they are more likely to borrow to aid consumption in times of temporarily low income.116

39. Long-term unemployment (as opposed to job loss) is a risk factor for this reason and when employment status is considered, the greatest percentage of households falling into arrears is the category classed as unemployed.117

(c)Irresponsible Borrowing: Over-Burdensome Borrowing and Consumption

40. Responsible conduct is needed on the part of both creditors and debtors if responsible credit agreements are to be created. Thus it can be seen that some financial difficulties of debtors arise from irresponsible behaviour on the part of the borrower. Three main practices pose particular concern in this regard.118

41. First, the practice of re-financing and borrowing to pay bills can lead to serious financial difficulties. This practice reduces repayments that households have to make on their total credit repayments, but it is often only a short-term solution. The concern caused by this practice is heightened by the fact that this refinancing is often secured on the borrower’s home. Borrowing for these reasons is an indication of financial stress and also occurs in households where a large proportion of income is spent on either consumer credit alone or on consumer credit and a mortgage.

42. Secondly, the practice of taking out loans where the borrower has doubts about his or her own ability to meet repayments is a practice which can lead to financial difficulty.119 Equal concerns arise where a borrower does not consider carefully whether or not he or she will be able to repay the monies borrowed. It may be useful to note, however, that studies have shown that only a minority of borrowers are not confident of being able to repay any amounts borrowed.

43. A third practice which may lead to financial difficulty is impulsive spending and unplanned purchases on credit.120 Often this kind of borrowing is “lifestyle” spending, whereby largely, though not exclusively, middle-class borrowers incur debt in order to sustain a certain lifestyle.121 This practice has been shown to have been influenced by a consumerist society which exerts pressure on consumers to spend. Pan-European studies have shown these links between compulsive shopping, over-borrowing and financial difficulties, with surveys of four European countries illustrating that a third of the adult population could be classed as “addictive spenders”.122

44. Studies across Europe have shown this to be a considerable cause of financial difficulty.123 Irish studies have shown that the borrowing of large amounts, with high levels of repayment, can leave a household very vulnerable to financial difficulties caused by a change in circumstances such as an increase in interest rates.124 On the other hand, the borrowing of a large amount as part of a single loan agreement does not lead to as high a risk of failure to repay as the entry into multiple loan agreements.125 The more credit commitments a house must balance and the greater the proportion of its income which it spends on making debt repayments, the greater the risk of debt difficulty.126

45. The risk of over-commitment borne of consumerism is particularly acute in relation to borrowing via credit card.127 Credit cards provide a source of credit for instant gratification and allow credit to be accessed more easily than other traditional forms of lender or vendor credit. This may loosen borrower discipline and lead to irrational borrowing behaviour, which can cause temporary or long term over-indebtedness for users.128

46. Nonetheless, in practice it is often difficult to judge whether over-commitment has been the result of strategic or irresponsible debtor behaviour or a desperate attempt to overcome difficult times.129 Often a household will borrow as a means of getting through periods of financial difficulty, for example when a member of a household becomes unemployed. By borrowing in this way, debtors use credit as a form of social insurance to compensate for the absence of public support systems in times of crisis.130 Nonetheless, increased borrowing is not the only response of the already-indebted individual to adverse circumstances. Studies illustrate that over-indebted households will also decrease consumption and make sacrifices in order to repay debts.131 Thus, while some credit card debtors are shown to keep their cards for emergencies or use them to pay for bills and necessities, others return them to the lender on entering financial difficulty.132

47. In general while it is the better off who use credit to finance a consumer lifestyle, it is poorer families who use credit to ease financial hardship.133 The above discussion makes it clear that the issue of over-commitment is a complicated matter, depending on a variety of factors. Thus it can be said that simple views of debtor abuse or creditor exploitation are unlikely to capture the complexity of the question, and it is difficult to ascertain whether to apportion the blame for over-commitment in any given situation on a lender, borrower, or merely on unavoidable external circumstances.134

(d)Money Management

48. A similar risk factor to irresponsible borrowing is the absence of money management skills among borrowers.135 Studies in Germany and the UK found that approximately 20% of borrowers who were in arrears attributed their inability to repay to poor money management.136 Poor money management skills can manifest themselves in a number of ways, most of which stem from a lack of financial literacy, a disorganised or relaxed approach to managing finances and an inexperience of the operation of credit.

49. A specific aspect of poor money management skills is the lack of awareness among consumers of the terms and conditions of the credit agreements into which they enter.137 This can in part be attributed to a lack of financial literacy, which is a recurring characteristic among individuals experiencing difficulties in making debt repayments. In particular, consumers have been shown to be unaware of cancellation rights and interest rates. Recent Irish research has indicated that many of those experiencing debt difficulties were not originally aware of the level of interest being charged on their loans.138 In this regard the findings of the recent study on financial capability conducted by the Irish Financial Services Regulatory Authority are very relevant, and these are discussed further in Chapter 3.139

50. It must be noted however that advances have been made in the provision of information to borrowers during the pre-contractual stage by the Consumer Credit Act 1995, the IFSRA Consumer Protection Code and the 2008 EC Consumer Credit Directive140 (due to be implemented by May 2010). Nonetheless, the effectiveness of such measures requiring the provision of information to consumers has been questioned, as such information may be of little value to borrowers who do not possess the necessary financial literacy skills to comprehend and use them.141

(e)Irresponsible Lending

51. As mentioned above,142 a sound credit agreement requires appropriately responsible conduct on the part of both the creditor and debtor. In a highly competitive credit market, the most profitable customers may also be those who carry the greatest risk for lenders.143 Some studies have noted that the range of credit options available to lower-income customers through both the prime and sub-prime markets has rapidly increased, resulting in easier access to credit, particularly of an unsecured nature.144 This wider availability of credit has been coupled with aggressive marketing of credit, which though affecting all society, is often particularly aimed at vulnerable lower-income consumers.145 Thus the question arises as to the responsibility of creditors for debts going unpaid when money is lent to high-risk borrowers.

52. The most obvious aspect of this problem of irresponsible lending is where lenders advance credit to a borrower without conducting an adequate assessment of a borrower’s ability to repay. Lenders may fail to take into account the entirety of a borrower’s existing obligations before lending. In addition, lenders may neglect to conduct a “stress test” to ensure that a borrower will remain able to repay the loan in the event of a change in his or her financial circumstances. While it is to be expected that lenders will usually perform a creditworthiness assessment of a borrower in advance of a credit agreement, a number of disincentives exist to doing so.146 First, lenders may provide a risky loan where the loan is secured against an asset such as the borrower’s home, as it retains the option of selling the secured asset in the case of default. Other options available to the lender in such a situation would involve transferring the risk of default to third parties by issuing residential mortgage-backed securities or even selling the loan portfolio.147 In addition, as consumer credit markets became ever more competitive in recent years, lenders may have incentives not to undertake thorough creditworthiness assessments to speed up the loan process and gain new clients as quickly as possible.148 Similarly, credit intermediaries and the employees of lending institutions may be paid on a commission-basis and may have incentives to issue loans without suitable creditworthiness assessments, or may be encouraged to provide a credit product which is unsuitable to the particular borrower just because a higher commission is paid for sales of that product.149

53. Some particular practices which have raised concerns include the automatic increase of credit limits by lenders, the transfer of credit card balances from one card to another and the reduction of the minimum payment on credit cards.150

54. It has been quite common for lenders to raise credit limits on credit cards and overdrafts automatically despite studies showing that the large majority of customers feel that limits should only be raised at the customer’s request.151 This has raised concerns amongst money advisors and their clients that limits may be raised without adequate checks on the credit risk of customers.152 Research has supported this by showing a link between raised limits on credit cards and financial difficulties, with households whose credit limits were raised within the last twelve months more likely to be in financial difficulty than households with similar borrowings whose limits had not been raised.153 It must however be noted that this practice is no longer permitted under Irish law. The Irish Financial Services Regulatory Authority’s Consumer Protection Code, introduced in 2006, now prohibits a regulated entity from increasing a consumer’s credit card limit in the absence of an express request from the consumer.154 Similarly, regulated entities may not offer unsolicited pre-approved credit facilities.155 Thus these two practices which had been commonplace have been banned on the basis of evidence showing that they could lead to excessive borrowing and spending by consumers.156

55. The increasing transfer of credit card balances from one credit card account to another has been fuelled by offers of low initial interest rates on balances transferred in this way.157 This practice can raise problems when people in financial difficulty and with arrears of debts transfer balances to avail of the initial introductory interest rate but without planning how to meet the repayments once this rate expires. This switching of credit card provider to pay off other cards has been shown to be a strong indicator of financial difficulties.

56. The reduction in the minimum monthly repayment on credit cards has also been criticised on the ground that it may take decades to clear a large balance.158 Households in financial difficulties have been found to be three times more likely to be making only the minimum payment, and as these households are attracted to cards with low minimum payment levels it will take them years to reduce any balances accumulated on credit cards.159

57. Recent developments have been made by legislation and statutory codes of practice to ensure responsible lending practices are followed, and these will be discussed in more detail below.160

(f)Conclusions

58. This analysis indicates that the reasons why debts go unpaid, and why the enforcement system of the courts is required, are many and varied. Debt agreements can go unperformed due to fault on the part of both debtors and creditors, as well as due to external circumstances. Thus any system of debt enforcement must be capable of dealing appropriately with the circumstances of each case. Any reform of the law in this area must allow the law to take into account the reason why a particular debt is unpaid, and provide mechanisms to deal adequately with each particular scenario. Thus for example a single debt which is unpaid due to the deliberate or negligent fault of the debtor may need to be treated differently from a series of debts owed to multiple creditors by an over-indebted household. The debtor who has just lost his or her source of income and ability to repay may need to be treated differently to the debtor who has consistently over-borrowed for speculative investments when unsure of his or her ability to repay.

59. The next part of this chapter continues to discuss this theme, and its relevance to the law on debt enforcement, in relation to the important distinction between debtors who can, but refuse to, pay their debts, and those debtors who are simply unable to meet their contractual obligations.

60. The Commission provisionally recommends that the law on debt enforcement should be drafted to take account of the different circumstances in which over-indebtedness arises.

HDebtors Who Cannot Pay and Debtors Who Refuse to Pay

61. In discussing indebtedness, there is a clear and important difference between those who cannot repay their debts and those who can but refuse to do so; in other words, between those who can’t pay and those who won’t pay.161

(1)The Importance of this Distinction

62. This distinction is fundamental to any discussion of the reform of the law on debt enforcement.162 First, creditors should not waste time and money pursuing futile enforcement action against debtors who simply do not have the means to pay a debt. Secondly, it is important that vulnerable debtors who clearly have insufficient resources to pay their debts are protected from being subjected to the rigours of often harsh enforcement measures. Thirdly, the courts system has a strong interest in keeping “can’t pay” debtors out of the judicial enforcement system for two reasons. The first of these is that court resources are limited, and so the identification of debtors who cannot pay will free up court resources for the pursuit of the “won’t pay” debtors who are seeking to evade payment.163 Next, it is important that the integrity of the courts is not compromised through the making of futile orders which cannot be complied with successfully. It can thus be seen that there are no benefits in allowing a situation where a “can’t pay” debtor is admitted into the judicial debt enforcement system.

63. The present legal system does not appear to successfully achieve this task, as it has been noted that the system fails to identify debtors whom have the ability to pay and those which have not.164 It must be noted however that the distinction between these “can’t pays” and “won’t pays” is not an easy one to draw in practice, and has been variously described as an “over-simplification”165 and “crude”.166

64. Nonetheless, research has been carried out which has attempted to explore this distinction in detail and to help to identify the cases which are appropriately dealt with by the judicial enforcement system and those which are not.167 It is important to recognise that there are two distinct elements to the can’t pay/won’t pay divide. First, there is the ability to pay the money owed and secondly there is the commitment to paying.168

(2)Those Who Can’t Pay

65. As noted above,169 most debtors intend to repay their debts as required but are driven by their circumstances into financial difficulties which render them unable to pay. Such debtors are affected by the consequences of low income, sudden drops in income and irresponsible lending or borrowing. These groups can all be considered as “can’t pays”. They demonstrate a commitment to pay but lack the ability to do so.170 Sometimes these people may resemble “won’t pays” as they somehow manage to produce the money needed to avoid a court order (especially a committal order), but this can often be attributed to borrowing from family, friends or emergency commercial lenders.171

66. On the other hand, there are groups of debtors who demonstrate an ability to repay but who lack the commitment to do so.172 This group includes several different categories of “won’t pays”.

(3)Those Who Won’t Pay

67. First, there are “payment withholders”.173 These people usually pay their bills but either object to the payment of one particular bill on principle or dispute the obligation which the creditor argues they owe. Research shows that this group includes people of all incomes.174 It is clear that those who object to paying in principle should be exposed to the full rigour of an effective enforcement regime. In contrast, creditors seem to agree that where a situation of a disputed debt is identified, attempts should be made to resolve the dispute first before turning to the courts.175 If the dispute persists, recourse to the courts may be the only option for unsatisfied creditors.

68. The second group of debtors showing a lack of commitment to repay are those who have been classed as “working the system”.176 This group is reportedly considered by creditors to be the largest group of delinquent debtors who have the ability to pay, and are generally looked upon as deliberately “playing games” with their creditors. These debtors are identifiable by a pattern of waiting until the last minute to see what action the creditor plans to take against them and then generally paying quickly to avoid a court hearing or the passing of their account to a debt collection agency. These debtors tend to be people who spend freely and have a long history of arrears with multiple debts. While most of these debtors avoid court proceedings by paying at the last minute, some miss the relevant deadlines and so become subject to the enforcement mechanisms of the courts. It is appropriate that such debtors should be the subject of effective and strict enforcement systems.

69. The third group of “won’t pays” have been classed as those who “duck responsibility” towards their debts.177 These people have been identified as spending very freely and running up large credit commitments, before criticising the credit companies for having lent them the money in the first place. This attitude leads this group to feel that the credit companies could wait for repayments. This group has been identified as growing due to the development of fee-charging debt management companies who advertise solutions to debt problems, as well as through irresponsible lending practices on the part of credit providers. Often borrowing by this group is to support an extravagant lifestyle, and some of these people could easily honour their commitments.178 These people are clearly “won’t pays” and should be treated by the law as such.

70. The last group is those debtors which are categorised as “disorganised”.179 This group is distinguishable from the “won’t pays” in that disorganised people do not deliberately delay payment, but fall into arrears due to poor money management and disorganised bill payment, as described above.180 This group is composed of people from all income groups.181 Disorganised bill-payers could, in the majority of cases, solve many of their difficulties through the use of direct debit or standing order mechanisms to pay their bills. Where even these mechanisms have proved unsuccessful and a judgment debt has arisen, specific enforcement mechanisms such as attachment of earnings could target these debtors.

(4)An Intermediate Category: Those Who Could Pay

71. The disorganised debtor is placed by some studies into a third category of debtor called the “could pays”.182 This intermediate category can also include those who cannot pay their debts at present but could pay a proportion of their debts over time if provided with help to negotiate with their creditors. Similarly, among this group are those who are currently “can’t pays” due to a temporary change in circumstances but who may be able to pay their debts in future if provided with temporary relief from enforcement.

72. Thus it can be seen that various types of debtors exist and that appropriate means of enforcement are needed to deal with each type. However, this is not the end of the matter. First, difficult situations arise in relation to debtors who do not have the means to meet their obligations, but even if they did would not pay and would fall into the “withholding payment”, “working the system” or “ducking responsibility” group. Though it would be desirable to subject such debtors to a rigorous enforcement system, this may be futile since such debtors cannot afford to pay. Thus the best option here may be to subject such debtors to full enforcement mechanisms if and when their circumstances improve.183

(5)Conclusions: An Individualised, Debtor-Specific Approach

73. It is important that in a system which is founded on a categorisation of debtors under various headings that sight is not lost of the circumstances of the individual case.184 Before any enforcement order is made, it is essential to explore the conduct and circumstances of the particular creditor and debtor and to examine how the debt was created and the reasons why it is unpaid. The fact is that often the reason why a debt is unpaid may be a combination of all the reasons discussed so far, and all of these factors must be taken into account in choosing the appropriate means of dealing with a particular case.

74. Fundamental to this nuanced approach is the availability of accurate and up-to-date information, both to the creditor and to the enforcing authority. The need for, and possible means of acquiring, such information generally in a reformed system of debt enforcement will be discussed further below.185

ICreditor Practices

75. Just as the above analysis demonstrates the many different types of debtor to be considered when discussing the issue of debt recovery, so different attitudes and approaches to the debt recovery process can be seen among various types of creditors.186

76. Before the 1990s, if debtors in difficulty did not make contact with creditors, it was almost always assumed that the debtors were deliberately seeking to evade payment. This can be at least partially attributed to the fact that most creditors did not possess mechanisms enabling them to identify the reasons why individual customers had defaulted.187 This state of affairs in turn led to creditors adopting a hard-line approach to debt recovery, with the first move often being to commence court proceedings as soon as possible against defaulting debtors, with little regard to the reasons for defaults.

77. A greater understanding of the causes of arrears and the typical reactions of debtors to financial difficulties has led to a situation where a majority of creditors now appear to acknowledge that many of their clients fall into arrears due to changes in circumstances.188 Dominy and Kempson argue that this greater understanding has led to the development of industry codes of practice and guidelines on arrears management and debt recovery. The operation of such codes will be examined in more detail in the second part of this section.

78. The second consequence of this increased understanding has been the development of different techniques by creditors to deal with debt recovery. While the main causes of over-indebtedness have been shown to be adverse events such as unemployment, ill health, personal difficulties and excessive consumption, it must be noted that these events do not always transform consumers into over-indebted debtors.189 The process of over-indebtedness goes through several stages, and certain decisions may be made before the debtor is hopelessly indebted, with both the debtor’s coping strategies and the creditor’s debt management skills being important in preventing such an outcome. In recognition of this, creditors have developed more sophisticated systems for the avoidance of the accrual of arrears in the first place as well as arrears management and debt recovery. These sophisticated business systems have been used by many creditors to adopt a holistic approach to their customers, involving attempts to identify the reasons why a debtor had fallen into arrears and efforts to find appropriate solutions to the individual situation of such a debtor.190

79. It must however be noted that this approach is not adopted by all creditors. Dominy and Kempson argue that three different styles of debt recovery can be observed among creditors, which the authors have described as: the “holistic” approach, the “hard business” approach and the “one-size-fits-all” approach. These various techniques will now be briefly discussed.

(1)The Different approaches of Creditors to Debt Collection

(a)“Holistic” Approach

80. The authors use the term “holistic approach” to describe the methods adopted by creditors who found their debt recovery and arrears management strategy on the principles of maintaining a close customer relationship. Thus these creditors take steps to avoid the occurrence of arrears, seek to recover arrears through modifying payment plans to suit individual customers, and avoid legal debt enforcement proceedings if at all possible.191 Such creditors use sophisticated behavioural scoring techniques, as well as regularly updated customer records, to identify debtors who fall into arrears and place them into categories of debtors similar to those discussed above. Thus creditors can, for example, offer disorganised debtors a more organised means of making repayments by assisting them to pay by direct debit, while offering the option to low-income debtors to pay small amounts at regular intervals.192 The holistic approach envisages a relationship of two-way communication between creditor and debtor, and customers in financial difficulty are urged by creditors adopting this approach to contact them as soon as possible so that a modified repayment plan can be agreed. When such plans are agreed, holistic approach creditors will always aim to find a realistic agreement by seeking to work out precisely what a customer can afford to pay.193 Such creditors encourage the assistance of money advisors and will work closely with such agencies in seeking to reach such agreements.

81. Under the holistic approach, recourse to the legal debt enforcement proceedings is seen as a last resort and can even be viewed as an admission of failure.194 Legal proceedings are only usually commenced where the creditors’ sophisticated systems indicate that the debtor in question is deliberately seeking to evade repayment. Furthermore, the legal enforcement methods will not be used where previous court judgments exist against a debtor, as this is seen as an indication that to bring enforcement proceedings against such a debtor would be a waste of resources. If a dispute arises between lender and customer in relation to a repayment, enforcement proceedings are generally suspended by the lender so that the matter can be resolved without recourse to the courts.

82. It will be seen below that the holistic approach to arrears management and debt recovery is widely reflected in the various industry guidelines and codes of practice concerning these issues.195

83. In conclusion, it can be said that three fundamental principles inform the holistic approach to arrears and debt management.196 The first is the recognition that the main reason for repayment default by customers is financial difficulty, and that a customer who has fallen into arrears should be presumed to be suffering from such difficulties, rather than deliberately seeking to avoid payment. Secondly, customers who have fallen into arrears should be treated on an individual basis, with creditors making an effort to understand the particular reasons for non-payment and to provide flexible and individualised solutions to payment problems. Thirdly, the holistic approach requires compliance with the spirit and the letter of the rules of good practice in arrears management, which are increasingly to be found in industry guidelines and codes of practice.

84. The obvious disadvantage for creditors of adopting such an approach is the expense involved in establishing sophisticated arrears prevention and management and debt recovery systems. A particular difficulty arises in identifying customers who have fallen into debt difficulty.197 The debt difficulties of many debtors will not be readily visible, particularly where a debtor owes multiple debts, of which one particular creditor may not be aware. Thus from the creditors’ point of view, it can take three or four years for a creditor’s employee to acquire the level of training and experience necessary to be able to identify and deal with people in debt.198 Of course, this expense may ultimately be worthwhile for creditors who achieve more success in recovering debts and in retaining customers than those creditors who do not adopt a holistic approach.199

(b) “Hard Business” Approach

85. The underlying philosophy of the hard business approach is the recovery of arrears at the lowest possible cost to the creditor.200 Thus creditors adopting this approach exhibit less concern for the needs of individual customers, and are reluctant to commit resources to advanced arrears management systems. These creditors view codes of practice or guidelines as restrictive, and comply with them only to the extent to which they are obliged. Under the hard business approach, it is seen as the sole responsibility of the customer to contact the lender if he or she is in financial difficulty, and a view exists amongst creditors in this category that many debtors will falsely claim to be in difficulty in an attempt to deliberately evade payment.201

86. This approach involves little personal contact with customers, with the obvious consequence of the unavailability of information concerning each debtor’s financial circumstances which would enable creditors to create realistic and workable payment plans. This means that payment plans frequently cannot be completed. There is little place for the work of money advice agencies under the hard business approach, with some creditors holding the view that the intervention of such agencies hinders the recovery process by delaying the agreement of a payment plan.

87. Creditors adopting this approach do however invest in developing systems for handling the later stages of debt recovery which enable them to choose against which customers legal enforcement proceedings should be brought.202 The process of “litigation scoring” is often used whereby computer models predict the likely outcome of legal enforcement proceedings so that creditors can estimate in which cases the bringing of court proceedings would be effective and worthwhile. Despite this attempt to distinguish between debtors at the late stage of the arrears management and debt recovery process, hard business creditors remain much more likely to bring formal enforcement proceedings than creditors following the holistic strategy. This is due to the view that customers claiming to be in financial difficulty are merely seeking to evade payment. Also, hard-business creditors lack information on the true financial circumstances of their customers. The result is that proceedings are often still brought where the chances of their effectiveness are unknown.

(c)“One-Size-Fits-All” Approach

88. Creditors adopting a “one-size-fits-all” approach rely on standard mechanisms for dealing with all aspects of arrears management and debt recovery and do not attempt to categorise their customers into different groups for these purposes.203 Only standard means of billing and accepting payment will be offered, with no provision of individualised payment mechanisms to suit the varying different categories of debtor. Standard arrears management letters and notices are sent to defaulting customers at standard set intervals, with little attempt to obtain further information on the financial circumstances of individual customers. Payment plans will only be formulated at the initiative of the customer, and creditors adopting this approach will rarely be concerned with assuring that offers of payment are realistic.

89. For creditors adopting this approach, the institution of legal enforcement proceedings is normally viewed as a natural continuation of arrears management.204 These creditors issue more court proceedings than the other categories and such proceedings are largely taken indiscriminately, with little regard to whether the debtor being sued is in a position to repay the monies owed. Such creditors prefer to proceed before the courts than to negotiate informal payment plans, as they have witnessed the failure of many involuntary payment plans which have not been court-sanctioned. Evidence suggests that one-size-fits-all creditors use the means examination carried out by the court as their method of obtaining information regarding a debtor’s financial circumstances, rather than trying to ascertain such information prior to commencing court proceedings.205

90. It must be noted that in recent years the more sophisticated approaches to arrears management and debt recovery have grown in popularity, and the use of the one-size-fits-all model has become rare in recent times. This will be shown in the discussion of the codes of practice for lenders below, which all advocate more sophisticated and consumer-friendly strategies.

(2)Industry Guidelines

91. The changes described in the attitudes of creditors to arrears prevention and management and debt recovery are now evidenced in the various codes of practice and credit industry guidelines which have been developed in Ireland and in other jurisdictions in recent times. The setting out of both broad principles and detailed guidelines on how to abide by such principles facilitates good practice and assists creditors in adopting a holistic approach to arrears problems, which in turn allows lenders to increase their rates of arrears recovery and customer retention.206 The fact that such practices are ultimately to the benefit of creditors has led to the voluntary creation of rules of good practice by members of the relevant industries. As a result it has been argued that high levels of compliance with guidelines can be achieved through self-regulation.207

92. A brief description of the provisions of some such industry codes is presented in Chapter 3 below as part of a discussion of the current law on arrears management in Ireland. This discussionillustrates how issues of arrears prevention and management and debt recovery are dealt with by creditors before recourse is had to the legal enforcement procedures which ultimately form the basis of this Consultation Paper.

(3)Conclusions

93. The above discussion illustrates the current prevailing attitudes of creditors to the law on debt enforcement. It also describes the place of legal debt enforcement procedures in the overall debt recovery process. It has been shown that while once recourse to legal enforcement would have been the first course of action for an unpaid debtor, in recent years greater understanding of the causes of debt have resulted in the deployment of different arrears management and debt recovery techniques before legal proceedings are commenced.

94. The Commission wishes to endorse the holistic approach to debt management described above. The law should reflect an attitude to debt enforcement similar to this approach. An emphasis should be placed on good practice in debt management, non-judicial debt settlement procedures should exist to avoid court proceedings, with the use of court proceedings being reserved as a genuine last resort. While the debt enforcement systems should facilitate and assist creditors in recovering what the law states to be their rightful dues, creditors also have a responsibility to help themselves by engaging in sound arrears management and debt recovery practices.208

95. The Commission provisionally recommends that the law should reflect and support the holistic approach to debt management and debt enforcement, namely, that legal debt enforcement proceedings should be seen as a last resort to be used when other measures have failed or can be shown to be inappropriate.

a framework for reform

96. This Chapter establishes a set of principles for the reform of the law on debt dispute resolution and the enforcement of judgments. The Commission uses these principles as a guide throughout the Consultation Paper when identifying areas for reform and when making provisional recommendations. The Chapter begins by establishing the key dynamic of the law in this area: the balance of the respective rights of creditors and debtors. Part A begins by discussing the fundamental rights of judgment creditors as recognised by the Constitution of Ireland and the European Convention on Human Rights. These rights include the right of access to a court and property rights. Part A concludes that these rights must be adequately respected by providing effective mechanisms for enforcing court judgments. The part however also emphasises that these rights are not absolute, and must be balanced with the rights of debtors and the public interest.

97. Part B outlines the fundamental rights of debtors which must be protected by enforcement procedures, including the rights to fair procedures, liberty, privacy and property. This part recognises that enforcement procedures must by their nature involve an element of coercion and so must restrict the rights of judgment debtors to a certain extent. Part B makes two important conclusions: the law on debt enforcement must strike a fair balance between the rights of creditors and debtors; and the law on debt enforcement must be based upon the principle of proportionality, so that while restrictions on debtors’ rights are necessary, such restrictions must always be appropriate.

98. Part C discusses the interests of society in general which must be considered by the law in this area. This part notes that the principle of the rule of law, the protection of basic principles of contract law, and the efficiency of the economy all demand that efficient mechanisms for the enforcement of judgment debts exist. The public interest in the prevention and alleviation of over-indebtedness is also recognised as a legitimate aim which may justify restrictions on the rights of creditors.

99. Finally, Part D draws conclusions from the above discussion and presents a list of fundamental principles which guide the Commission’s provisional recommendations for reform throughout this Consultation Paper. This part notes that the law on debt enforcement must be balanced, proportionate and clear. It also states that the distinction between debtors who cannot pay and those who refuse to pay must be recognised by the law, and that methods must be introduced by which more information about the means of debtors can be obtained so that this distinction may be made in individual cases. Finally, Part D acknowledges that those who cannot pay should not be subject to enforcement proceedings and that a system of debt settlement must be introduced to provide a solution to the difficulties of the over-indebted.

JRights of the Creditor

100. A central aspect of any system of civil justice is that legal rights can be effectively respected, protected and vindicated. Thus, a creditor who has established a legal right to seek payment from a debtor must be provided by the State with the necessary mechanisms to give effect to this right.209 Indeed for the majority of litigants, the very reason why they initiate civil proceedings is to recover the money which they believe their legal rights entitle them to obtain.210 In this regard it has been said that “people do not institute civil proceedings to vindicate their rights; they do so to get their rights.”211

101. Thus, a civil justice system which fails to provide for the effective enforcement of judgments may be failing in its obligation to protect the rights of successful plaintiffs. Any reform of the law of debt enforcement must thus have regard to the rights of creditors protected by the Constitution of Ireland and the European Convention on Human Rights.212

(1)Access to the Courts/Right to Litigate

102. The first right of the creditor which must be considered in enforcement proceedings is the right of access to the courts or the right to litigate, as protected both by 40.3 of the Constitution of Ireland and Article 6 of the European Convention on Human Rights.

103. The right to have access or recourse to the courts and the related right to litigate have been recognised as constituting one of the unenumerated rights of the citizen as protected by Article 40.3 of the Constitution.213 In the case of Macauley v Minister for Posts and Telegraphs, Kenny J held that this right is a necessary inference from the jurisdiction vested in the High Court by Article 34.3.1o to determine all matters and questions of law or fact, civil or criminal.214 In this regard this right can be seen as protecting the rule of law and integrity of the judicial system as well as protecting individual rights.215

104. Case law has illustrated that this right of access to a court extends to an entitlement to have any judgment obtained therein enforced. This can be seen from the judgment of Keane CJ in the Supreme Court decision of Foley v Bowden. Here the judge describes the right as the:216

“right of the plaintiff to have access to the courts and to be in a position, so far as the law can enable him so to do, to execute any judgment he has obtained.”

Here the plaintiff sought to conduct an oral examination of the Garda Commissioner217 to ascertain whether the defendant, a participant in the witness protection programme, was owed monies by the State which could be made subject to a garnishee order so as to enforce a judgment previously obtained by the plaintiff against the defendant. The Court held that although the aim of the scheme was to assist in the prosecution of serious crime - and so there was a strong public interest in the non-disclosure of information relating to the scheme - the programme must observe the constitutional right of access to the court and to execute any judgment therein obtained.218 Thus, the plaintiff’s constitutional right entitled him to conduct an oral examination of the Garda Commissioner.

1. The Council of Europe has confirmed that the enforcement of a court judgment is “an integral part of the fundamental human right to a fair trial within a reasonable time, in accordance with Article 6 of the European Convention on Human Rights.”219 The object of Article 6 is “to enshrine the fundamental principle of the rule of law,”220 a principle which can only be realised if citizens can, in practice, assert their legal rights and challenge unlawful acts.”221 While the text of the Convention does not expressly guarantee a right of access to a court, this right was recognised as part of the Article 6 scheme in the decision of Golder v United Kingdom.222

2. The ECtHR has expressly confirmed that the enforcement of a judgment falls under the protection of the Article 6 guarantee. Plaintiffs should not be prevented from benefitting from the success of litigation.223 In Hornsby v Greece, the court held that the right of access to a court “would be illusory if a Contracting State's domestic legal system allowed a final, binding judicial decision to remain inoperative to the detriment of one party.” 224 The Court held that it would be inconceivable that Article 6 should ensure fair procedures without guaranteeing the implementation of judicial decisions. A view of Article 6 which limited it to the mere conduct of proceedings would fail to protect the principle of the rule of law enshrined in Article 6. The Court thus concluded that the “[e]xecution of a judgment given by any court must therefore be regarded as an integral part of the "trial" for the purposes of Article 6”,225 and that obstacles, or even delays, in the enforcement of judgments may render the Article 6 guarantee “devoid of purpose”.226

3. The decision in Apostol v Georgia,227 confirms this approach. Here the ECtHR reaffirmed that “the right to a court is not merely a theoretical right to secure recognition of an entitlement by means of a final decision but also includes the legitimate expectation that the decision will be executed.”228 While this right may be subject to limitations, such restrictions must not impair the very essence of the right, and must pursue a legitimate aim in the public interest and demonstrate a relationship of proportionality between the means employed and the aim sought to be achieved.229

4. In examining the scope of the right, the Court went so far as to state that the duties imposed on Contracting States by Article 6 “may require the State to take various forms of positive action”.230 The facts of the case involved Georgian legislation which required the payment of a fee by the party seeking to enforce a judgment. In this context, the Court decided that by moving the responsibility for financing the enforcement proceedings to private parties, Georgia attempted to evade its “positive obligation to organise a system for enforcement of judgments that is effective both in law and in practice.”231 The provision of Georgian law thus constituted an excessive burden on the applicant and restricted his right of access to a court to the extent of impairing the very essence of that right.

5. Thus, it can be seen that the obligations imposed on Contracting States by Article 6 are quite extensive and far-reaching, to the point of placing a positive obligation on States to organise an effective system of enforcement.232 Enforcement may however be delayed where there is a strong public interest in so doing, and where such an interference with a judgment creditor’s rights is proportionate.

6. The Commission provisionally recommends that the law on debt enforcement should adequately respect creditors’ rights to have access to a court and to be able to enforce any court judgments.

(2)Property Rights

1. Both the Constitution of Ireland and the European Convention on Human Rights provide for the protection of property rights. The expansive interpretation given by Irish and European courts to the concepts of property rights and possessions mean that a judgment debt can fall under such protection. For this reason the law on debt enforcement must provide an efficient and effective enforcement system so as to vindicate the property rights of creditors. It must be noted that both the Irish constitution and the ECHR place several conditions on the enjoyment of property rights. Most notably, these rights are subject to the general interest or common good. A justification for the restriction of these rights may be provided by the general interest in the need to provide a solution to the problem of over-indebtedness, an issue which will be discussed further below.

2. The Constitutional protection of property rights in Ireland is provided by Articles 40.3.2o and 43 of the Constitution.233 A similar protection of property rights is provided by the ECHR. Article 1 of the First Protocol to the ECHR effectively guarantees the right of property.234 The protection of property or possessions has been given a wide scope by the Irish courts235 and the ECtHR. Importantly for the present discussion it was held in the Irish High Court decision in Chestvale Properties v Glackin236 that contractual obligations could form property rights for the purposes of the Constitution and that a statute which necessitated a breach of an implied contractual term by one party to a contract constituted an interference with those property rights. The Court found in the circumstances that this statute merely resulted in a limited intrusion on the contractual rights of the parties and thus was justifiable as a means of reconciling the exercise of property rights with the exigencies of the common good as envisaged by Article 43.2.1o of the Constitution. Applying this decision to the debtor-creditor contractual relationship, it can be relied on as authority for the argument that the law must respect the contractual obligations created between debtor and creditor as constitutionally protected property rights. Creditors thus have a constitutional right to have these obligations enforced, albeit a right which may be subject to interference which does not amount to an unjust attack and which is required by the common good.

3. A similar outcome occurred in relation to the protection of the contractual rights of creditors under the ECHR in the House of Lords decision of Wilson v First County Trust Ltd (No. 2).237 This case concerned a challenge to legislation,238 which restricted a creditor’s power to enforce a credit agreement where the agreement did not comply with the provisions of the Act. The majority of the House of Lords held that the guarantee of Article 1 Protocol 1 was not engaged as it is the role of national law “to define the nature and extent of any rights which a party acquires...”239 If under national law the right to enforce the contractual right “had never in truth [been] validly acquired”,240 then there was no interference with the protection of possessions where the agreement, which would otherwise have been valid, was rendered unenforceable due to its failure to comply with the relevant formalities. The non-binding commentary of the Lords also indicated that had an interference with Article 1 Protocol 1 rights occurred, it would have been both a legitimate and proportionate interference due to the important social policy of consumer protection which the relevant legislation sought to achieve.

4. The Irish Supreme Court has confirmed that the Constitution’s protection of property rights extends to a cause of action. In the case of In the Matter of Article 26 of the Constitution and in the Matter of the Health (Amendment) (No. 2) Bill 2004,241 the Court held that a cause of action under the law of unjust enrichment for the restitution of health charges paid when not due constituted a property right capable of falling under the protection of Articles 40.3.2o and 43. The Court thus accepted the argument that the legal right to recover charges these charges constituted a debt which was a constitutionally protected property right.242

5. By similar reasoning, case law of the ECtHR has shown that a judgment obtained by a plaintiff in judicial proceedings can constitute a possession for the purposes of the guarantee of property rights. So, in Stan Greek Refineries and Stratis Andreadis v Greece,243 the Court held that a judgment or arbitration award which gives rise to a debt that is sufficiently established to be enforceable may constitute a possession for the purposes of Article 1, Protocol 1.244 Therefore, where a defendant State refuses to pay the sum ordered to the applicant the fact that the applicant finds it impossible to obtain execution of the decision constitutes interference in his or her right to property.245

6. Subsequent decisions of the ECtHR have further shown that even a temporary delay which prevents a successful plaintiff from obtaining the execution of a judgment as soon as it becomes enforceable246 can constitute an interference with the plaintiff’s right to peaceful enjoyment of his or her possessions.247 If a plaintiff is unable to obtain the enforcement of a judgment for a substantial period of time, his or her right will be infringed.248

7. Both the Irish Constitution and the ECHR recognise that property rights are not absolute. The conditions imposed on the right to property by Article 1 of Protocol 1 mean that interference with property, whether through expropriation or through control of use, will be permissible if it is lawful, pursues the general or public interest, and is proportionate, in that it strikes a fair balance between the demands of the general interest and the protection of the individual interest.249 The fact that the defendant State in Prodan v Moldova could not provide any justification for the delay in the enforcement of the applicant’s judgment debt was important to the ECtHR’s finding that the applicant’s rights had been infringed.250 Thus if obstacles to the enforcement of judgment debts arise, they must meet these criteria in order to avoid contravening the Article 1 Protocol 1 guarantee.

8. The Commission provisionally recommends that any reform of the law on debt enforcement must produce an efficient system of enforcement so as to vindicate the property rights of creditors. The Commission also recognises that the property rights of creditors may be subject to limited interferences if justified by the interests of the common good.

KRights of the Debtor

1. While having regard to the rights of creditors outlined above, and the interest of society in the effective enforcement of legal obligations, it is important that a system of enforcement equally acknowledges the rights of debtors. The law on debt enforcement thus must seek to achieve a balance between the rights of creditors and debtors. The following section outlines the primary constitutional and Convention rights of debtors which are engaged by various enforcement procedures.

(1)Fair Procedures

1. The first right of debtors which must be considered is the right to fair procedures, as protected by articles 34, 38 and 40.3 of the Constitution of Ireland, and article 6 of the European Convention on Human Rights. These articles guarantee certain procedural safeguards which must be provided to parties to legal proceedings. While a detailed discussion of the content of the right to fair procedures is beyond the scope of this Consultation Paper, the following paragraphs present a discussion of how this right was applied to enforcement procedures in the 2009 Irish High Court decision of McCann v The Judge of Monaghan District Court, the Commissioner of an Garda Síochána, the Chief Executive of the Irish Prison Services, the Minister for Justice, Equality and Law Reform, Ireland and the Attorney General. 251

2. In McCann, this right was considered in the context of the procedure for the arrest and imprisonment of debtors that existed under section 6 of the Enforcement of Court Orders Act 1940 until this section was replaced in 2009.252 This procedure applied where a debtor failed to comply with an order to pay a judgment debt by instalments, at which point a creditor could seek to enforce the instalment order by seeking an order for the arrest and imprisonment of the debtor. While the debtor could avoid an order for imprisonment being made by proving that the failure to pay the instalment order was not caused by his or her wilful refusal or culpable neglect, the burden of proof fell on the debtor to appear in court and prove this defence. The procedure allowed for such an order to be made in the absence of the debtor, and if the debtor did not appear, the court could proceed to order his or her arrest and imprisonment. The Irish High Court held that this procedure violated the protection of the right to fair procedures under the Constitution of Ireland.

3. Here it was argued that the procedure under section 6 was incompatible with the constitutional guarantees of fair procedures under articles 34, 38 and 40.3, and the right to a fair trial under article 6 of the European Convention on Human Rights. Considering this argument, Laffoy J held that for the procedure to be compatible with the Constitution, the same procedural safeguards must exist in committal hearings as are provided in criminal trials.253 Having rejected the argument that the wording of section 6 of the1940 Act could be interpreted in a manner that implied the necessary safeguards to make it compatible with the Constitution, Laffoy J continued to hold that the provision violated the debtor’s constitutional guarantee of fair procedures in three principal ways.254 First, it conferred jurisdiction on the District Court to order the arrest and imprisonment of a debtor even where the debtor was not present before the Court and even if the District Court Judge was not in a position to decide whether the absence of the debtor was due to a conscious decision. Secondly, the impugned section conferred jurisdiction on the Court to order the arrest and imprisonment of the debtor while not providing any administrative or legal scheme under which the Court was given the power to grant free legal representation to the debtor. Finally, section 6 breached fair procedures guarantees in expressly placing the onus on the debtor to prove that default was not caused by his or her wilful refusal or culpable neglect. Laffoy J noted that if the legislation had created a criminal offence of failing to obey an instalment order, with a possible three month prison sentence, the constitutional requirements of fair procedures and trial in due course of law would have been necessitated. This is because Irish case law has established that the presumption of innocence must be protected and that the prosecution must prove its case beyond all reasonable doubt.255 The judge continued to state that

   “By analogy, when the Oireachtas considers it appropriate to provide for a party in civil litigation a remedy in the case of contumacy on the part of the debtor, and, if granted, the remedy will result in the imprisonment of the debtor, fair procedures must require that the burden of proof of contumacy is on the creditor availing of the remedy.”256

4. This case affirmed the principle that the debtor’s right to fair procedures must be respected in enforcement proceedings, and that it must be reconciled with the rights of the creditor to enforce a judgment. Where an enforcement mechanism carrying the threat of imprisonment exists to compel payment from “won’t pay” debtors, sufficient procedural steps must exist to determine the question of whether the debtor is indeed refusing to pay, or whether he or she is a “can’t pay” debtor. Enforcement mechanisms which are designed for “won’t pay” debtors must therefore not be used indiscriminately against “can’t pay” debtors. The case establishes the principle that the severity of the consequences of enforcement for the debtor must be considered when determining the extent of the procedural safeguards necessary to protect the debtor’s rights.

(2)The right to liberty

1. In McCann v The Judge of Monaghan District Court & Ors, Laffoy J also found that section 6 of the 1940 Act was contrary to the Irish Constitution’s protection of the right to liberty under Article 40.4.1o. This article simply provides that “[n]o one shall be deprived of his personal liberty save in accordance with law.”

2. The judge first noted that section 6 implicitly recognised that a debtor should not be imprisoned if he or she is unable to pay the debt being enforced, and so the provision did not deprive a person of his or her liberty in a manner which ignores the fundamental norms of the legal order postulated by the Constitution.257 The flaw of the provision therefore was that it did not contain sufficient safeguards to ensure that a debtor who cannot pay is not imprisoned. The provision was designed to imprison only those who refuse or neglect to pay, but the judge found that it “also strikes at those who cannot pay and simply fail to prove this at the hearing due to negative circumstances created by the provisions themselves.”258

3. Having considered this, the judge continued to state that “the core question is whether s. 6 constitutes a disproportionate interference with the right to liberty.” To answer this question, Laffoy J applied the three stage proportionality test as first enunciated in Heaney v Ireland259 which requires that the provision under scrutiny must:

• be rationally connected to a legitimate and important object;

• must impair the right in question as little as possible; and

• must be such that its effect on this right is proportional to the legitimate objective sought to be achieved.

The judge noted that an effective statutory scheme for enforcement of contractual obligations is “unquestionably a reasonable and legitimate objective in the interests of the common good in a democratic society.”260 Laffoy J noted that this objective could feasibly justify a mechanism for the imprisonment of defaulting debtors, but such a mechanism would be unconstitutional unless it passed the proportionality test.

126. Section 6 of the 1940 Act failed this test on several grounds. First, since the object of imprisonment is to procure the discharge of the arrears of instalments, a statutory scheme which allowed debtors who cannot pay to be imprisoned could not be rationally connected with the objective.261 As the judge continued to state, “[n]ot only would the process have no practical value in securing payment of the outstanding debt or any part of it, but it is difficult to see how it could be said to have any deterrent value.”262 Secondly, where the debtor has some resources with which to meet the debt, a statutory scheme which does not require these resources to be attached before an order of imprisonment may be sought does not impair the debtor’s right to liberty as little as possible. The judge here held that the reasoning of the European Court of Human Rights in the case of Saadi v United Kingdom263 applied equally to protection of the right to liberty under the Constitution as under the ECHR. This decision was interpreted by Laffoy J as illustrating that the detention of an individual is such a serious measure that it may only be justified when used as a last resort where less restrictive measures have been considered and found to be insufficient to safeguard the individual or public interest.264 Similarly, the right is infringed more than necessary by the failure of the provision to impose procedural safeguards such as a requirement of personal service of the order for arrest and imprisonment and the inclusion of a penal endorsement on this order. Furthermore, the absence of a mechanism in section 6 for re-entering the application for arrest and committal before the District Court after the order is made, “infects the provision with arbitrariness and unfairness.”265 Finally, the judge noted that the view in the Saadi case that the duration of the detention is relevant to deciding whether there has been a disproportionate interference with the right to liberty under the ECHR applies by analogy when considering the right to liberty under the Irish Constitution.

127. The decision of Laffoy J in McCann confirms that the right to liberty of debtors must be respected by the law on debt enforcement, and that imprisonment may only be used as a method of enforcement against debtors who have been proven to have the means to pay and yet refuse to honour their obligations. Imprisonment may only be used as an absolute last resort, where no other method of enforcement is available.

128. The reasoning of Laffoy J has significance beyond the context of the right to liberty, and serves to direct the general approach which the law should take to the enforcement of judgments. The decision identifies the enforcement of contractual obligations as a legitimate aim in the public interest which may justify certain interference with the rights of debtors. Enforcement must nonetheless always be proportionate. The method of enforcement used must be rationally connected to its objective, the least restrictive method possible and its effect on the rights of debtors must be proportionate to the objective which it seeks to achieve. This principle of proportionate enforcement will appear as a fundamental principle throughout this Consultation Paper.266

(3)Privacy

130. Both the Constitution of Ireland and the ECHR provide for the protection of the right to privacy. As is the case in many other countries, the right to privacy is not expressly protected, but Irish courts have found the right to be implicitly guaranteed by the Constitution of Ireland.267 In contrast, Article 8 ECHR expressly guarantees the right to respect for private and family life.268 The ECtHR has given a very broad interpretation to the concept of “private life” and has refused to provide a single definition of the term.269 The right to privacy under both regimes consists of various elements, and the law on debt enforcement could thus potentially impact on disparate aspects of privacy rights.

(i)Informational Privacy

131. One particular element of the right to privacy recognised under both the Constitution of Ireland and the ECHR is the right to informational privacy.270 This form of privacy concerns the right to prevent the dissemination of information of a private nature.271 Delany and Carolan note that this form of privacy has been recognised and applied by the Irish courts without demur in the cases in which it has been raised.272 Perhaps most relevantly for present purposes, in the case of Haughey v Moriarty Hamilton CJ stated that

“[f]or the purpose of this case, and not so holding, the Court is prepared to accept that the constitutional right to privacy extends to the privacy and confidentiality of a citizen’s banking records and transactions.”273

The court also recognised that this right to privacy in respect of banking records is protected at common law by the duty of confidentiality owed by a bank to its clients. Similarly, it has been established under the ECHR that Article 8(1) places restrictions on how the State stores, processes and disseminates information about individuals.274 The duty of banking confidentiality and data protection rules as aspects of the right to privacy are discussed further in Chapter 4.275

132. The first problematic issue regarding debtors’ privacy rights arises in relation to the consequences of the potential introduction of a general attachment of earnings mechanism in Ireland.276 As will be discussed in more detail below, such a procedure requires the participation of the judgment debtor’s employer in the enforcement process, as the employer must make deductions from the debtor employee’s earnings and forward these to the judgment creditor(s). This process could risk infringing debtors’ rights to informational privacy. Irish legislation, in the form of section 46 of the Consumer Credit Act 1995, already exhibits a policy of protecting employees’ informational privacy in respect of their financial circumstances as against their employers. Thus this section prevents a creditor from communicating with a consumer’s employer unless that employer is party to the financial agreement between consumer and creditor. Thus if such a measure is introduced, privacy rights of debtors must be amply safeguarded.

133. A second threat to the guarantee of informational privacy is to be found in the possibility of increasing access to data relating to a debtor’s financial status as part of creditworthiness assessments and enforcement proceedings. As will be seen below, a fundamental flaw in the current enforcement system is the lack of readily available information concerning debtors’ assets and means. This prevents effective and individually appropriate enforcement decisions from being made in each particular enforcement proceedings.277 Thus an improved system, whether it is to be creditor-driven or overseen by enforcement body, will require accurate and detailed information concerning a debtor’s financial circumstances.278 Similarly, the expansion of systems of credit reporting279 and of registering judgment debts280 may facilitate responsible lending practices. This would obviously involve the dissemination of the debtor’s financial information to creditors or third parties. Any proposals recommending such reforms must be conscious of the need to respect the informational privacy rights of debtors.

134. In this regard it is important to note that the interference with a debtor’s privacy rights in this situation may be capable of justification. 281 The Irish courts have recognised that the right to privacy is not absolute, and the ECHR outlines specific justifications for interference with the right under Article 8(2).282 In particular, the storage and dissemination of such information relating to individual debtors may be “necessary in the interests of a democratic society”, for the “economic well-being of the country” and “for the protection of the rights and freedoms of others.” In Meeder v Netherlands,283 a legislative measure requiring a bankrupt to undergo a compulsory psychiatric examination was held to be a justifiable interference with the bankrupt’s Article 8 rights as it pursued a legitimate aim of the protection of the rights the bankrupt’s creditors, as well as furthering the general interest which exists in ensuring the proper administration of bankrupt estates.

135. This would suggest that the dissemination of information relating to a debtor’s financial circumstances could be justified by the need to protect the rights of creditors and the common interest in the enforcement of court orders.284 Nonetheless, measures which necessitate interference with Article 8 so as to vindicate the rights of creditors “must be accompanied by adequate and effective safeguards which ensure minimum impairment” of the debtor’s Article 8 rights.285

136. The Commission provisionally recommends that the informational privacy rights of debtors must be respected by the law on debt enforcement.

(ii)Territorial Privacy

137. Both Irish law and the Convention also recognise that the right to privacy encompasses a protection of spatial or territorial privacy.286 This aspect of the right to privacy is assured in respect of the home by Article 40.5 of Constitution of Ireland, which guarantees the inviolability of the dwelling.287 Similarly, Article 8 ECHR obliges contracting States to guarantee respect for the home, including a protection of the physical security of a home and the belongings therein.288 Both the Constitution and the Convention also appear to provide to a certain extent a right to territorial privacy in respect of business premises.289 A typical interference with respect for the home often takes the form of a personal invasion of an individual’s home, such as a forcible entry or arrest at home.290 Therefore close regard should be had to the potential interference with the privacy rights of the debtor involved under the procedure for the execution against goods by Sheriffs and County Registrars.291

138. Generally, what case law exists on the practice of distress against goods has found the mechanism not to infringe the above guarantees of territorial privacy. The validity of execution against goods for the purposes of enforcing a Revenue debt was upheld in Deighan v Hearne292 Here a challenge was made to legislation293 which permitted the County Sheriff, under the authorisation of a certificate of the tax collector, to enter a tax defaulter’s premises and distrain goods found therein. The plaintiff argued inter alia that such a provision authorising execution by the sheriff otherwise than on foot of an Order of the Court was unconstitutional. This argument was dismissed after little discussion by the Court. Murphy J held that such a power to enter a premises for the purposes of seizing goods therein could be justified by the common good. Since execution as part of private debt enforcement always takes place under a Court Order, the greater protection provided to a debtor in such cases would, in light of Deighan, suggest that this mechanism is constitutionally sound.

139. The European Commission of Human Rights has previously found the practice of forcible entry to attach and sell moveable goods in a dwelling to be compatible with the Article 8 guarantee. In the decision of K v Sweden,294 the defendant state did not contest that the enforcement operation in question constituted an interference with the applicant’s right to respect for her private life and her home. The question then arose as to whether such interference could be justified. The Commission held that it indeed could be, applying the Article 8(2) justificatory criteria to the facts at hand. First, the interference with the right was “in accordance with law” as the enforcement legislation permitting the bailiff’s actions was formulated in a precise manner. Furthermore, the fact that the Swedish courts possessed a power to review the seizure was considered to provide protection to the individual against arbitrary interference by the authorities. Secondly, the Commission held that the measure pursued a legitimate aim, that aim being the protection of the rights of creditors, as covered by the words “for the protection of the rights... of others” in Article 8(2). The Commission then examined whether the interference with the applicant’s rights were necessary in a democratic society, noting that the case law of the ECtHR has described this criterion as requiring an interference with rights to correspond to a pressing social need and to be proportionate to the legitimate aim pursued. The Commission found that in the present case these conditions were met, due to the particular circumstances of the case and the special problems connected with the enforcement of the claims against the judgment debtor in question.

140. This decision appears to have been generally accepted as affirming the compatibility of a mechanism of execution against goods with Article 8.295 It is nonetheless important to emphasise that the Commission merely affirmed the proportionality of the mechanism in the circumstances of the particular case due to the special enforcement difficulties involved. Thus the procedure may be disproportionate under certain circumstances, where less restrictive enforcement mechanisms are available.296 This view is shared by the UK Citizen Advice Bureau, which argues that the interference with the rights of debtors involved in execution against goods represents an excessive and undue burden when compared with the use of other enforcement methods such as attachment of earnings.297

141. The Commission provisionally recommends that the law on debt enforcement should respect the territorial privacy of debtors and that such rights should only be subject to proportionate interference where necessary to achieve an important objective.

(iii)Human Dignity

142. The right to privacy under the Constitution of Ireland has been conceptualised as being founded on the Constitution’s protection of the dignity of the individual.298 In Kennedy v Ireland Hamilton P stated that “[t]he nature of the right to privacy must be such as to ensure the dignity and freedom of an individual in the type of society envisaged by the Constitution...”299 Similar recognition was given to the constitutional guarantee of human dignity by Denham J in the case of In Re a Ward of Court (No 2). Here the judge stated that the unenumerated rights guaranteed under Article 40.3 include a right to be treated with dignity.300

143. Thus the law of debt enforcement must seek to respect and protect the human dignity of debtors while also vindicating the rights of creditors.301 This duty to preserve the basic dignity of the individual should also encourage the law to provide solutions for those suffering from the adverse consequences of over-indebtedness. In this context, regard must also be had to the dignity of the dependents of debtors. The law must be particularly conscious of the detrimental impact of financial difficulties on the lives of children living in over-indebted households.302 It should be noted in this regard that the United Nations Convention on the Rights of the Child provides that all signatory states recognise the right of every child to a standard of living adequate for the child's physical, mental, spiritual, moral and social development.303

144. The Commission provisionally recommends that the law on debt enforcement must at all times have regard to the need to protect the basic human dignity of debtors and their families.

(4)The Property Rights of Debtors

145. The property rights of debtors can potentially be subject to interference in a variety of ways throughout the debt enforcement process. In particular, certain enforcement mechanisms such as the garnishee order procedure and the seizure for sale of a debtor’s goods may impact on the property rights of the debtor.

(i)Distress against Goods

146. First, the procedure of execution against goods obviously involves an interference with the property of the debtor. This procedure allows a sheriff, under an order of court, to enter upon the premises of the debtor and to seize and subsequently sell the goods of the debtor in satisfaction of a judgment debt.304 The court order thus gives the sheriff the authority to commit an act which, without this order, would amount to a trespass to goods.305 The question then arises as to whether this interference is capable of justification as a mere control of the use of property or the delimitation of property rights in accordance with the common good.

147. Certain decisions of the ECtHR have dealt with the interference with the property rights of debtors which may occur as part of the mechanism of execution against goods. Commentators such as Jacob306 have noted that the general legality of execution against goods was assumed by the ECtHR in Västberga Taxi Aktiebolag and Vulic v Sweden307 and Janosevic v Sweden.308 The Scottish Law Commission argues that the decision of the ECtHR in Gasus Dosier und Fördertechnik GmbH v The Netherlands309 shows that domestic legislation which allows tax authorities to seize and sell a third party’s assets in certain circumstances so as to satisfy the tax debts owed by another party is not per se incompatible with the Convention.310 The Scottish Law Commission then argues that a system of distress or execution against goods which allows for mere distress of the debtor’s goods and not those of a third party is even less likely to be found to be contrary to the Convention.311

148. Under Article 1 Protocol 1 ECHR an individual may be deprived of his or her possessions in the public interest and in accordance with the conditions prescribed by law, and a State may control the use of property in accordance with the public interest. The decision of the ECtHR in James and Others v The United Kingdom provides a detailed examination of the protection of the right to property under Article 1 Protocol 1.312 The Court here stated that the compulsory transfer of property from one individual to another may in some circumstances serve a legitimate public interest.313 The court continued to hold that if this taking of property is part of a policy calculated to enhance social justice then it will be in the public interest. In particular, the court held that the fairness of a system of law governing the contractual or property rights of private parties is a matter of public concern and therefore legislative measures intended to bring about such fairness are capable of being "in the public interest", even if they involve the compulsory transfer of property from one individual to another.”314 This reasoning would suggest that the legitimate objective of the enforcement of contracts is of sufficient public concern to provide justification for the transfer of the property of a debtor to a creditor to satisfy a properly incurred contractual debt. The Court proceeded to state that there must nonetheless be a reasonable relationship of proportionality between the aim sought to be achieved and the means employed to meet that aim, so as to ensure a “fair balance” between the demands of the general interest and the protection of the fundamental rights of the individual.315

149. Jacob cites the above reasoning as indicating that execution against goods may be compatible with the Convention provided the mechanisms used contain sufficient safeguards to protect the individual.316 The legitimate aims in the public interest at issue in this context are the protection of the sanctity of contract and the protection of the rights and freedoms of creditors. Nonetheless, these aims could in certain cases be achieved through other less restrictive enforcement mechanisms, and so Jacob argues that the procedure of execution against goods is “only proportionate and only ECHR compliant, so long as it is actually the last resort.”317 Where other less restrictive methods of enforcement are available and appropriate, they must be used before the restrictive procedure of execution against goods is deployed.

(ii)Attachment of Debts/Garnishee

150. The attachment of debts or garnishee procedure, as discussed below, also involves an interference with the property rights of a debtor. In the case of Orange v Revenue Commissioners, Geoghegan J stated that the attachment of a debt, in this case in favour of the Revenue Commissioners, constitutes an attack on the property rights of the individual to whom the attached debt is owed.318 The debt, as a chose in action, constitutes a property right and the effective removal of the chose in action is thus an attack on this right.319

151. The judge however cautioned that this did not necessarily mean that the statutory provision authorising this attachment of a debt was an unjust attack on property rights.320 In fact, the judge proceeded to state that “there would not appear to be anything inherently unconstitutional in a statutory provision effecting an attachment of a debt.”321 The decision concluded that on the facts of the case the attachment procedure under s73 of the Finance Act 1988 was compatible with the requirements of the Constitution. First, the fact that the attachment was effected by the Revenue Commissioners and not by a court did not constitute a violation of Article 34 of the Constitution’s protection of the principle of the separation of powers. The judge held that the enforcement mechanism of attaching the debt was an administrative, rather than a judicial, function. Secondly, the attachment procedure contained sufficient safeguards so as not to constitute an attack on the constitutional property right to earn a livelihood. These took the form of providing notice to the tax defaulter and so providing him or her with the opportunity to enter negotiations and make representations in order to avoid the attachment procedure.322 The responsible conduct of the Revenue Commissioners in engaging in negotiations and attempting to come to a repayment agreement meant that on the facts the procedure in this case could not be regarded as unconstitutional. The judge did nonetheless hold that an attachment of a debt could in certain circumstances constitute an unconstitutional attack on the right to a livelihood, but unfortunately for present purposes did not suggest what such circumstances might involve.323

152. This case therefore illustrates that the property rights of debtors must be considered under the garnishee order procedure. Procedural safeguards must be in place so that recourse is only had to this procedure in appropriate cases, where it is necessary and proportionate.

(iii)The Right to Earn a Livelihood and Attachment of Earnings

153. The right to earn a livelihood has been recognised by the Irish courts as an unenumerated personal right protected by the Constitution under Article 40.3.1o, as well as possibly a property right under Article 40.3.2o.324 This right has also been recognised internationally by such provisions as Article 6 of the UN Covenant on Economic, Social and Cultural Rights 1966, which guarantees “the right of everyone to the opportunity to gain his living by work which he freely chooses or accepts”.325 If an attachment of earnings mechanism is introduced into Irish law as part of a reform of the debt enforcement process this right will have to be considered and given appropriate weight.

154. First, there is a risk that if the amount of a debtor’s earnings attached is too high, all incentives for that debtor to work will be removed and the debtor may be deprived of all of the advantages of gainful employment.326 Previous studies have argued that a large attachment of earnings order resulting in a low protected earnings rate can act as a major employment disincentive as the employee debtor is left with either a very small income or no income at all once a basic subsistence level is passed.327 The Irish Supreme Court has held that the Constitutional right to earn a livelihood includes associated rights such as the right to a pension, gratuity or other emolument, or the right to the advantages of a subsisting contract of employment, which are all property rights guaranteed by the Constitution.328 These rights must thus be given sufficient weight when balancing the relevant rights and interests at stake in assessing the merits of adopting an attachment of earnings system.

155. The second possible interference with a debtor’s right to earn a livelihood could arise from the possible detrimental impact caused to the employer/employee relationship by an attachment of earnings procedure.329 A concern has been raised that the making of an attachment of earnings order could sometimes lead to difficulties for an employee in achieving promotion or advancement at work. This concern is based on the risk that an employer may, either consciously or subconsciously, gain an unfavourable impression of the employee due to his or her knowledge of the employee’s debt difficulties.330 In the worst case scenario, there is even a risk that the employee may be dismissed from his or her employment entirely. While certain research has indicated that the risk of a detrimental impact on the employee/employer relationship may be sometimes exaggerated,331 the possibility of such a disadvantageous impact must be taken into account in formulating recommendations for reform in this area.

156. When discussing the impact of an attachment of earnings mechanism on the debtor’s constitutional right to earn a livelihood, it is useful to consider the discussion of this right in the context of the attachment of a debt in the judgment of Geoghegan J in Orange v Revenue Commissioners.332 The court’s findings in relation to the possible infringement of the right to a livelihood have been discussed above. Where the procedure leading to the making of an attachment of earnings order gives the debtor notice of the possibility of such an attachment, and allows the debtor to engage in negotiations and reach an agreement with creditors, no unjustifiable interference with the debtor’s rights occurs. The debtor enters such an agreement in the knowledge that should he or she default in the terms of the agreement an attachment order could result. Thus it appears that if the attachment of earnings procedure is used in a proportionate manner where alternative means of resolving the dispute are first attempted, then the constitutional guarantee of the debtor’s right to a livelihood will not be disproportionately affected.

157. The Commission provisionally recommends that the property rights of debtors, including the right to earn a livelihood, must be respected by the law on debt enforcement.

LInterests of Society

158. As well as balancing the competing rights of creditors and debtors, the law on debt disputes and the enforcement of judgments must also have regard to the important interests of society in this area of law. This section identifies certain public interests and aims which must be taken into account when considering the law in this area.

(1)The Rule of Law

159. The fundamental principle of the rule of law requires that legal rights must be vindicated and that the authority of the courts must be protected.

(a)Legal Rights must be Vindicated

Irish democracy is founded upon the principle of the rule of law. This principle can be given effect only if citizens possess the means to assert and vindicate their legal rights and challenge unlawful acts, so that the precepts of the law can be given real and genuine effect.333 As Jacob has noted,

“[c]ourt orders are the sharp edge of the rule of law: without them the doctrine loses meaning.”334

160. Therefore, if a court has pronounced on the legal rights of the parties to a dispute, the rule of law demands that this judgment must be effectively enforced so that those rights may be vindicated, and that real effect may be given to the law.

(b)Integrity of the Courts Requires Enforcement

161. It is essential to the protection of the constitutional role of the courts as administrators of justice under Article 34 that court orders are enforced. The legitimacy and integrity of the courts would be compromised if judgment debtors could evade court orders. For this reason, enforcement mechanisms must be effective and must not permit deliberately evasive debtors to frustrate court judgments.335 As Sir Jack Jacob has commented:336

“… the machinery of the enforcement of the judgments and orders of the court constitute the very foundation of the judicial process … Without the supportive enforcement machinery, the judgments and orders of the court would lose their force and effect and become transformed into mere pious resolutions; with an effective enforcement machinery, they should command unquestioning and unconditional compliance.” 337

162. In a similar manner, it is important that futile orders are not made by the courts. Thus, if a debtor is unable to pay the amount ordered, enforcement of a judgment will be impossible, and the integrity of the court may be compromised by the making of an order which will never be enforced.338 This point provides further support for the need to draw a distinction between those debtors who cannot pay and those who will not pay.

163. A related concern is the risk that if the law cannot provide an effective system of enforcement, other forms of “private justice” may develop and further compromise the authority of the legal system.339 If the judicial enforcement system is inefficient, due to high costs or long delays, creditors may resort to other means to collect debts. This would create a danger that dubious intimidating tactics could be employed by creditors or their agents in order to recover monies owed.340 Therefore the principle of the rule of law requires effective enforcement mechanisms so as to remove the need for creditors to have recourse to such practices. Furthermore, as long as private debt collection agencies continue to operate, efforts should be made to ensure that their practices are lawful and respect the rights of debtors.

(c)Moral Issues

164. Apart from legal arguments, there is also a strong moral interest that judgments be effectively enforced and debts repaid. It is a fundamental common value of our society that promises should be kept and that obligations freely undertaken should be honoured. To this extent, the legal enforcement of judgments aims to support and protect this precept.341 Our legal system would fail in its moral duty if it did not provide the means to give effect to this important value of our society.

(2)Efficiency of the Economy

165. Society also has an interest in providing efficient enforcement procedures due to the economic impact of such mechanisms. An effective enforcement system is a condition for a well-functioning credit market.342 The results of studies illustrating the impact of debt enforcement procedures on the availability and cost of credit are now presented.

(a)Availability of Credit

166. Law and finance theory has illustrated that there is a positive association between legal institutions and financial development and it is now generally accepted among commentators that legal institutions are important to financial markets.343 Various studies have illustrated the practical application of this theory, by showing how efficient and effective enforcement mechanisms increase lender confidence and so encourage them to provide credit more readily. On the contrary, banks will be reluctant to lend where they are unsure that their contractual rights will be effectively enforced. Poor legal enforcement mechanisms have been shown to reduce the ratio of credit to GDP and the volume of credit made available.344 This has the negative consequence of leaving many households credit-constrained and deprived of access to credit facilities.345 Also, studies show that when legal measures are introduced to provide increased protection of creditor rights with the aim of increasing lending levels, such reforms lead to dramatic increases in the availability of credit in legal systems which provide effective enforcement procedures.346 In contrast, such reforms are largely ineffectual in systems which do not provide effective mechanisms to enforce such creditor rights.347

167. It has thus been concluded from such research that the quality of enforcement procedures is linked to the provision of credit and the accompanying entrepreneurial investment and economic growth.348 For this reason, society has a strong interest in ensuring that legal enforcement mechanisms encourage the provision of credit.

(b)The Cost of Available Credit

168. Along with increasing the volume of credit made available by lenders, efficient enforcement mechanisms have also been shown to reduce the levels of interest charged by lenders.349 In fact, one study has shown that the efficiency of judicial enforcement is, along with the rate of inflation, the main factor influencing interest rate spreads.350 Thus inefficient enforcement mechanisms extract a significant proportion of money from economies, and thus it is likely that it would be beneficial to the economy in the long term to spend an equivalent amount of resources on reforming enforcement mechanisms. In this way, a greater protection of the legal rights of creditors can be seen to also produce benefits for borrowers, as they gain from the ability to access cheaper credit.

169. An example of this theory in operation can be observed in the introduction of Debt Recovery Tribunals in India in the 1990s to facilitate the efficient enforcement of loan contracts by lenders.351 Due to concerns over the inefficiency of civil proceedings in India, and in particular the long delays in the hearing of disputes and the execution of judgments, the Indian government introduced the Recovery of Debts due to Banks and Financial Institutions Act 1993. This Act aimed to expedite the recovery of debts by Indian banks and financial institutions through the establishment of quasi-judicial Debt Recovery Tribunals throughout the country.352 Research into the economic impact of this reform has produced significant results. First, loan default rates were reduced by between 3% and 11%.353 Secondly, interest rates fell considerably after the reform, with lenders charging interest rates 1.4% to 2% lower than those charged on loans before the introduction of the new adjudication and enforcement regime.354 Thus the introduction of more efficient mechanisms for the enforcement of loan contracts led to cheaper credit becoming available to Indian borrowers.

170. It can thus be seen that efficient enforcement mechanisms are necessary to promote the availability of credit at low interest rates. Since the well functioning credit markets are essential to the growth of an economy and are also beneficial to the well-being of the individual,355 society has a strong interest in ensuring that its legal enforcement system is sufficiently effective to serve the needs of the credit industry and to allow it to fulfil its important role in the economy.

(c)Limitations on the Link between Enforcement Procedures and Credit Supply

Despite these considerations, it must be noted that not all unpaid debt can be attributed to failings in legal enforcement mechanisms. When creditors lend they necessarily take a risk that the loan may be unpaid, and it is this which informs the interest rates they charge. To the extent that there will always be certain debtors who are simply unable to pay, the most efficient enforcement mechanisms can only go so far in facilitating the availability of credit at low interest rates.356 Thus there will always be a certain amount of unpaid debt in the economy as long as lenders extend credit where there is a risk as to the borrower’s ability to repay. This also has the consequence that while enforcement mechanisms should be efficient, they should not be used against over-indebted “can’t pay” individuals. For these reasons, creditors are now more open to the settling of debt issues outside the judicial system as they realise that many debts go unpaid due to financial difficulties of debtors rather than attempts of delinquent debtors to evade their obligations.

170. In addition, there are a range of non-legal incentives and sanctions which assure performance of obligations, such as reputation, the pressure of continuing relationships with lenders and the desire to be a “good citizen”.357 Thus, while enforcement mechanisms remain importantly linked to credit supply, it has been argued that the sharing of credit histories between creditors through credit reporting systems is more effective than the threat of effective legal enforcement in assuring repayment of debts and thus a steady credit supply.358 In this way debtor data sharing may be seen to reduce the need for legal enforcement while at the same time ensuring that supply lines of credit remain open.359

171. It may also be incorrect to see the role of judicial enforcement mechanisms as formulating micro-economic policy,360 and this Consultation Paper will for this reason seek to avoid engaging too deeply in the area of economic policy choices relating to credit markets.

172. Nonetheless, the importance of efficient enforcement mechanisms to the provision of credit must be emphasised. Thus while it is necessary to remain conscious of the need to protect individual debtors, regard must be had to the general interest in the free supply of credit. This is indicated by Article 45.2.iv of Constitution of Ireland, which provides that:

“[t]he State shall... direct its policy towards securing... that in what pertains to the control of credit the constant and predominant aim shall be the welfare of the people as a whole.”

(3)Fundamental Principles of Contract Law

174. It is in the common interest that fundamental principles of the law of contract are amply respected by debt enforcement procedures. Commerce is founded on such principles and it is these core rules which govern everyday commercial and consumer relations between members of society. Thus the protection of a fair and effective law of contract is a legitimate aim which may occasionally restrict or qualify the rights of members of society.

175. The importance of this principle and the extent to which it justifies restrictions on the rights of debtors was affirmed in the 2009 Irish High Court judgment of McCann v The Judge of Monaghan District Court and Others. Here Laffoy J noted that an effective statutory scheme for the enforcement of contractual obligations is “unquestionably a reasonable and legitimate objective in the interests of the common good in a democratic society.”361 This principle was recognised by the ECtHR in the case of James and Others v The United Kingdom.362 Here the Court held that an interference with the applicants’ property rights could be justified by the social aim of ensuring a fair system of contract law and property rights. The Court stated that the fairness of a system of law governing the contractual rights of private parties is a matter of public concern and a legitimate public interest for the purposes of the Convention.363

176. In particular, efficient and effective enforcement mechanisms are required in order to protect and vindicate the two fundamental principles of freedom of contract and the binding force of contract.364 The principle of freedom of contract was described by Lord Diplock when he stated that “A basic principle of the common law of contract... is that parties to a contract are free to determine for themselves what primary obligations they will accept.”365 Freedom of contract has also been described as a general principle of civil law by the European Court of Justice and is protected by Article 16 of the EU Charter of Fundamental Rights under the guarantee of the freedom to conduct business.366 An equally fundamental rule of contract law is the binding force of contracts or the “sanctity of contract”.367 The authors of Chitty on Contract point to the methods which the courts use to enforce contracts,368 the refusal of the courts to deny effect to contracts on general grounds of unfairness or inequality, and the development of the law of frustration369 as evidence of this principle.

177. While both of these principles have been qualified by jurisprudential and legislative developments in recent times, they remain part of the bedrock of contract law. They reflect the conception of contract as the free expression of the choices of the parties which will then be given effect by the law.370 They are illustrative of the connection between autonomy, freedom and the binding effect of parties’ bargaining choices.371

178. Thus it is clear that the fundamental concept that parties should honour the contractual commitments, according to the terms into which they have freely entered, must borne in mind when recommending reforms of the law of debt enforcement. This has the consequence that the vindication of these principles may at times require an element of coercion.372 It is however important that the law provides for the least coercive methods possible and that any interferences with the rights of debtors are proportionate to the need to vindicate the rights of creditors and protect society’s interest in the fairness of contractual relations. Also, while respecting the principles of contract law, it is necessary not to lose sight of the reality of the over-indebted consumer, and the law must recognise that these principles must be restricted in certain cases where the performance of a contract is impossible.

(4)Prevention and Alleviation of Over-Indebtedness

179. The serious negative consequences of over-indebtedness for debtors and their families as well as for society at large have been described above.373 It is in the common interest both that members of society do not personally suffer from the severe adverse effects of over-indebtedness and that society is not obliged to maintain debtors and their families when their over-indebtedness renders them unable to provide for themselves. Thus the prevention and alleviation of the problem of over-indebtedness is a legitimate aim in which society has a strong interest.

180. The legitimate social aim of addressing the problem of over-indebtedness has also recently been recognised at European level. Members of the Council of Europe have recently committed themselves to finding legal solutions to debt problems.374 The Committee of Ministers of the Council of Europe have acknowledged that the use of credit has become an essential part of the economies of Member States and stressed the responsibility of Member States for the consequences of their social and economic policies. Similarly, the European Commission has identified the problem of over-indebtedness and has sought to produce policy guidance on how Member States of the European Union could address this issue.375

181. It is thus clear that society has an interest in preventing and alleviating the problem of over-indebtedness amongst its members. The ECtHR has indicated that when dealing with social and welfare issues, Contracting States have a particularly wide margin of appreciation, and thus the pressing need to address over-indebtedness will permit proportionate interferences with the rights of creditors.376

MKey Principles for Reform

182. Drawing on the above analysis, the Commission concludes that the following key principles should inform the reform of the law of debt management and debt enforcement.

(1)A Balanced Approach to Debt Enforcement

183. A fundamental guiding principle in reforming the law must be the need to provide a balance between the rights of creditors and debtors and the interests of society. The above analysis has illustrated the competing rights of debtors and creditors which must be reconciled by the law in this area. As Capper notes:

“any reasonable enforcement system must maintain an even balance between protecting the rights of creditors by enforcing judgments that can be enforced and protecting debtors from possible oppression by identifying those situations where enforcement is impossible.”377

184. Undoubtedly a primary goal of the reform of the law of debt enforcement must be to provide effective and efficient methods for enforcing court judgments. In this light it should be recalled that the ECtHR held in Apostol v Georgia that Contracting States are under a “positive obligation to organise a system for enforcement of judgments that is effective both in law and in practice.”378

185. It is equally vital that the law on debt enforcement respects and protects the rights of debtors, especially defending the interests of those debtors who do not have the means to pay. Society’s interest in the alleviation of the social problem of over-indebtedness must also be considered, with the recognition that the law must provide solutions other than enforcement for over-indebted individuals.

186. This Consultation Paper therefore seeks to propose recommendations for a system of resolving debts disputes in a manner which achieves a balance between these competing rights and interests.

187. The Commission provisionally recommends that a guiding principle of the law on debt management and debt enforcement should be the need to reach a fair balance between the rights of creditors and debtors.

(2)A Proportionate Approach to Debt Enforcement

188. In seeking to achieve this balance, this Consultation Paper will aim to ensure that the law adopts a proportionate approach to debt enforcement. The principle of proportionality has long been applied both under Irish law379 and under the ECHR380 in adjudicating on the legality of interferences with fundamental rights. The principle was affirmed in the context of debt enforcement procedures in the 2009 Irish High Court case of McCann v The Judge of Monaghan District Court and Others.381 Here Laffoy J described that principle as requiring a measure which restricts rights to:382

be rationally connected to a legitimate and important object;

impair the right in question as little as possible; and

be such that its effect on this right is proportional to the legitimate objective sought to be achieved.

Each aspect of this principle can thus inform a proportionate approach to shaping the law on debt enforcement.

(a)Appropriate Enforcement: Enforcement Rationally Connected to a Legitimate and Important Object

189. First, the debt enforcement mechanisms applied in any given case must be necessary to achieve a legitimate goal and must be rationally connected to that goal. The interests which the law of debt enforcement seeks to achieve - which are outlined above – must be identified and the law must set out the most appropriate means of achieving these aims.383 Although the interests of society and the rights of creditors demand effective enforcement mechanisms, it is nonetheless arguable that the enforcement mechanisms applied in certain individual cases are not necessary or rationally connected to this aim. In McCann, Laffoy J applied this reasoning to the imprisonment of debtors and held that where the legitimate aim of an enforcement mechanism is to compel the discharge of a debt, a procedure which allowed the mechanism to be used against debtors who cannot pay could not be rationally connected to the objective and would so be disproportionate.384 Similarly, the issuing of a writ of fieri facias against a debtor who possesses no assets capable of seizure is not rationally connected to the objective of the effective enforcement of debts. Certain enforcement mechanisms are inappropriate in given cases and the law must provide that such mechanisms cannot then be used.385

190. In the same manner, if the debtor possesses certain assets or income which could be used to repay the debt owed, it is important the law provides appropriate means for these assets to be accessed for the purposes of enforcement.386

191. A fundamental consequence of the principle of appropriate and rational enforcement is that sufficient information concerning the financial circumstances of the debtor must be made available to the court and creditors so that accurate decisions can be made as to the most appropriate enforcement mechanism in a given case.

(b)Least Coercive Means Possible

192. The doctrine of proportionality requires that any measure which infringes rights must be the least restrictive method of achieving the legitimate aim in question. This principle requires that where a choice is available between different means of achieving the same end, the means which has the least restrictive effect on the rights of the individual must be chosen.387 While debt enforcement must by its nature involve a degree of coercion, the law must ensure that the methods employed are no more coercive than is necessary to achieve the objectives which enforcement serves in any given case.

193. This reasoning was applied by Laffoy J in the 2009 McCann decision. Here the judge stated that a statute which did not require all of a debtor’s assets to be attached before an order for imprisonment may be sought did not impair a debtor’s right to liberty as little as possible.388 Similarly, the procedure of execution against goods by the sheriff arguably involves a greater intrusion of a debtor’s rights than the instalment order procedure, and so the latter option must be chosen where possible. Of course, certain cases will require more coercive methods to deal with “won’t pay” debtors, as was illustrated in the case of K v Sweden, where the European Commission of Human Rights held that on the facts stringent enforcement means were justifiable when dealing with a deliberately evasive debtor.389

194. Sometimes a creditor will possess no more information about a debtor than his or her address, and in such a case the procedure of execution against goods may be the only available enforcement option. For this reason the importance of the availability of accurate information regarding a debtor’s circumstances is once again emphasised.

(c)Enforcement Means must be Proportionate to the Debt Owed.

195. The enforcement methods provided by the law must also be proportionate in the sense that there must not be a discrepancy between the impact of the enforcement procedure on the debtor and the extent to which the goal of effective enforcement is achieved. Therefore factors such as the severity of the consequences of enforcement on the debtor and the amount of the debt recovered under the enforcement procedure must be considered in ensuring proportionate enforcement.

196. The Commission provisionally recommends that the principle of proportionate enforcement should be a guiding principle of the law on debt enforcement.

(3)Legal Solutions to the Problem of Over-Indebtedness

197. This Consultation Paper takes the view that the law on the enforcement of judgment debts cannot be discussed in isolation from the problem of over-indebtedness in Irish society. As has been shown above, society has a strong legitimate interest in the aim of alleviating the problem of over-indebtedness. Members of the Council of Europe have recently committed themselves to finding legal solutions to debt problems.390 The Committee of Ministers acknowledged that the use of credit has become an essential part of the economies of Member States and stressed the responsibility of Member States for the consequences of their social and economic policies. Thus the Committee’s Recommendation stated that governments of Member States, when creating domestic legislation and procedures should aim to prevent and alleviate over-indebtedness among individuals and families through a variety of political, legal and practical measures. The Commission wishes to follow this Recommendation and proposes that the reform of the law on debt enforcement must seek to address the problem of over-indebtedness.

198. This Consultation Paper therefore takes a global approach in considering legal solutions to the problem of over-indebtedness, in the knowledge that all Member States of the Council of Europe have pledged their commitment to this objective.391 This Consultation Paper adopts the framework of policy solutions to over-indebtedness advocated by a 2008 report of the European Commission.392 This framework outlines six steps to be followed in finding policy solutions to over-indebtedness, which contain both preventative and remedial measures. These issues sometimes veer away from the law of debt enforcement, which remains the core concern of this Consultation Paper. Therefore the Commission makes no recommendations in relation to some of these issues, but rather identifies the current position and issues for consideration in relation to these areas.

(a)Preventative Measures

199. The first three policy steps identified in the European Commission report can be categorised as preventative measures, although they will necessarily involve some overlap with the second category of remedial measures described below. While the prevention of all causes of over-indebtedness is beyond the capabilities of law reform, the European Commission has identified three causes of over-indebtedness to which legal solutions may be found. These preventative steps involve the promotion by the law of responsible borrowing, responsible lending and responsible practices in arrears management and debt recovery. The Commission believes that the recommendations proposed by this Consultation Paper must seek to support such practices, and that the law should require responsible conduct from both debtors and creditors in these areas. Chapters 3 and 4 discuss the contents of these principles and the legal and political methods which may be used to achieve them.

(b)Remedial Measures

200. The remedial measures advocated by the European Commission are composed of three strands: debt counselling services, personal insolvency procedures and holistic debt enforcement proceedings.393

201. The Commission agrees that legal solutions to over-indebtedness should be informed by a need to provide widespread access for debtors to appropriately qualified money advisors. Money advisors must be given an important role to play in the debt dispute resolution process. Furthermore, the law should ensure that the money advice services offered to consumers are of a sufficient standard and that sound business practices are observed by those operating in this industry.

202. As regards the need for personal insolvency procedures and holistic debt enforcement procedures, it is to be noted that the situation of the over-indebted debtor poses a difficult problem for the law of debt enforcement. The law is based on the traditional model of a single debt between a creditor and a debtor, and thus many enforcement mechanisms are unsuited to the situation of a defendant who owes many debts to various different creditors. The traditional model was designed with the “won’t pay” debtor in mind, and its application to the over-indebted “can’t pay” defaulter frustrates the interests of all stakeholders.394 The Commission believes that the law on debt enforcement needs to be modified to provide solutions to the problem of the over-indebted “can’t pay” debtor. This will involve the introduction of new court procedures and the establishment of a debt settlement scheme. This scheme should operate as a non-judicial alternative and complement to a reform of bankruptcy law. Chapter 5 discusses the Commission’s provisional recommendations for the introduction of a debt settlement system into Irish law. In addition to this new system, enforcement procedures must be modified to facilitate improved access to information which allows the ability of a debtor to pay to be determined. Chapter 6 discusses how this may be achieved, and describes how the proposed debt settlement scheme and proposed enforcement system could interact to adopt a holistic approach to resolving debt disputes.

203. The Commission provisionally recommends that the recognition of the need to prevent and remedy personal over-indebtedness should form a guiding principle of the law on debt enforcement and debt management.

(4)Can’t Pay and Won’t Pay

204. The distinction between debtors who are unable to meet their obligations and those who refuse to do so has been described in detail above.395 The Commission believes that this distinction is important to informing any proposed reforms of the law on debt enforcement. The law should provide effective and efficient enforcement mechanisms to be used against debtors who refuse to pay, and should provide alternative solutions in the form of measures such as debt settlement schemes for those who cannot pay.

205. Distinguishing between these two categories of debtor is undoubtedly a difficult task, and it will be necessary to draft criteria which will be applied in determining whether legal enforcement or debt settlement is more appropriate in a given case. To enable authorities and creditors to take informed decisions as to the appropriate course of action in a given case, it is essential that access is made available to comprehensive and up-to-date information regarding a debtor’s ability to repay his or her debts.

206. The Commission provisionally recommends that the law on debt enforcement should distinguish between debtors who cannot pay and debtors who refuse to pay. This will involve an individualised approach to debt enforcement, requiring increased access to accurate information on the circumstances of each debtor.

(5)The Crucial Need for Greater Debtor Information

207. It has been repeatedly emphasised above that improved access to information relating to a debtor’s financial circumstances is essential to the reform of the debt enforcement system. This has also been recognised by the Council of Europe as a necessary requirement for effective and efficient enforcement procedures.396

208. Judicial proceedings against “can’t pay” debtors would not be brought nor heard if sufficient information was available to indicate that such proceedings would be futile. Furthermore, informed decisions as to the appropriate approach to enforcement cannot be made without knowledge of the debtor’s circumstances. For example, a lack of debtor participation in enforcement proceedings under the current system means that the court often cannot conduct an accurate examination of the debtor’s means and so cannot make appropriate enforcement decisions. This means that instalment orders can be made which are set at unrealistically high levels.397 Similarly, a lack of information of a debtor’s circumstances leads many creditors to use the procedure of execution against goods even where the debtor may have no assets suitable for seizure and sale.

209. Thus, the Commission is of the opinion that the increased availability of information relating to a debtor’s financial circumstances is of fundamental importance in both reforming the law on debt enforcement and in seeking to prevent the problem of over-indebtedness.

210. The Commission is conscious, however, of the competing need to protect the privacy rights of debtors. Thus a balance must be struck between the vindication of the rights of creditors and the interests of society and the protection of the rights of debtors. In adopting a balanced approach to this issue, the Commission will have regard to the Data Protection Act 1988, the Data Protection (Amendment) Act 2003 and the ongoing work of the Data Protection Review Group. Directive on Privacy and Electronic Communications398 Various methods have been proposed in other jurisdictions to allow better information about debtors to be obtained, and this Consultation Paper will discuss the various options for reform below.

211. The Commission provisionally recommends that the need to obtain accurate information relating to a debtor’s financial circumstances should be a guiding principle of the law on debt management and debt enforcement.

(6)The Non-Judicial Resolution of Debt Disputes

212. The Commission believes that debt repayment issues should be resolved without recourse to litigation where possible. The coercive force of legal enforcement mechanisms should be reserved for “won’t pay” debtors, in situations where all other attempts to reach a solution acceptable to both creditor and debtor have failed. Court procedures as they currently exist are an inappropriate mechanism to deal with “can’t pay” debtors, and the use of proceedings in such cases does not serve the interests of any of the parties concerned. Legal proceedings are expensive and time-consuming for creditors, who have a strong interest in the early resolution of debt cases. Honest but insolvent debtors also should not be dragged through traumatic legal proceedings, particularly as among this group are some vulnerable members of society. Furthermore, the efficiency and integrity of the courts should not be compromised through ultimately futile proceedings, and the courts should not be used by some creditors as a substitute for responsible arrears prevention and management practices.

213. Thus the Commission recommends that the law should achieve a solution whereby the legal debt enforcement system is used as a last resort. The law should require solutions to debt difficulties to be achieved outside the framework of the courts where possible. Debtors and creditors, with the assistance of the intervention of debt counselling services, should be encouraged or even obliged to negotiate repayment arrangements before litigation is commenced. The law should permit recourse to legal enforcement mechanisms only where attempts at reaching such arrangements have failed, or where a “won’t pay” debtor refuses to cooperate. The Commission is however aware of the rights of creditors to have access to a court to vindicate their legal rights, and the Commission has due regard to this right when proposing recommendations.

214. The principle of the promotion of the non-judicial resolution of debt disputes recurs throughout this Consultation Paper. Chapter 4 applies this principle in discussing the subject of responsible arrears management and debt counselling.399 Chapter 5 furthermore discusses the Commission’s provisional recommendations for the introduction of a non-judicial debt settlement scheme which would allow debt disputes to be resolved outside of the formal legal system.400 Chapter 6 discusses methods by which the participation of debtors at earlier stages of the debt collection and enforcement process can be encouraged, and how the early intervention of money advisors can assist in resolving disputes.401 Finally, Chapter 6 discusses the possible introduction of measures permitting the suspension of enforcement proceedings while attempts are made to resolve debt disputes through voluntary debt management arrangements or through the proposed statutory debt settlement scheme.402

215. The Commission provisionally recommends that the promotion of the non-judicial resolution of debt disputes should be a guiding principle of the law on debt management and debt enforcement.

(7)Streamlining of the Law on Debt Enforcement

216. In its Recommendation to Member States on Enforcement,403 the Committee of Ministers of the Council of Europe stated that enforcement should be defined and underpinned by a clear legal framework which sets out the powers, rights and responsibilities of interested parties and third parties. Similarly, legislation should be sufficiently detailed to provide legal certainty, transparency and predictability.

217. The Irish law on debt enforcement is derived from many different sources.404 The main legislative provisions operating in this area are the Enforcement of Court Orders Acts 1926-1940 as amended and the Judgment Mortgage (Ireland) Acts 1850-1858, with the Common Law Procedure (Ireland) Act 1853 also of relevance. Legal and equitable execution methods derived from case law are also available. Orders 42-49 of the Rules of the Superior Courts, Orders 35A-39 of the Rules of the Circuit Court and Orders 53-57 of the Rules of the District Courts further lay down the rules of procedure for the enforcement of judgments. Thus the law on debt enforcement is complex and many sources must be consulted in order to fully understand it.

218. Furthermore, the origins of much of this law are very old, and certain procedures exist more due to historical reasons than to their status as relevant and regularly used enforcement mechanisms. It must also be remembered that much of the law on enforcement was designed for an environment vastly different from today’s “credit society”. Thus the law in this area must be re-assessed in light of the changed prevailing attitudes to credit and debt which exist in today’s society.

219. The Commission therefore takes the view that a basic concern of the reform of the law on debt enforcement should be to clarify, streamline and update the law in this area. The Commission has previously acknowledged the attractiveness of the idea of updating the law on the enforcement of judgments so as to combine all the enforcement mechanisms into a single Act of the Oireachtas.405 The Commission now wishes to reaffirm this view.

220. The Commission provisionally recommends that the need to consolidate, clarify and simplify the law should be a guiding principle of the reform of debt management and debt enforcement law.

debt and over-indebtedness: the current law

221. The goal of this Chapter is to outline the current legal position in relation to personal debt and over-indebtedness in Ireland, in order to identify the areas which are appropriate for reform. The Commission seeks to recommend legal solutions to the problem of over-indebtedness as part of its primary aim of reforming the law on debt enforcement.406 As noted above, in this regard the Paper follows the framework for legal solutions to over-indebtedness proposed by the European Commission in its recent report. This framework is based on the twin goals of preventing the problem of over-indebtedness and alleviating the problem for those households who are already over-indebted.

222. In response to an analysis of the causes of over-indebtedness, the European Commission report has proposed that the law should focus on three main areas in seeking to prevent over-indebtedness.407 The law must thus ensure responsible practices in lending, borrowing and arrears management. This Chapter discusses the position of Irish law under each of these subject headings, and identifies areas of the current law which should be considered as part of a review of over-indebtedness law and policy. Chapter 4 discusses further these issues, examines comparative approaches to the problems identified in other countries, and makes suggestions as to how these issues could be addressed. Returning to the present chapter, Part A discusses the subject of responsible borrowing. It identifies two aspects to this subject: financial education and the provision of information to consumers under consumer credit law. Part A examines how financial education is currently being provided, and discusses how, through a variety of instruments, the law requires certain information to provided to consumers in relation to credit agreements. The limitations of the current Irish position in these two areas are then discussed. Part B discusses the subject of responsible lending. It first outlines the justification for the principle of responsible lending, and describes its importance in preventing over-indebtedness. The part proceeds to outline the current legal measures which seek to ensure that responsible lending standards are observed, before continuing to identify areas which could be considered in order to further advance the principle of responsible lending in Irish law. Part C discusses the principle of responsible arrears management, and describes how this principle is advanced through both legislation and codes of practice. The need for reflection as to how this principle can be further enshrined into law is then discussed.

223. It is widely recognised that in addition to legal measures which seek to prevent problems of over-indebtedness from arising, legal provisions are also needed to provide relief and rehabilitation for those individuals who have become over-indebted.408 It is unrealistic to think that preventive measures, no matter how successful, can be capable of eradicating over-indebtedness completely, especially when the need to protect the supply of credit is considered.409 In this light, the law must recognise that a consequence of a credit society is that certain individuals will become over-indebted, and thus a means of rehabilitating such debtors must exist. This chapter therefore also describes the position of Irish law in relation to debtor rehabilitation methods, beginning with a discussion of the subject of debt counselling in Part D. The current state of debt counselling in Ireland is outlined, and issues which should be addressed through law reforms are identified. Part E presents an outline of the law on personal insolvency. The Irish bankruptcy system is discussed and flaws in this system are highlighted. This part also discusses the various non-legal methods of remedying the difficulties of over-indebted individuals which are used in Ireland. Finally, Part F describes debt enforcement procedures under Irish law. This part provides a detailed account of the various methods of enforcing a judgment debt, and describes the procedural steps involved in each method. Several failings of the system of debt enforcement as a whole and of individual enforcement procedures are discussed. As has been noted elsewhere in this Consultation Paper, the primary focus of the Commission is on the areas of debt enforcement procedures and personal insolvency law, areas which the Commission identifies as most appropriate for examination by a law reform body. Therefore more attention is given to these two areas than the other elements of a holistic over-indebtedness policy, which the Commission believes raise issues of economic and social policy which may lie beyond the scope of this Paper.

NResponsible Borrowing

224. As noted above, irresponsible borrowing practices are a recognised cause of over-indebtedness. Over-spending, over-commitment and poor money management skills have been shown to contribute significantly to over-indebtedness, and also to inhibit debtors in emerging from debt difficulties.410

225. Both the European Commission411 and the Council of Europe412 have thus advocated measures which seek to achieve responsible borrowing practices among consumers. Two linked approaches are proposed, the first seeking to ensure financial literacy education is provided to consumers, and the second seeking to provide individual consumers with information relating to individual credit transactions. Recital 26 to the EC Consumer Credit Directive 2008413 reflects this approach by stating that Member States should “take appropriate measures to promote responsible practices during all phases of the credit relationship...” To achieve this aim, the recital states that these measures “may include, for instance, the provision of information to, and the education of, consumers, including warnings about the risks attaching to default on payment and to over-indebtedness.”

(1)The Current Position in Ireland

(a)Financial Education: Non-Legal Measures

226. It has been shown that poor money management skills are a cause of debt difficulties and that those consumers who budget and save are less likely to encounter such difficulties.414 As the European Commission’s Communication on Financial Education has stated, financial education allows individuals to improve their financial literacy skills and so develop an awareness of financial risks and opportunities which allows them to make informed choices in relation to financial services.415

227. Until recently, studies had indicated that no national policy response to the question of financial literacy has been produced in Ireland.416 This has changed in recent years however. One of the statutory functions of the Irish Financial Services Regulatory Authority (IFSRA) is to:

“[t]ake such action as it considers appropriate to increase awareness among members of the public of available financial services and the cost to consumers, risks and benefits associated with the provision of those services.”417

As part of this role, IFSRA published a consultation paper in 2004 entitled “Financial Planning Education for Consumers”, the purpose of which was to seek views from stakeholders on the development of an appropriate programme for financial education. Following the success of this document, a National Steering Group on Financial Education was convened by IFSRA in 2006, the members of which were drawn from stakeholder organisations working in the areas of personal finance and education.418

228. The National Steering Group on Financial Education published its report in 2009.419 The report outlined the current position of financial education in Ireland, and decided upon a series of commitments and recommendations for the development of a financial education programme in Ireland. While these recommendations and commitments are discussed further in Chapter 4 below,420 the following paragraphs describe the current position of financial education in Ireland.

229. Secondary school curricula currently provide a degree of financial education. In the Junior Certificate cycle, the Business Studies course contains a section entitled “The Business of Living” which provides education on budgeting, general consumer issues and financial services for consumers.421 Approximately 60% of Junior Certificate students take the Business Studies course. In the Leaving Certificate cycle, the Home Economics – Scientific and Social syllabus contains a section labelled “Resource Management and Consumer Studies” which seeks to provide students with information on money management at the level of the household and on consumer issues such as consumer protection, consumer responsibility and consumer choice. In the academic year 2008/2009 a financial education programme entitled “Get Smart with your Money”, a joint initiative of the Money Advice and Budgeting Services and the Irish Financial Services Regulatory Authority aimed at Transition Year students, was launched on a nationwide basis.422 This is a personal development programme which seeks to encourage students to explore their attitudes to money and to highlight the practices of budgeting, shopping around, financial planning and saving.423 This programme was initially provided in 65 schools by 120 teachers. The Irish Banking Federation also provides free education on finance to schools at both primary and secondary level.424

230. As regards adult financial education, the Financial Regulator operates a campaign entitled “It’s Your Money” which provides both information through its website (www.itsyourmoney.ie), leaflets and handbooks and a one-to-one guidance service.425 The scheme aims to provide clear, easy to understand resources to help Irish consumers make informed financial choices. It focuses primarily on enabling informed cost comparisons amongst consumers when selecting financial services. The scheme had 560,000 participants in 2007, and was awarded the award of “Best Financial Campaign” by the Health and Consumer Protection Directorate General of the European Commission in 2008.426

231. EBS Building Society and the National Adult Literacy Agency (NALA) have for several years operated a joint Financial Literacy Programme designed to tackle the problem of financial illiteracy as a barrier to understanding and accessing financial services.427 This programme includes the publication of a leaflet entitled “The A-to-Z Pocket Guide to Financial Terms”, which contains over 500 definitions of terms used in relation to financial products and services.

232. At a European level, the European Commission Directorate General for the Internal Market and Services has a dedicated policy on financial education.428 It was under this policy that the Communication on Financial Education discussed above was published, and this document has outlined basic principles for the provision of high-quality financial education schemes. An Expert Group on Financial Education was established under the policy,429 and a survey of financial literary schemes in the 27 Member States has also been conducted.430 The European Commission has also established a website, Dolceta,431 which offers consumer education to adults, including a module on financial services. This module includes information on such subjects as budgeting, consumer credit and home loans, payment methods and investments.

(b)Legal Measures – Consumer Protection Legislation

233. A second step in seeking to ensure responsible borrowing is to provide consumers entering credit agreements with all relevant information concerning the individual financial products or services which they are acquiring. This approach is a necessary complement to the need to ensure financial literacy among consumers, as the provision of information will only facilitate responsible borrowing practices if consumers are sufficiently skilled to use and understand this information.432 The rationale for legislative requirements on the provision of information to consumers is thus to produce a free and responsible model consumer, who uses the information provided to make rational and responsible borrowing choices.433 While the common law has always to a certain extent regulated consumer transactions by requiring sellers and lenders to disclose various types of information to consumers,434 recent statutory intervention has demonstrated an accelerated development of consumer protection in this regard.

(i)Consumer Credit Act 1995

234. The Consumer Credit Act 1995, implementing the first EU Directive on Consumer Credit,435 imposes various requirements on credit institutions when providing credit to consumers.436 Subject to exceptions, the Act applies to all credit agreements, hire-purchase agreements and consumer-hire agreements to which a consumer is a party.437 This includes agreements involving banks, building societies, moneylenders and certain other finance companies. Consumer credit agreements made by credit unions, pawnbrokers and utility service providers are not however within the scope of the Act.438 The Act and Directive seek to achieve responsible borrowing through the provision of information by the lender to the consumer439 in the marketing of credit, in the entering of a credit agreement, and throughout the duration of the agreement.

235. First, Part II of the 1995 Act imposes requirements on lenders to supply certain information when advertising and offering credit.440 A clear and prominent statement of the “annual percentage rate of charge, being the total cost of credit”441 must be included in the advertisement, with a representative example being provided if no other practical means of providing this information is available.442 If the credit promoted is subject to the payment of charges other than the principal sum borrowed and interest on that amount, those charges must be included in the advertisement.443

236. Part IX of the 1995 Act provides additional requirements which must be observed in advertising housing loans. Mortgage agents must ensure that any information document, application form or approval form for a housing loan must include a warning in the specified format cautioning that the borrower’s home is at risk if the borrower does not keep up payments.444 Similarly, where the housing loan includes an endowment mortgage, a warning must be included indicating that the proceeds of the relevant insurance policy may not be sufficient to repay the loan in full when repayment is due.445 Furthermore, the Financial Regulator may give a direction to any mortgage agent regarding the matter and form of any advertisement relating to a housing loan published or displayed by the agent.446 A recent direction issued required the inclusion of certain information in advertisements and information documents promoting “debt consolidation housing loans”.447 The information included warnings that debt consolidation housing loans may take longer to pay off than previous loans, resulting in the repayment of a larger sum by the borrower.

237. Any person who contravenes the above provisions by publishing an advertisement which does not comply with the above requirements will be guilty of a summary criminal offence,448 subject to certain defences for professional advertising publishers and lenders who did not consent to the publication.449

238. Part III of the Act lays down requirements as to the form and content of credit agreements,450 as well as the procedural steps to be followed in entering such agreements. Credit agreements must be in writing and must be signed by all the parties to the agreement. A copy of this agreement must be given to the consumer either on entering the contract or within 10 days of so doing.451 Information which must be provided in the agreement includes the amount of credit, its true costs and any penalties which may arise in the case of non-compliance with the terms, the number of instalments, date of expiry of the loan and the means of termination.452 Importantly under section 50 of the Act, consumers possess a right to a 10-day “cooling-off period” whereby a consumer may withdraw from a credit agreement within 10 days of receiving the written agreement or a copy of it. A consumer may waive his or her right to this cooling-off period, but to do so must sign a separate agreement which contains a prominently-positioned, specifically worded warning indicating that this right is being waived.453 It is understood that in practice quite often consumers agree to waive this right.

239. As regards the sanction imposed on lenders who fail to comply with the above provisions, the general rule is that the credit agreement will be unenforceable by the creditor.454 While this rule is absolute455 in respect of the requirements of section 30,456 the court possesses a discretionary power to enforce contracts where any of the other requirements of Part II have not been met but it would be just and reasonable to dispense with those requirements. Thus if a court is satisfied that a failure to comply with the requirements was not deliberate and has not prejudiced the consumer, the court may decide that the agreement should be enforced subject to any conditions that it sees fit to impose.

(ii)Consumer Protection Code

240. The Irish Financial Services Regulatory Authority Consumer Protection Code also seeks to ensure that consumers entering credit agreements are informed and so capable of making rational and responsible borrowing decisions. The Code thus lays down requirements as to both the content of the information which must be provided to consumers and the manner in which this information should be presented. Thus regulated entities457 must provide a consumer with information of any charges, including third party charges, which will be passed on to the consumer in advance of providing a service to the consumer.458 Prior to providing a personal (non-mortgage) loan, a regulated entity must explain to the consumer borrower the consequences of missing a repayment, and must highlight these consequences by including a warning taking a prescribed form in the relevant documentation.459 Where a regulated lender offers a mortgage to a consumer for the purpose of consolidating other loans, the lender must provide the consumer with a written comparison of the total cost of the consolidating mortgage being offered and the total cost of continuing to repay the various existing credit facilities.460 In addition, if payment protection insurance is offered as part of a loan offer, the initial repayment estimate provided to the consumer must exclude the cost of the insurance.461

241. The Code also contains certain provisions as to the form the information supplied to the consumer must take. All information provided to the consumer must be clear and comprehensible, and key items must be brought to the consumer’s attention.462 Information must be provided in a timely manner, giving the consumer sufficient time to absorb and react to it.463 Regulated entities must ensure that the terms and conditions relating to a product or service are provided to the consumer before the consumer enters an agreement or before the expiry of any relevant cooling-off period.464

242. The Consumer Protection Code is a statutory code, issued by IFSRA under powers conferred on it by various pieces of legislation.465 Thus regulated entities can face sanctions under Part IIIC of the Central Bank Act 1942466 if they are found to have contravened provisions of the Code. The sanctions which IFSRA can impose include issuing a regulated entity with a caution or reprimand, ordering the repayment of any money charged or paid for the provision of a financial service, disqualifying a person from being involved in the management of a financial service provider, or ordering a fine of up to €5 million to be paid by the offending institution.467