The Minister for Finance in Ireland recently announced that the National Asset Management Agency (Nama) has written off some €1.5 billion (approximately $1.7 billion) of debts owed by 80 debtors. Nama is Ireland's so-called bad bank and was set up to acquire distressed loans from Irish banks during the financial crisis. It has been reported that this debt forgiveness amounts to approximately two per cent of all debt acquired by Nama.
The treatment of defaulting debtors across the entire economy is a difficult and complex issue. In Ireland, the approach, to date at least, appears to have been far from consistent. Inevitably, different institutions have taken different approaches.
Until recently, Ireland's bankruptcy legislation provided for an eight year rehabilitation period. On any analysis, this was unduly onerous. Furthermore, it is not as if this rehabilitation period was enshrined in legislation from the Victorian era. On the contrary, the eight year timeline was adopted in the update to the relevant legislation in 1988. The reduction to one year was only implemented in 2015. The onerous nature of bankruptcy processes in Ireland has caused a significant amount of so-called bankruptcy tourism, particularly to Ireland's nearest neighbour, the UK. This phenomenon was evidence of Ireland's failure to align its bankruptcy regime with modern realities.
Many of the issues with Ireland's debt forgiveness regime stem from the fact that it has not taken a structured approach to debt forgiveness unlike, for example, countries such as Iceland. In Iceland, small and medium enterprises (SMEs) are entitled to apply for debt relief on a case by case basis, household debt in excess of 110% of the security's fair value is written off and low income households receive a temporary government subsidy.
There is much to be said for a systematic approach to debt forgiveness. Anything which depends on the appetite of individual creditors will inevitably be inconsistent. Furthermore, it is perceived as unfair and accusations are inevitably made that large corporate debtors are treated more favourably than retail debtors. While the economy in Ireland is currently showing strong signs of growth, many commentators argue that Ireland would have rebounded more strongly and benefited more greatly had it adopted a more structured approach to debt forgiveness.
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