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Lessons Not Learned in Designing a Consumer Insolvency Regime

posted by Jason Kilborn

PennilessJudging by an Irish Times report today, the designers of the new Irish consumer insolvency system seem to be falling into two old familiar traps.

First, the focus of the story is on rumors that the proposed income guidelines for the new regime will make payment plans too parsimonious. Pressing debtors too hard in the name of "responsibility" is a recipe for disaster, as administrators of the French system learned decades ago. A discharge is a nice incentive to get debtors to really exert themselves for the benefit of creditors, but five or six years on an overly repressive budget will produce plan failure, all but guaranteed. Paul Joyce, Senior Policy Researcher at the Irish Free Legal Advice Centres (and an absolute prince of a guy) pointed out this danger in his fine policy analysis of the new regime. It will be a shame if the soon-to-be-released guidelines fail to heed Paul's and others' warnings.

Second, the government's response to these concerns is ominous: "The guidelines are indicative in nature only and are not binding." This is a time-honored capitulation by regulators who can't be bothered to make hard policy choices, and it has backfired time and again in Europe. The rather clear lesson from longstanding systems like those in France, the Netherlands, and Sweden is that consumer insolvency administrators either need or at least want reasonable rules, not vague guidelines. Customization is too expensive, especially given the limited resources available in these cases. Left with only general guidance, administrators will either undermine the entire regime by leaving debtors with blatantly insufficient resources, or they will gravitate toward some solid norm, most likely by applying "guidelines" as hard-and-fast rules. Some flexibility is necessary, but it is not realistic to expect administrators to expend significant time and resources establishing perfectly custom-crafted budgets in these sorts of cases.

These countries are separated by only a few hundred miles, yet regulators continue to ignore valuable, hard-won lessons from similarly situated neighbors. Lighthouse no good, indeed.

Penniless debtor image courtesy of Shutterstock.

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