Prof. Jason J. Kilborn John Marshall Law School (Chicago) jkilborn@jmls

1. A comparative consumer insolvency perspective:Key lessons from 30 years of pitfalls and best practices Prof. Jason J. Kilborn John Marshall Law School (Chicago) jkilborn@jmls.edu

2. Introduction • Irish bill based all but exclusively on E&W model • Unique E&W model likely not best for Ireland • Other models in Europe (and US) enlightening

3. Comparative Sources • Expert Recommendations and the Evolution of European Best Practices for the Treatment of Overindebtedness, 1984-2010 (Deventer: Kluwer, 2011), ssrn.com/abstract=1663108 • World Bank, Insolvency and Creditor/Debtor Regimes Task Force, Report on the Treatment of the Insolvency of Natural Persons (forthcoming 2012)

4. Two Main Policy Areas • Consumer insolvency policy: What goals are we pursuing? • Lessons from empirical observation: (1) weaknesses of negotiated solutions (2) negotiating in shadow of key alternative

5. Insolvency Policy goals Why now? Why is IMF interested? How to evaluate proposed solutions

6. Why now? Why IMF interest? • Pandemic of crushing debt • Structural problem • Allowing this problem to persist unaddressed undermines national economic development, international competitiveness

7. How to evaluate solutions? • Tired slogans versus systemic goals • Bi-lateral versus multi-lateral, societal view • Broad benefits of safety release valve versus narrow (illusory) virtues of pacta sunt servanda

8. The FACT of debtors’ insolvency creates losses, “deprives creditors of their rights”—an insolvency system compels creditors to accept this truth and find a productive way forward . . . . . . for themselves and SOCIETY.

9. Identified societal benefits • Internalizing negative externalities of loose underwriting

10. Identified societal benefits • Internalizing negative externalities of loose underwriting • Facilitating proper account valuation

11. Identified societal benefits • Internalizing negative externalities of loose underwriting • Facilitating proper account valuation • Reducing waste in fruitless enforcement

12. Identified societal benefits • Internalizing negative externalities of loose underwriting • Facilitating proper account valuation • Reducing waste in fruitless enforcement • Reducing costs from illness, crime, welfare

13. Identified societal benefits • Internalizing negative externalities of loose underwriting • Facilitating proper account valuation • Reducing waste in fruitless enforcement • Reducing costs from illness, crime, welfare • Increasing production of taxable income

14. Identified societal benefits • Internalizing negative externalities of loose underwriting • Facilitating proper account valuation • Reducing waste in fruitless enforcement • Reducing costs from illness, crime, welfare • Increasing production of taxable income • Enhancing economic activity, entrepreneurialism

15. If healthy levels of activity and RISK are desired,the optimal rate of insolvency is not zero!

16. If healthy levels of activity and RISK are desired,the optimal rate of insolvency is not zero! Insolvency system functions as a backstop, safety net for inevitable casualties

17. Why, then, the obsession withmoral hazard?

18. Why, then, the obsession withmoral hazard? . . . still chasing chimeras . . .

19. Default seldom solely debtor’s “fault” • economic cycles—unemployment • currency swings—asset devaluation • globalization—exported banking risk (RMBS US → Europe) • health, divorce, childbirth . . . life is risky!

20. Insolvency relief ≈ Auto insurance Dividing the costs of expected tragedy Dispersing the burdens of expected tragedy

21. Moral hazard? Insolvency System • Unfair penalty on “responsible” debtors who would never default?

22. Moral hazard? Insolvency System • Unfair penalty on “responsible” debtors who would never default? Auto Insurance System • Unfair penalty on “safe” drivers?

23. Moral hazard? Insolvency System • Unfair penalty on “responsible” debtors who would never default? Auto Insurance System • Unfair penalty on “safe” drivers?. . . accidents happenwith and without driver fault . . .

24. Moral hazard? Insolvency System • Unfair penalty on “responsible” debtors who would never default?. . . and default occurswith and without debtor fault . . . Auto Insurance System • Unfair penalty on “safe” drivers?. . . accidents happenwith and without driver fault . . .

25. Cure for moral hazard:Proper administration • Keep egregious credit abusers out of system • Keep egregiously bad drivers off the road

26. Cure for moral hazard:Proper administration • Keep egregious credit abusers out of system • Keep egregiously bad drivers off the road Over-reaction & over-deterrenceare undesirable in both cases

27. Insolvency relief is a trade-offfor deregulation of consumer lending Insurance for restoring equilibriumin “open credit society” Moral hazard = inevitable slippage Don’t sacrifice the many good benefitsfor want of unattainable perfection!

28. Empirical observation on negotiated solutions The long, frustrating quest for alternatives to bankruptcy

29. Leaving solutions in creditors’ hands? • Business is business vs. moralistic judgment • What’s the alternative?

30. There be dragons! The tri-partite Irish approach in light of comparative experience PIA DSA Bankruptcy

31. Personal Insolvency Arrangement:Status Quo Masquerading as Solution • One creditor easily has > 50% secured debt • That creditor thus has absolute veto, with no review for “reasonableness” or “good faith” • No change from status quo: banks CAN agree to voluntary modifications NOW—do they? • US experience reveals inevitable failure

32. A similar fate for DSA . . . • 20 years of wrangling with unsecured creditors • E&W, Sweden, France, Germany, Netherlands

33. A similar fate for DSA . . . • 20 years of wrangling with unsecured creditors • E&W, Sweden, France, Germany, Netherlands • Few assets, limited income, large debts, and moralistic creditor judgments = negotiation proved “pure formality” in all but a few cases • Distracts counseling resources/attention from truly negotiable cases! • Sweden first to scrap mandatory stage in 2007

34. Recipes for success? Trusted intermediaries

35. Recipes for success? France • More than 50% “success,” but trending down • Not just for “insolvent” debtors► more and more “insolvent” Ds = immediate discharge! • KEY: Banque de France pressure on creditors► rise in plan acceptance from 40% → 65%+

36. Recipes for success? Netherlands • NVVK long history of plan negotiation • Sharp downward trend to 9% after new Wsnp • Reversal, back to ≈ 30%, on 2 NVVK fronts:

37. Recipes for success? Netherlands • NVVK long history of plan negotiation • Sharp downward trend to 9% after new Wsnp • Reversal, back to ≈ 30%, on 2 NVVK fronts:(1) hopeless cases routed immediately to Wsnp-concentrating resources on good candidates(2) structural negotiation with key creditors - (CJIB—fines and penalties bureau)

38. Plan broker for Ireland? • MABS as trusted intermediary? • No compulsion for creditors The alternative is no “stick behind the door”…

39. Cure worse than the disease? Debtors will agree to unworkable plansthat will eventually fail

40. Key = alternative: Bankruptcy • Overwhelming majority of Ds will have no realistic option other than bankruptcy► expect cries of debtor “moral hazard” when creditors reject reasonable proposed plans . . . • KEY: reasonable, consistent, uniform application of “income payment orders”► bill’s guidelines seem sensitive, but† 5 years following 3-year “recovery” is too long† “reasonable needs” per court discretion = disaster

41. Conclusion • Half-measures ignore societal goals of insolvency • Why parrot unique E&W system? • Why leave public policy to banks— look where that has gotten us. • One portal; one solution, but . . . . . . fool’s errand to expect substantial returns to creditors—pounds of expense for pennies of gain