Qualifying for Personal Insolvency

In the coming months the process of authorising Personal Insolvency Practitioners (PIP’s) will have commenced. This much anticipated scheme will no doubt be investigated by a number of individuals looking to identify the requirements of the process and how arrangements can be put in place. One of the obstacles which an individual will be required to meet is the reasonable standard of living test.  

The Insolvency Service of Ireland (ISI) has published its guidelines as to what constitutes a reasonable standard of living and these are intended to give direction to Approved Intermediaries (AI’s) and PIP’s on the level of net income required to be earned by an individual before they can proceed with personally insolvency.  

Calculation of Reasonable Standard of Living

The guidelines issued by ISI set a base level for a reasonable standard of living. It is intended that such a base level of expenses will facilitate the sustainability of repayments on any agreements reached.  The reasonableness of living expenses will be determined by creditors on a case by case basis and will assist in ensuring that debtors can meet the agreed repayments, while still retaining a sufficient income to maintain a reasonable standard of living. The ISI guidelines incorporate eight tables for a variety of possible household scenarios such as, the number of adults, the number of children and whether or not the household requires a vehicle.  The guidelines have determined that a household will not normally need a vehicle where the individual lives in an urban area, with adequate public transport links. There are 15 main categories which are considered when calculating the set costs for reasonable living expenses which are as follows:

1. Food
2. Clothing
3. Personal Care
4. Health
5. Household Goods
6. Household Services
7. Communications
8. Education
9. Transport
10. Household Energy
11. Insurance
12. Savings and Contingencies
13. Social Inclusion and participation
14. Household
15. Childcare

In addition to the above set costs, a PIP or AI will also take into consideration reasonable costs of housing (rent/mortgage), childcare and special circumstances (age, health, physical or sensory mental health or an intellectual disability). If an individual does not earn the minimum standard of living, as determined by the ISI’s guidelines, they may ultimately be precluded from involvement in the insolvency scheme.  

Example

To understand how the reasonable standard of living is calculated let’s take the following example: 

Two adult household with one primary and one secondary school child and one private car, along with a mortgage of €1,000 per month and childcare costs of €400 per month. 

Under the above scenario the set living expenses will amount to €1,891.70, which is calculated as follows using the ISI’s guidelines:

When making their decisions the PIP will also assess whether or not the costs of the mortgage and childcare are reasonable, along with any other special circumstances that may exist. Again taking the above example, if the mortgage and childcare costs are deemed to be reasonable, the couple would require a net income of €3,291.70 (€1,891.70 + €1,400) to maintain a reasonable standard of living before making a contribution to the unsecured creditors.  

Qualifying for Personal Insolvency?

The guidelines set out by the ISI are put in place to safeguard a minimum standard of living so as to protect debtors, while at the same time enabling creditors to recover all or part of the debts due to them. As can be seen from the above example some individuals who wish to enter into personally insolvency may not be able to do so as their net income simply does not meet the requirements of the reasonable standard of living test.