A new state insolvency service has been set up to try to broker deals between debtors and lenders.
That could force those in mortgage trouble to give up their cars, private health insurance and holidays and feed themselves on 8 euros (£6.80) a day.
The period of bankruptcy will also be reduced from at least 12 years to just three.
The measures are part of an overhaul of Ireland’s antiquated bankruptcy laws.
They are in response to a stalemate that has developed in Ireland between banks with rising mortgage debts and borrowers unable to meet their repayments, which the IMF says threatens Ireland’s prospect for economic recovery.
Only a handful of bankruptcies take place in Ireland each year with the measure seen as a last resort under which banks have little prospect of recouping their losses.
A 2011 court ruling in Dublin effectively made it impossible for banks to repossess family homes.
Although some people have cut informal deals with lenders, the scale of the problem has forced the government action to provide new means of transparent and consistent debt resolution.
The new Insolvency Service of Ireland will regulate “personal insolvency practitioners” – expected to be lawyers or financial services professionals – who will broker deals between banks and debtors whose finances will be run according to new guidelines.
Leaks of the draft guidelines sparked uproar in Ireland – with suggestions that some parents might be forced to quit work and look after their children instead of paying out childcare costs.
Irish Justice Minister Alan Shatter denied this at the launch.
“The guidelines on reasonable expenses provide an essential defensive shield to ensure that neither financial institutions nor other creditors attempt to deprive debtors of funds they truly need for reasonable household family expenditure, or indeed deprive debtors in employment from benefitting from continuing employment,” he said.
The arrangements are designed to last for up to seven years, during which debtors must comply with the guidelines’ spending limits.
These will mean serious financial and lifestyle restrictions, with an allowance for food limited to around eight euros a day in a country still one of the EU’s most expensive to live in, despite the economic crash.
Cars are only allowed when there’s no public transport alternative, while all socialising costs are limited to just under 29 euros a week and will not include items like cable television packages.
Those who don’t enter into agreements could risk having their home repossessed, with the government expected to pass new legislation to make this easier.
Ireland faces a mounting mortgage debt crisis after the collapse of the country’s economy in 2008.
A property crash following years of boom has left many with high mortgages in negative equity.
House and apartment values have fallen more than 50% nationally since 2007.
Unemployment of 14% and wage cuts in a weak economy have also hit those with mortgages hard.
Almost one in eight of the country’s private residential mortgages are in arrears – classed as 90 days or more behind with repayments – a figure which has been rising.
Statistics do not cover those who have negotiated reduced interest-only repayments with their banks to temporarily reduce their mortgage bills, meaning the underlying picture of those struggling with debt is worse.
The new insolvency regime has been driven by the troika – the European Commission, European Central Bank and the International Monetary Fund.
They have taken control of Ireland’s finances since the country entered a bailout programme in 2010 following the crash of its banking sector.
Read more about international debt collection laws.