What is the Personal Insolvency Bill?
The Bill introduces legal mechanisms through which borrowers can reach arrangements with their creditors on their debts which may involve writing off some of that debt. The scheme should be running by the end of the year.
What is the current situation?
At the moment, people who do not pay their debts are pursued through the courts by creditors who typically secure a judgment against them. Many people who cannot pay their debts are forced to declare bankruptcy, which up to now has lasted for 12 years.
Over the last few years Irish banks – at the behest of the Central Bank – have been reaching individual arrangements with customers in arrears. All banks have to comply with the Central Bank’s code of conduct on mortgage arrears, and try to engage with customers constructively.
Who can apply for these new debt resolution measures?
Three different schemes were announced yesterday, each one aimed at helping a different group of people. People will apply for the scheme which matches their circumstances.
What is the scheme for people owing less than €20,000?
The debt relief notice (DRN), which applies to unsecured debt of up to €20,000 including credit cards and mortgages, requires that applicants do not own a house, have total assets of less than €400 and have disposable income of no more than €60 a week. Applicants are permitted to own a car provided it is worth less than €1,200. Applicants must prove they are insolvent.
Will their debt be written off?
Yes – at the end of the three-year term that debt will be written off.
What is the scheme for people owing more than €20,000 in non-mortgage debt?
The debt settlement arrangement (DSA) allows consumers to settle non-mortgage debts within a five-year period. It is geared towards people who are unable to pay their unsecured debts, but have sufficient income to propose a reasonable level of repayment to creditors.
In some ways it is akin to an examinership process for companies whereby debtors and creditors come to an arrangement at a creditors’ meeting. At the end of the five-year period, after the debtor has followed the proposed scheme of arrangement, the remaining debt is written off.
What about mortgage debt?
The third process, personal insolvency arrangement (PIA), applies to secured debt (ie mortgages) as well as unsecured debt.
The legislation published yesterday does not include any detail as to what exact measures can be adopted by banks and their mortgage customers. Possible proposals are likely to include the following:
A split-mortgage
A distressed mortgage is split into an affordable mortgage and the balance, which is “warehoused”, although mortgage holders should note the bank can still charge interest on the warehoused segment.
Should a mortgage holder’s disposable income increase, an amount would transfer from the warehouse to the affordable mortgage. At the end of the term, the balance remaining in the warehoused loan must still be repaid.
This could be achieved by selling the property and using the proceeds to pay down the bank or trading down to a smaller property, while some people may be forced to use their pension lump sums.
A trade-down mortgageThis is where mortgage holders in negative equity trade down to a lower value house and carry the negative equity with them. Many banks may be in favour of this as it may move people off unprofitable tracker mortgages.
The advantage for the mortgage holder is that they would have a much lower monthly mortgage repayment, though the scale of the remaining mortgage relative to the value of the house would be bigger.
Mortgage to rent
Targeted at low-income families, this ensures the family remains in the home, paying rent. Ownership is transferred to an approved housing body. Unlike the previous two options, which allow people to retain ownership of their homes, the downside of the scheme is that homeowners no longer own their homes.
I am in negative equity. Can I apply for this scheme?
Not necessarily. The schemes are only targeted at people who genuinely cannot afford to pay their mortgages – not as a way of addressing negative equity.
If you can prove you are having difficulty servicing other debts – perhaps loans to a collapsed business to which you had given a personal guarantee – you may be eligible for the DSA or PIA, which may include the option of a trade-down mortgage which allows you to sell your house and bring the negative equity with you.
How do I apply for one of the three schemes?
Applicants for the DRN need to appoint an “approved intermediary” – most likely Mabs (Money Advice and Budgeting Service)
If you think you may be eligible for the DSA or PIA schemes you need to appoint a personal insolvency practitioner (PIP).
Details of who will be included on the register of PIPs will be outlined later in the year, but will most likely be members of the legal and accountancy profession.
The payment will be calculated on a fee-based system and is most likely to be covered by you and the financial institution. When a scheme of arrangement is being worked out, the scheme will also include details of proposed payments to the PIP.
Will the banks sign up to these deals?
All of these arrangements are voluntary, hence the banks can decide not to play ball. The incentive for banks is that they are guaranteed to get some of their money back. The alternative may be that the customer files for bankruptcy and is no longer liable for the debts, including mortgages, after three years.
Alternatively, if a bank repossesses a heavily indebted house, they are likely to face a situation where they cannot sell it at a sustainable level.
What are the advantages of declaring bankruptcy?
The reduction in the bankruptcy term from 12 years to three may incentivise some to file for bankruptcy. The new law permits people to shed their debts after three years, although you are likely to lose your home. It may be difficult to get a mortgage again.
Will the new laws apply retrospectively?
At the moment the Bill does not allow retrospective arrangements to be included, but the Department of Justice said yesterday people are not barred from proposing an agreement encompassing debts subject to a court judgment.
Thousands of people are being pursued by banks and other creditors through the courts. According to business information company visionnet.ie, almost 70,000 court judgments were awarded against debtors between 2008 and 2011. It is calling for the provisions of the Bill to be applied retrospectively where necessary.
How many people are likely to avail of these measures?
Minister for Finance Michael Noonan refused to proffer a figure but tens of thousands of people will be eligible. Latest figures from the Central Bank show just over 116,000 mortgages were in arrears of 90 days or more or had been restructured. That represents about 15 per cent of all mortgages.
Who is going to take a hit due to the measures?
The banks and credit card companies are going to be left most exposed if debts are written down. This has an implication for taxpayers, as the Government is now the main shareholder in the Irish banking system.
Michael Noonan said yesterday the banks have already been sufficiently recapitalised to take account of these measures and won’t need extra funds because of them.
Are there any costs to the State?
A new entity called the Insolvency Service of Ireland is to be set up to oversee the process. Personal insolvency practitioners will also liaise between debtors and creditors and will incur costs. Their costs will be paid by the debtors and creditors rather than the State.
