Mortgage debt forgiveness will have to be a central plank of the banks' approach to dealing with borrowers with unsustainable levels of debt, Minister for Justice Alan Shatter said yesterday.
The Minster was speaking at the launch of the Insolvency Service of Ireland, at which details of the new system were released, including the income distressed borrowers who enter into an insolvency arrangement will be allowed to live on.
Distressed borrowers
Mr Shatter said that while banks could not be compelled to act in a certain way when dealing with genuinely distressed borrowers, he said that he fully expected them to use various models of debt forgiveness rather than take on the costs and difficulties of repossessing homes. He said in some cases "you can only bring about a sustainable solution if a portion of the debt is written off" and he warned the banks the Government would be "keeping a watching brief on the approach" they took to make sure they "fully engage with borrowers".
The new insolvency service outlined how it envisaged debt forgiveness for homeowners would operate in a series of case studies it published to highlight how the arrangements would operate in practice. In one example, a debtor has a mortgage of €120,000 on a property which is now worth €60,000. They also owe a credit union €18,000 and while they have net monthly income of €2,000, they can’t meet all repayments.
The insolvency service says that if half that mortgage is converted to unsecured debt, the secured debt falls to €60,000, which means the borrower can afford to meet their repayments.
Once all their living expenses are covered, they are left with €90 a month, which goes towards these unsecured debts, and after six years with just 2 per cent of the unsecured debt having been paid off, the remainder gets written off.
A debtor who finds themselves in circumstances such as this will, however, have had to pay a heavy price. Under the minimum income guidelines which were published yesterday after weeks of leaks, a single adult with no car will be permitted expenditure of €898.96 in set cost over and above any mortgage or rent payments each month. This rises to €1,030 if that adult has a car.
This Insolvency Service says that €247.04 can be spent on food, €35.73 on clothes while another €33.40 will be allowed for personal care, €31.09 can go on health costs while €48.87 is allowed for electricity, and a further €57.31. It has allowed €125.97 for social inclusion, €43.45 for communications, €24.50 for education and €136.29 for public transport or €240.13 if a person has a car.
Rent excluded
The new service has taken the decision to exclude rent or mortgage payments and childcare costs from its list of set costs as these can vary depending on circumstances. It said personal insolvency practitioners would look at such costs on a case-by-case basis.
While the figures outlined in the guide are very exact, the insolvency body stressed that they were guideline figures only. The service said once people in an insolvency arrangement did not spend more than the monthly allocation, they could use whatever income remained as they wished.
