Borrowers urged to avoid ‘strategic default’

Borrowers are being urged against deliberate non-mortgage repayment — in a hope of attracting debt forgiveness — ahead of new legislation being passed.

The Association of Chartered Certified Accountants (ACCA Ireland) said, yesterday, that to view the pending personal insolvency legislation as some kind of magic wand could be a grave mistake by consumers.

ACCA said it fully understands that many borrowers are unable to meet their mortgage repayments, but warned against borrowers opting for a so-called “lifestyle strategic default” option, whereby they use their mortgage payments for lifestyle spending choices instead — all in the hope that the new legislation could usher in debt forgiveness alternatives.

The organisation said that the personal insolvency legislation will at best reduce the mortgage repayment burden, for consumers, from “completely unaffordable” to “barely manageable”.

“A borrower is better off doing a budget, determining how much they can afford to pay on their mortgage and paying that amount. Simply stopping payment in the hope that this will force the bank to forgive the debt is likely to backfire badly,” said Tom Murray, president of ACCA Ireland.

“The personal insolvency legislation is not yet finalised, so a borrower doesn’t know what they will face yet — the final draft may be far more burdensome for lifestyle strategic defaults rather than the genuine, unable to pay, defaulters,” he added.

“The current draft legislation gives the banks the upper hand, with the option for the banks of forced personal bankruptcy on borrowers who are able, but unwilling, to pay their debts. Personal bankruptcy may be shortened in the legislation from 12 to three years, but it’s still a tough process and may involve matters such as surrendering your passport, the likely sale of the family home and a ban on obtaining certain employments as well as being unable to borrow,” Mr Murray went on to say.