The Personal Insolvency Bill will not lead to a large number of bankruptcies, according to international ratings agency Fitch.
Fitch has talked to Irish banks on the impact the legislation will have on their mortgage portfolios and the agency believes the insolvency bill will not be a short cut allowing people in negative equity and arrears to walk away from their debts.
“Personal insolvency arrangements would not be an appropriate solution until existing forbearance measures which banks currently employ are exhausted. For this reason and also due to the ability for banks to vote against proposed personal insolvency arrangements if they view them to be an inappropriate solution, Fitch does not expect a wide-scale take-up of personal insolvency arrangements for delinquent borrowers,” the rating agency said.
Fitch said the new legislation does not offer an easy way out for borrowers.
“A personal insolvency arrangement application is only open to distressed borrowers who can demonstrate that they are insolvent and that their position is unlikely to improve over the next five years.
“The personal insolvency arrangement will be monitored and borrowers must periodically provide updated financial statements and abide by the terms of the personal insolvency arrangements . If a borrower was to fail in their personal insolvency arrangement commitment, then the personal insolvency arrangement could be terminated, leaving the borrower liable for all debts covered under the arrangement,” said Fitch.
Despite the stringent nature of the Irish insolvency legislation, Fitch said there is always a danger some borrowers will attempt to withhold mortgage payments, in the hope of achieving partial debt forgiveness.
Fitch said that no matter how stringent the law, how it is applied by banks and insolvency practitioners will be key.
“Uncertainty remains on how personal insolvency practitioners and lenders would agree on the value of the property securing the mortgage debt and how mortgage affordability is assessed. The rigour of these assessments will be key to deterring moral hazard,” said Fitch.
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