The new Personal Insolvency Bill offers mortgage holders and others struggling with debt recourse to remedies to manage those loans in a more humane and sustainable way, writes, Frank Conway
IT was the middle of Dec 2010 when the Law Reform Commission presented its recommendations for reform of the legal system in relation to how our society manages and deals with the problem of indebtedness.
The LRC had long advocated for the reform. Yesterday, the Government finally presented the Personal Insolvency Bill 2012. It is a welcome break from the past. It provides for a range of options that will become available to citizens when the bill finally becomes law.
Its main purpose is to provide for a much more humane way of dealing with the problem of indebtedness in Irish society. It follows similar moves taken in other countries for decades.
The detail in the bill is extensive. From a layman’s perspective it can be summarised as follows: The bill will permit those who no longer service their debt to seek a remedy through two primary routes: (1) They can do so outside of the courts, this is called the non-judicial option and it has three main components, all of which are listed below; (2) They can go through the courts.
THE NON-JUDICIAL OPTIONS
1. One-year debt relief notice
This allows for the write-off of unsecured debt up to €20,000, subject to a three-year supervision period. It would cover unsecured loans such as credit card debt and personal loans but not mortgage debt.
2. A debt settlement arrangement
This covers unsecured debts over €20,000, lasts for five years and can only come into force with the agreement of creditors.
3. A personal insolvency agreement: This covers secured debts such as mortgages as well as unsecured debts. It lasts for six years (but could be extended to seven).
The Personal Insolvency Agreement will be available for the agreed settlement of secured debt (mortgages) and unsecured debt. The upper limit is €3m. ! The big sticking point likely to surface is the agreement of the creditors. For example, in the third option, banks could refuse a customer’s proposal if a particular bank or number of banks feel that customer has not made every possible effort to rein in spending. It could be easy to get carried away with what may or may not happen under the new law, but the non-judicial option will be a financial battleground.
Also, contained throughout the bill are numerous provisions designed to ensure citizens seeking to avail of the various options are honest and complete when disclosing their personal financial affairs?
There are also residency requirements (one year) for those that wish to apply for the various options.
Also, the new bill provides for the establishment of the Personal Insolvency Service as well as personal insolvency trustees, so this is a new industry with lots of players. The position of the trustees will play a central role and go-between for the citizens who apply for one of the non-judicial debt options and the various creditors. It will require time to see how they balance the financial tightrope.
THE JUDICIAL OPTION
The judicial option is far more serious as it is processed through a court of law in a very public manner. Ultimately, this is the process where one petitions the court to be declared bankrupt, where the consumer’s case (all of their current financial details) is presented and analysed and where a judge decides to declare the petitioner bankrupt or not. As with any court of law, full and complete financial declaration is a must and enforced by statute.
Bankruptcy means a financial no-man’s-land for three years instead of the 12 presently.
A new mortgage arrears support unit will be established later this summer. It will be managed under the Department of Social Protection. Its purpose will be to provide information to those facing mortgage difficulty. It will be independent of the banks and the Money Advice and Budgeting Service (Mabs). At this point, there appears to be a lot of emphasis on the provision of information electronically, although there will also be staff available to meet with mortgage holders.
A mortgage-to-rent scheme is due to be made available under the housing and planning portfolio of Housing Minister Jan O’Sullivan. This option is likely to be offered to the more extreme cases.
Additional mortgage options (from banks)
NEGATIVE EQUITY MORTGAGES
Several banks have been piloting so-called negative equity mortgages. These are relatively simple. If a mortgage holder wishes to sell their home for, say €150,000, and still owes €250,000 on the property, their negative equity is €100,000. Now, if they can afford the €250,000 loan, then banks agree to allow those mortgage holders to carry the loan over to a new property. And, because property prices have fallen by more than 50% since their peak, banks have been allowing some mortgage holders to carry their total debt, even if is higher than the value of the property they are buying. There are no hard and fast rules and banks have been agreeing these loans on a case-by- case basis. Also, as a rule of thumb, negative equity mortgages are generally designed to allow those who can easily afford their current debt levels to move property.
Split mortgages are mortgages where part of the mortgage is parked for a specific period of time and the mortgage holder pays on the remaining amount of the mortgage that they can afford at the time they agreed to ‘split’ the loan. These loans have been proposed by many of the main mortgage lenders and have been designed to provide financial breathing space to mortgage holders in financial difficulty. However, mortgage holders are likely to face incurring interest charges on the amount of the mortgage that is set aside.
Reduced interest rates for those unable to meet monthly payments
It has been reported that few banks are considering this option and they are unlikely to be made available to mortgage holders that carry tracker mortgage deals.
LONG-TERM INTEREST-ONLY DEALS
These deals will result in much lower monthly repayments but no reduction in the capital reduction, which will need to be repaid.
Deferred-interest loans were originally proposed by the government-appointed group to consider remedies for the growing problem of mortgage arrears. Under the deferred interest option, mortgage holders would have interest payments deferred if they were to pay at least 66% of the interest on their loan. This would give distressed borrowers five years to get back on their feet. When the accumulated amount in the deferred interest account is equal to a total of 18 months interest, or when the borrowers have been in the deferred interest scheme for five years, the mortgage will be categorised as unsustainable.
Assisted property sales are where a bank assists the property owner to sell their property in the open market and outside of the foreclosure process, which can have a negative impact on the perceived value of the property. This is a relatively common option is some other countries. It provides for an opportunity to achieve the best price for the property and protect the privacy of the property owner.
nFrank Conway is founder of the Irish Financial Review (www.irishfinancialreview.com),an independent financial website that provides financial reviews and commentary
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