Deal allows for write-offs and restructuring

Struggling borrowers will be able to avail of debt write-offs and restructure their loans under a deal agreed with the Central Bank, financial institutions, and credit card companies.

The latest initiative to solve the mounting crisis was announced on the same day the Central Bank revealed banks wrote down €400m of household loans over the final three months of 2012.

The purpose of the pilot scheme is to take the pressure off borrowers who owe money to multiple lenders — including banks, credit unions, and credit card companies. It is aimed at distressed borrowers who do not qualify for a personal insolvency arrangement.

Banks, credit unions, and credit card companies have been locked in heated negotiations over the past two months in an attempt to hammer out an agreement on how to treat secured and unsecured debt in the event of a restructuring.

However, it is hoped that under the new initiative, all those who are owed money will work together to find “sustainable and fair outcomes”.

The Central Bank proposes that 750 cases will be dealt with in a three-month period starting in June.

A number of details still have to be finalised but the initiative proposes that an independent third-party service provider would do a thorough background check on the financial health of the distressed borrower. All assets and liabilities must be disclosed. If any information is withheld, then that borrower is excluded from the scheme.

Depending on the borrower’s difficulties, potential treatments on offer include:

*An extension of the terms of unsecured debt;

*Reduction of interest rates and terms on secured and unsecured debt;

*In more extreme cases, mortgage restructuring right up to split mortgages and voluntary sale for loss.

In more extreme cases, borrowers would pay a set amount to their creditors on a proportionate basis for two years. If the borrower is still in difficulty after two years, unsecured loans would be written off.

The scheme will operate on a voluntary basis. For it to work, all 400 credit unions, credit card companies, and other unsecured lenders, as well as the mortgage providers, will have to sign up. If a borrower has one unsecured lender who has not signed up, then that borrower will not be able to avail of the service.

Michael Culloty of the Money Advice and Budgeting Service (Mabs) said: “There is a write-off in this pilot and that is to be welcomed. It is something that was missing from voluntary arrangements heretofore. We in Mabs would feel there is space for voluntary arrangements and that the insolvency process is a place of last resort for people who are chronically insolvent and have nowhere else to go.”

The banks wrote down €400m in household debt over the last three months of 2012, according to the Central Bank. It is the first time this figure has been included in the Central Bank’s quarterly accounts.

It is not known how much of this was mortgage debt or consumer loans. The €400m includes debt written down by all the main banks, credit unions, money lenders, and banks leaving the country including the Bank of Scotland.

Overall, the latest accounts show household debt fell 1.7% to €173.9bn at the end of December, which means that each household owes €37,928. Total debt as a percentage of disposable income — 201.6% — fell to its lowest level since the end of 2006. However, this figure is still very high by international standards.

Household net worth grew by €4.7bn over the final three months of last year to reach €461.6bn, or €100,674 per household.