Debt deal may force sale of homes

Decisions on whether a family can afford to live in their current home or be forced to trade down will be the most controversial part of the personal insolvency legislation.

The process is likely to result in “lots of legal challenges”, according to the advocacy group, New Beginnings.

It could see some debtors opting for bankruptcy proceedings rather than surrender their homes because there is better protection, according to a legal expert.

The Insolvency Service of Ireland (ISI) will issue the first licences to personal insolvency practitioners (PIPs) in the next few days, and the courts will issue the first protective notice certificates to debtors from Aug 19 in the first steps towards solving the country’s massive debt problem.

The insolvency legislation is aimed primarily at dealing with the mortgage arrears crisis. The scale of the challenge is outlined in the latest Central Bank figures which show 95,554, or 12.3%, of all mortgages are in arrears of 90 days or more, with a total value of €18.1bn.

According to the ISI, the insolvency legislation will look to keep people in the family home through personal insolvency arrangements where possible.

“However, a PIP is to have regard to the costs likely to be incurred by the debtor by remaining in occupation of his or her principal private residence,” the ISI told the Irish Examiner.

“Where the PIP forms the opinion that the costs of continuing to reside in the debtor’s principal private residence are disproportionately large, he or she will not be required to formulate a proposal on the basis of the debtor continuing to occupy the property.”

Trophy homes that were acquired during the boom years and where the mortgage is now in arrears will be the obvious candidates for trade-downs.

Michael McAteer, a partner at the consultancy firm Grant Thornton and who has just been approved a PIP license, says that at the level below trophy houses, there will be a series of “tough judgement calls and hard conversations with some debtors” about whether staying in the family home is a realistic prospect.

Mr McAteer cites the example of a house in south Dublin that may have been worth €800,000 during the boom and has a €700,000 mortgage. It is now worth €500,000 and mortgage payments are in arrears.

The individual will have to accept a trade-down to a house with a value of about €400,000 in a similar location where there is not too much of a disruption to family life. The bank is going to have to provide 100% mortgage financing for a new home. “It is better to have a loan performing on a €400,000 mortgage than a non-performing loan on a €700,000 mortgage.”

Ross Maguire, a barrister with New Beginnings, believes many debtors will not accept trade-downs because there is more protection for the family home in bankruptcy proceedings than personal insolvency arrangements. “I think there are going to be a lot of legal challenges to this,” he said.

If a debtor rejects a proposal put together by a PIP and accepted by creditors, then that debtor loses court protection and faces the immediate prospect of bankruptcy.