New scheme could allow borrowers to write off debt

The Central Bank has announced a new scheme that aims to relieve pressure on borrowers who are in "significant financial difficulty".

The scheme will follow the same process of insolvency and could allow some borrowers to completely write off debt they owe to unsecured lenders like credit card companies and even credit unions.

The pilot scheme will begin in June and will run for three months.

It will conclude "with a thorough review of all results to evaluate the effectiveness of the framework in dealing with such cases and to determine next steps", the Central Bank stated.

Central Bank director of credit institutions and insurance supervision, Fiona Muldoon, said: "The decision to enter into this pilot is a constructive step by the lenders involved to help their own customers.

"The aim of the scheme is to test the viability of the proposed negotiated approach and to determine its effectiveness in achieving workable sustainable outcomes for borrowers and lenders.

"Participation in the pilot scheme is open to secured and unsecured lenders. We actively encourage the involvement of all lenders to ensure maximum effectiveness of this learning and information gathering pilot stage.

"I expect that the lenders participating in the pilot scheme will include all the main retail banks and many credit unions as well as other unsecured lenders."

Fran D'Alton, financial coach and author of 'Making a Deal with your Bank', said that under insolvency, unsecured creditors get burned.

He said that this scheme aims to try and combat that by restructuring borrowers mortgages and making unsecured debt more serviceable.

"They'll to ... extend the mortgage for a longer period, to allow a situation whereby unsecured creditors may recover more of their debt in the short term," he said.

"There's a model there called 'the restructuring waterfall', that the banks will work on.

"What will happen is they'll reduce the interest on, say, the unsecured debt, to make it more servicable in the shorter term.

"But whether they'll get write off of debt, that really has to be negociated."