Personal insolvency - Serious implications to new rules

A provision of the new personal insolvency arrangements, due to come into effect at the beginning of next week, will effectively allow banks 20 years to claw back mortgage debts written off under certain circumstances.

Initially it was suggested that borrowers availing of the arrangements would emerge with a clean sheet after three years, but this was then extended to six years. Now we learn that it is effectively extended to 20 years. This should really not have been a surprise to anyone because, although it was buried deep in the somewhat convoluted wording of the legislation, it was part of the bill since first drafted.

Under Section 103 of the arrangements, the debtor could be required to repay the written-off debt at any time up to 20 years, if the property was sold for more than the price paid under the personal insolvency arrangements. The legislation — drawn up in consultation with representatives from different interest groups, including the troika, Free Legal Advice Centres, the Money Advice and Budgeting Service, and the banks — has been described as a compromise between the various interests, with give and take on all sides.

More than 70% of the electorate is already opposed to the banks taking tough measures against distressed mortgage-holders. There were serious clashes over the weekend between protesters and security guards in Brannockstown, Co Kildare, outside a stud farm at the centre of a bank repossession controversy. The potential for serious unrest should not be underestimated.

Helping people in mortgage distress is very much in the public interest, but this should not become a licence to allow unscrupulous individuals to rip off the system. The clawback provision was considered a concession to the banks and the other lending institutions.

The provision essentially means the debt write-off does not become unconditional after six years. Instead there will be another 14 years in which the lending institutions can reclaim the money written off, if the borrower sells the property for a profit. This has been depicted as a kind of insurance policy for the banks, but some practitioners approved by the Insolvency Service of Ireland have denounced the provision as a distinct disadvantage to borrowers thinking of availing of the highly publicised distress relief measures.

It may have been an emotional exaggeration to describe the clawback provision as a confidence trick, but those providing advice have an obligation to ensure they are providing the best advice. As the write-off will essentially be conditional for up to 20 years, there are undoubtedly grounds for suggesting that some people would be better off going into bankruptcy.

If people extend their homes or make costly improvements, surely this should be factored into the subsequent sale of the property? The Government and the banks need to clarify such matters or bankruptcy could become the preferred option.

This would have very serious implications for all.