Removing the millstone from debtors’ necks will benefit all

“DEBT forgiveness” is an undefined expression, we have no commonly-held interpretation of what it is.

For that reason the debate rages as to whether it can occur or not; but without definition the argument cannot advance.

On one side you have household-name economists and on another you have Fine Gael’s Brian Hayes (Minister of State at the Department of Finance) saying it is an impossibility, along with most of the banks.

Perhaps the best contribution to the debate is to provide some clarification on what “debt forgiveness” is, or more importantly what “it isn’t”. And what it “isn’t” is “free money”.

In simple terms, “debt forgiveness” should be a function of law meeting finance in a pragmatic sense.

As it stands, the Government are trying to make this happen, bankruptcy discharge times have moved from 12 years to five years under the Miscellaneous Provisions 2011 bill.

But personal insolvency has not been addressed — this is currently under way in a new IMF-led bill that the Department of Justice will bring out in March of 2012 which, with any luck, will be based upon the Law Reform Commission report on debt management and enforcement, but until then we have no answers for the individual.

This is a mistake. When a company is incorporated, it effectively becomes like a person, it is an “entity” in the eyes of the law and courts and it has mechanisms in place when solvency problems arise (examinership, receivership etc), but individual people have no formal protocol.

So instead we must temporarily opt to place forgiveness in the void left by the legal and financial system.

If a person is out of work, loses their home and is left with a deficiency judgment, they are liable for the shortfall. This judgment is effectively a claim on any future earnings in order to repay the legacy debt, a veritable “millstone” around one’s neck.

The affected person now lacks reason to return to work because the bank can then stake claim to their earnings if they do, and they thus they enter a classic poverty trap, or at least a “non-participation in a return-to-work” trap. With unemployment in the region of 14%, it is a disastrous set of incentives.

This is a textbook debt forgiveness case, which is not a “free money giveaway”, as presented by detractors of the concept. Rather, it is acknowledging commercial loss appropriately and in a timely manner.

Herein lies the crux of the issue: In this analyst’s opinion “debt forgiveness” comes with considerable pain, such as losing your home. If we just write down debts and let people keep their property, then it is a direct transfer and equates to “free money”. Any plan outlining the latter should not be called “debt forgiveness”, rather it should be called “debt contribution” or similar.

And the money to do this already exists, which is the rub: if banks make a specific provision for bad debts (individual accounts in arrears), then they are not paying taxes on funds set aside for this, in fact they’ll get a tax rebate. Yet they are also not writing down those individual loans to the impairment provision, an aspect of accountancy allowing them to play both sides of the same coin.

Acknowledgement of this led the Master of the High Court Ed Honohan (brother of Central Bank boss, Patrick) to say that “accounting exercise” of chasing people to the bitter end was driving some people to suicide. Which is not nearly as tragic in words as it is when you know somebody it happens to.

AIB, having received €20 billion (only €9bn less than “toxic” Anglo), have said they will do it if other banks do. This corporate version of “I’ll show you mine if you show me yours” is laughable, not laudable.

What is outlined thus far is not a “transfer to the profligate”, it is a “transfer to the dispossessed”. And the “profligate” tag? Hardly fitting given that when you chop society up based on earnings, that the group in deepest arrears on mortgages and rents (10%) is the second lowest fifth of earners according to the CSO. Hardly the “high-fliers” swanning around on the dole while driving Land Rovers that opponents so readily and colourfully describe.

Banks must de-leverage, lower their loan to deposit ratio while paying more for deposits than they get from charging interest, not raise interest rates (as per Fine Gael programme for government), not repossess properties, NAMA can’t “firesale” and at the same time we must pay more taxes and cut spending to finance a €14,000,000,000 yearly funding hole.

Our banks are not lending, hence the 95% drop in mortgage finance — we are facing a 40-year-low in 2011. We spent the guts of €70bn on the banks and in return all we got was that we spent a lot of money; so why not set free at least some parts of the economy? Or we can take the same view that plantation owners used to foster that “giving certain people freedom comes at a cost to those who allow it” and we are not willing to accept the financial terms.

The facts don’t stack up when you actually start to look into this. I work in creating debt, this is perhaps the one area I truly know and the message is sincere: let people fail and let them do it humanely, keeping a debt judgment over a person who is already broke is an affront to any reasonable society.

* Karl Deeter is operations manager with Irish Mortgage Brokers.

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