Personal Insolvency Bill 2012 – mortgages and debt

It was mid-December 2010 when the Law Reform Commission presented its recommendations for the reform of the Irish legal system in relation to how our society manages and deals with the problem of indebtedness.

Legal solutions for with problem debt.

The LRC had long advocated for the reform.

Yesterday, the Government finally presented the Personal Insolvency Bill 2012. It is a welcome break from the past. It provides for a range of options that will become available to citizens when the Bill finally becomes law.

The main purpose of the new Bill is to provide for a much more humane way of dealing with the problem of indebtedness in Irish society. It is a move that follows similar actions taken in other countries for decades.
The detail contained within the bill is extensive and it is probably safe to say that legal interpretations taken from the bill will make for interesting conversation and debate in the weeks and months ahead. However, from a layman’s perspective, the new Bill can be summarised as follows:

The Bill will permit those that who no longer to service their current level of debt to seek a remedy through two primary routes:

1. They can do so outside of the Courts, this is called the non-judicial option and it has three main components, all of which are listed below.
2. They can go through the Courts – the judicial option.

The non-judicial option. Under the new legislation, there are a number of options expected to be made available to citizens that have unaffordable levels of debt, those include:

1. Debt Relief Notice
These allow for the write-off of unsecured debt up to €20,000, subject to a three-year supervision period. It would cover unsecured loans such as credit card debt and personal loans but not mortgage debt. .

2. A Debt Settlement Arrangement
This covers unsecured debts over €20,000, last for 5 years and can only come into force with the agreement of creditors.

3. A Personal Insolvency Agreement
These covers secured debts such as mortgages as well as unsecured debts. This will last for 6 years (but could be extended to 7 years). The Personal Insolvency Arrangement will be available for the agreed settlement of secured debt (mortgages) and unsecured debt. The upper limit is €3million

It all sounds pretty simple, well it’s not! The big sticking point that is likely to surface is the agreement of the creditors to the various options. For example, in the third option, it could be possible that banks refuses a customers proposal if a particular bank or number of banks feel the that customer has not made every possible effort to rein in spending. It could be easy to get carried away with what may or may not happen under the new law, but the non-judicial option will be a financial battleground. Also, contained throughout the Bill are numerous provisions designed to ensure citizens seeking to avail of the various options are honest and complete when disclosing their personal financial affairs?

The new Bill also provides other measures such as interim protections while a Debt Settlement Arrangement and Personal Insolvency agreement are being considered.

There are also residency requirements (1-year) for those that wish to apply for the various options.

Also, the new Bill provides for the establishment of the Personal Insolvency Service as well as Personal Insolvency Practitioners, so this is a brand new industry with lots of players. The position of the Personal Insolvency Practitioners will play a central role and go-between the citizens who apply for one of the non-judicial debt options and the various creditors. It will require time to see how they balance the financial tightrope.

The judicial option is far more serious as it is processed through a court of law in a very public manner. Ultimately, this is the process where one petitions the court to be declared bankrupt, where the consumer’s case (all of their current financial details) is presented and analysed and where a judge decides to declare the petitioner bankrupt or not. As with any court of law, full and complete financial declaration is a must and is enforced by statute. In other words, being absolutely honest about ones finances is not a choice; it is a legal requirement.

Under the new Personal Insolvency Legislation, if one is declared bankrupt means that they will be in a financial no-man’s-land for 3 years instead of the 12 presently. There are also a lot of other factors, but the most important change is that one can get on with their lives after three years instead of a decade-and-a-quarter. There are other important change in the law, but the primary point is that this is a significant departure from what has existed up to now.

Other factors
Mortgage Support – A new mortgage arrears support unit will be established later this summer. It will be managed under the Department of Social Protection. Its purpose will be to provide information to those facing mortgage difficulty and its main purpose will be to be independent of the banks. It will operate independent of the Money Advice and Budgeting Service (MABS). At this point, there appears to be a lot of emphasis on the provision of information electronically via the Internet, although there will also be staff available to meet with mortgage holders. It is likely that face-to-face meetings will only be provided in the most severe mortgage arrears cases.

A mortgage-to-rent scheme is due to be made available under the Housing and Planning Portfolio of Minister Jan O’Sullivan.
This option is likely to be offered to the more extreme cases where a combination of debt levels and severely diminished earnings potential would rule out the likelihood of one returning to the full cost of homeownership in the medium term.

Additional mortgage options (from the banks).

Negative equity mortgages
Several banks have been piloting so-called negative equity mortgages. These are relatively simple. If a mortgage holder wishes to sell their home for say €150,000 and still owe €250,000 on the property, their ‘negative equity’ is €100,000. Now, if they can afford the €250,000 loan, then what banks agreeing is to allow those mortgage holders to a new property. And, because property prices have fallen by over 50% since their peak, banks have been allowing some mortgage holders to carry their total debt, even if is higher than the value of the property they are buying. There are no hard and fast rules and banks have been agreeing these loans on a case-by-case basis. Also, a rule of thumb, negative equity mortgages are generally designed to allow those than can easily afford their current debt levels to move property.

Split mortgages
Split mortgages are mortgages where part of the mortgage to be ‘parked’ for a specific period of time and the mortgage holder pays on the remaining amount of the mortgage that they can afford at the time they agreed to ‘split’ the loan. These loans have been proposed by many of the main mortgage lenders and have been designed to provide financial breathing space to mortgage holders in financial difficulty. However, mortgage holders are likely to face incurring interest charges on the amount of the mortgage that is parked or set aside.

Reduced interest rates for those unable to meet monthly payments.
Reduced interest rate mortgages. It has been reported that few banks are considering this option and they are unlikely to be made available to mortgage holders that carry tracker mortgage deals.

Long-term interest-only deals
Long-term interest only loans will result in significantly lower monthly repayments. However, such loans do not result in any capital reduction, which will need to be eventually repaid.

Deferred-interest loans
Deferred interest loans were originally proposed by the Government appointed group to consider remedies for the growing problem of mortgage arrears. Under the deferred interest option, mortgage holders would have interest payments deferred if they were to pay at least 66% of the interest on their loan. This would give distressed borrowers five years to get back on their feet. When the accumulated amount in the deferred interest account is equal to a total of 18 months interest, or when the borrowers have been in the deferred interest scheme for five years, the mortgage will be categorised as unsustainable.

Assisted sales
Assisted property sales are property sales where a bank assists the property owner sell their property in the open market and outside of the foreclosure process, which can have a negative impact on the perceived value of the property. This is a relatively common option is some other countries. It provides for an opportunity to achieve the best price for the property and protect the privacy of the property owner.

Frank Conway is founder of the Irish Financial Review.

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