From the Department of Justice briefing papers
How might a Personal Insolvency Arrangement work in practice?
|My summary of this narrative
If John sells his home, the first €50k of increased value goes to the mortgage lender
Again, let us take the example of John
John has a number of unsecured debts, such as credit card, personal loans, overdrafts etc. These unsecured debts amount to €50,000. He also has a mortgage on his principal private residence for €300,000. His principal private residence is a house valued at €200,000. John also has a buy-to-let mortgage on an apartment that he bought as an investment. That buy-to-let mortgage is for €250,000 but the value of the apartment is only €150,000. John is self-employed and his income has fallen substantially over the past three years so that he is now unable to meet his debt payments as they fall due.
John has tried unsuccessfully to reach an accommodation with his mortgage lenders to restructure the loans. John contacts a personal insolvency trustee and completes a standard financial statement setting out his financial affairs in full. The personal insolvency trustee advises John as to his options and will assess whether John meets the eligibility criteria for a PIA. Those criteria include the following:
- John must be cash-flow insolvent (i.e. unable to meet his debts in full as they fall due);
- it is unforeseeable that over the course of a  year period, John will become solvent;
- a debt settlement arrangement (DSA) would not be a viable alternative to a PIA as a mechanism to make John solvent within a period of  years.
If the personal insolvency trustee is satisfied that John meets the above eligibility criteria and is satisfied that there is a reasonable possibility that a PIA would be capable of making John solvent within  years, the personal insolvency trustee applies to the Insolvency Service for a protective certificate. The Insolvency Service carries out certain checks in relation to the application and issues a protective certificate which protects John from action by his creditors for a minimum of  working days (and up to a maximum of  working days, subject to extension for a further  working days).
The personal insolvency trustee notifies John’s creditors and sends them prescribed information, including information as to John’s financial situation. The personal insolvency trustee considers any submissions from creditors and prepares a proposal for a PIA, taking into account what John can afford to pay to his creditors but leaving him with sufficient income to maintain a reasonable standard of living.
The proposal provides for the following treatment with respect to John’s debts:
- John to make payments totalling €20,000 to unsecured creditors over 6 years representing 40% of the amount due.
- The principal amount of the mortgage in respect of John’s principal private residence is written down to €250,000 and is restructured so that the term of the loan is extended by 5 years, thereby reducing the monthly repayments further.
- John is to sell the buy-to-let apartment under the supervision of the personal insolvency trustee. The proceeds of the sale (€150,000) are paid to the buy-to-let mortgage lender. The shortfall due to that lender (€100,000) abates in equal proportion to the unsecured debts (i.e. 40%) and so John makes further payments to that lender totalling €40,000 over 6 years.
If John consents, the personal insolvency trustee then summons a creditors’ meeting to vote on the proposal. In considering whether to vote in favour of the proposal, the creditors take into account whether the financial outcome for them under the PIA is likely to be better than the estimated financial outcome for them in alternative scenarios such as enforcement or bankruptcy.
If the specified majority of creditors vote in favour of the PIA and no creditor objects to it in the Circuit Court, the PIA comes into effect and the Insolvency Service registers it in the Personal Insolvency Register.
If John’s financial circumstances improve over the course of the PIA (e.g. if he receives an inheritance or his income increases materially), John is obliged to notify the personal insolvency trustee and the terms of the PIA may be varied to provide for increased payments to the creditors.
If John subsequently decides to sell his principal private residence and property prices have improved since he entered into the PIA, there is a clawback of the uplift in value up to a maximum of the amount that has been written off under the PIA (i.e. €50,000) but disregarding any improvements made to the property since the date of its valuation for the purposes of the PIA.
If John does not abide by the terms of the PIA (e.g. there is a 6 month arrears default in making the payments due under the PIA) the arrangement will fail and John will again be liable in full for the debts. The creditors can then take enforcement action against John or petition for his bankruptcy.
If John successfully completes the PIA, all of his unsecured debts and the shortfall due in respect of the buy-to-let mortgage are discharged. John remains liable to pay the mortgage in respect of his principal private residence on the restructured terms agreed under the PIA.
Joan Burton and banks clash on 3-year bankruptcy deal
SOCIAL Protection Minister Joan Burton has clashed with the Central Bank over how mortgage and other debts should be written off for those unable to meet their commitments.
She said people should be able to emerge from a personal bankruptcy process — that includes mortgage debt — within three years.
The Central Bank fears that including mortgages in new personal insolvency laws will lead to a surge of people walking away from their mortgage debts.
This, in turn, would mean more funds would have to be put into the banks by taxpayers to cover those losses.
The Department of Justice has decided to include mortgage debt in a new speeded-up bankruptcy regime, despite protests from banks.
Sources have confirmed that the Central Bank has “concerns” about the proposals.
Banks and the Central Bank fear the new scheme could make it possible for someone with €200,000 of negative equity to hand back the keys and walk away debt-free in three years.
Ms Burton said yesterday she favoured including mortgages in the new bankruptcy regime.
“There has to be a holistic approach to people’s debts. Mortgages have to be part of it,” she said.
She added that recent statements by the Central Bank governor, Patrick Honohan, indicated that the Irish banks had sufficient capital to withstand mortgage losses.
Ms Burton said the current bankruptcy regime was “unuseable” for ordinary people.
The new regime and the debt settlement arrangements are the Government’s major policy tools for dealing with the 10,000 “unsustainable” mortgages in force. Under the current regime, bankruptcy lasts for 12 years.
However, the Central Bank fears that a bankruptcy regime along with non-court debt settlement arrangements that are too easy to avail of will lead to new losses for banks.
They fear new mortgage losses could quickly exhaust the €10bn that bailed-out banks have been given to deal with mortgage losses, and the €5bn buffers they have to deal with extra general losses.
The Central Bank is likely to advise the Government of these potential issues. Sources said that the Central Bank strongly believed that borrowers’ capacity to repay should be a key consideration for the new regime.
The Cabinet is to discuss the proposals today.
– Charlie Weston Personal Finance Editor