Blog: Personal insolvency is the best way forward
Cork solicitor Alan McGee writes on a number of existing schemes designed to solve the issue of distressed debt.
The recent controversy over the impending sale of non-performing loans by PTSB, AIB and Ulster Bank has once again raised public awareness of dealing with distressed debt.
The PTSB proposed sale has generated much debate. The common themes are that the anti-sale advocates believe it is wrong to sell family home loan mortgages to vulture funds who are unregulated entities who have already made significant profit on previous distressed loan purchases. While those who support the sales argue that it is a normal event in the cycle of a distressed loan and that the servicing agents are regulated by the Central Bank of Ireland.
Regrettably, the response from politicians is to seek to decry the crisis and to rush to bring forth new legislation that will be a panacea to all that is wrong with the system.
Sadly previous experience proves otherwise. The Mortgage Arrears Resolution (Family Home) Bill 2017 sponsored by Fianna Fáil’s Michael McGrath was one recent example of where new legislation was proposed.
The version this year is the National Housing Co-Operative and Fair Mortgage Bill 2018, which again looks to introduce new measures instead of strengthening what is already on the statute books.
The Oireachtas introduced radical new legislation with the Personal Insolvency Act in 2012 that presented insolvent persons with a mechanism to clear their debts in an orderly manner and restore themselves to solvency.
Despite negative reporting and a slow uptake, debt resolutions through the personal insolvency process are growing in number and the process is developing in strength.
Initially when the process was introduced the banks had a de facto veto that allowed them to unreasonably reject proposals. This was remedied by the amendment of the legislation in 2015 which introduced a court based review system of rejected Personal Insolvency Arrangements (PIA) in certain circumstances. This access to the courts has allowed for the development of personal insolvency solutions and confirms the process as one of the best means for dealing with distressed debts whether the debt is held by a mainstream bank or vulture fund.
The High Court, particularly over the past two years, has delivered many groundbreaking judgments which have enhanced the position of distressed borrowers. The various decisions impacted on:
It was previously the position that banks would not consider restructuring a mortgage debt where only one party to the debt was engaging with the bank. This situation was all too common a feature in the lengthy repossession lists throughout the country as deserted spouses or non-co-operating former partners left a family behind in the home without the assistance to deal with the mortgage repayments.
Now since the High Court decision in the case of ‘JD’ it is possible for one party to a debt to proceed to have their mortgage restructured without the participation of the other party. This has been a game changer for many people who are now seeking a resolution through an insolvency arrangement.
Write down of family home mortgages
Certain banks, and Bank of Ireland in particular, repeated the mantra that there would be no write-down on family home mortgage debt. The court review process has confirmed that a PIA can write a debt down to current market value and that it is not an unfair prejudice to the secured creditor if they are treated equally with other creditors in respect of the negative equity element of the debt.
One of the common solutions as promoted by the Central Bank, the mainstream banks and the Department of Finance was the “split mortgage” where a large portion of the unsustainable debt was warehoused while a borrower serviced that element of the loan that they could afford.
These warehoused loans generally have a 3 -5 year review period as part of the restructure terms. The question arises as to what will happen when these loans are sold to vulture funds when the review period arises.
From the offset, the split mortatge solution was considered by personal insolvency practitioners to be a folly as it has resulted in many households being trapped in a “split mortgage” that they will not be able to pay off at the end of the mortgage term without having to sell their home.
The High Court in the case of Paula Callaghan (A Debtor) confirmed that where the repayment of the inactive account or warehoused amount is not dependant on any anticipated ability to pay in the future such as a pension lump sum etc and is therefore uncertain or unknown as to how it can be paid, results in unfairness. In such circumstances, a PIA does not unfairly prejudices the creditor.
Fixing of Interest rates
In the case of Jacqueline Hayes (A Debtor), the High Court determined that a vulture) fund is not a mainstream commercial bank and does not involve itself in normal commercial lending.
Accordingly, the court held that the fixing of a mortgage interest rate for the lifetime of the mortgage was permissible in a PIA. This now can allow a Personal Insolvency Practitioner (PiP) in certain circumstances to propose a solution that will set the interest rate for the lifetime of the mortgage thus ensuring repayment certainty at a time when interest rates are expected to rise in the coming years.
There have been other solutions including:
Mortgage to Rent
At present, there are some Mortgage to Rent cases being approved within Personal Insolvency Arrangements. This process is more advantageous to debtors as it may allow them to clear their debts, including their mortgage debt.
Debt for Equity
Another solution that is provided for in the legislation is a Debt for Equity swap where a debtor will grant a creditor part ownership of their home in discharge of the debt.
The creditor will realise that percentage of the property on the death of the mortgagor. This is an area that is currently being pursued by Personal Insolvency Practitioners and developments are expected shortly.
The Abhaile Scheme
This scheme was introduced to enable financially distressed borrowers avail of expert advice from a PiP and while this scheme is there those who feel their home is under threat should seek such help. A PiP can assist a debtor is applying for assistance under the scheme. The decisions in the above cases show legislation is working and if the politicians support the process the plight of financially distressed citizens can begin to improve.
Lorcan O’Connor the Director of the Insolvency Service of Ireland at the Oireachtas Joint Committee on Finance, Public Expenditure and Reform recently “called out” the banks for their reluctance to engage in the process.
He complained that creditors are not working within the spirit of the legislation. There has been some positive response from certain banks such as AIB in the wake of those comments.
The Carolan case has shown that the process if case managed correctly can produce a speedy resolution of a case in a short time frame thus allowing debtors achieve a resolution with as little extra stress as possible. If personal Insolvency laws were to be strengthened and given political support then it may be possible to restore some balance to homeowners whose loans are sold.
By supporting what is already in place and developing the Mortgage to Rent and Debt for Equity solutions, the Government and the courts can demonstrate a proactive and positive support for those who need their help most.