Personal Insolvency Ireland

Insolvency Laws Not Due Until Autumn

Justice Minister – Alan Shatter has said that he now expects the new insolvency legislation to come into force in the Autumn.

Only last week it was announced that publication of the new legislation has been delayed until the end of June, even though the original target date was the end of April.

A range of voluntary debt settlement systems are outlined in the draft version of the laws, as well as a plan to cut the period of bankruptcy from 12 years to three.

Minister Shatter said that ” we hope the second-stage debate on the Bill will commence in the Dáil in July.”

Insolvency Laws Need to be Carefully Drafted

The European Commission produced a report on Ireland this week – titled Economic Adjustment Programme for Ireland — Winter 2011 Review

They noted that ……

Progress continues to be made towards reforming the personal insolvency framework, including amendments to the Bankruptcy Act and the creation of structured non-judicial settlement and restructuring systems. An important element of the authorities’ strategy in this regard, as reflected in the Heads of the Personal Insolvency Bill approved by the government and published on 24th January 2011, is the proposed establishment of a dedicated Insolvency Service to oversee the main elements of the out-of-court debt resolution process. These include:

(i) debt relief certificates (DRCs). These certificates are intended to benefit persons who have no assets and no income and are unable to pay relatively small unsecured debts (the debt obligation needs to meet certain conditions, including being not larger than EUR 20,000);

(ii) debt settlement arrangements (DSAs). These are meant to allow the settlement of unsecured debts larger than EUR 20,000 between a debtor (who has income and assets) and two or more creditors; and

(iii) personal insolvency arrangements (PIAs), which allow for the agreed settlement and/or restructuring of both secured and unsecured debts larger than EUR 20,000 (up to a ceiling of EUR 3 million) between a debtor (who has income and assets) and one or more creditors.

The legislation will be carefully drafted to prevent expectations of debt forgiveness for solvent debtors. While the inclusion of secured debt (e.g. mortgages) in the non-judicial framework can be an important element in facilitating the development of adequate strategies to address the pertinent issue of mortgage distress, it should be carefully formulated in order to prevent an adverse impact on borrower behaviour and unintended consequences for the profitability of Irish banks.

Thus the authorities appropriately intend to permit DSAs and PIAs only on a voluntary basis so that the consent of the debtor and a majority of the creditors would be required.

As regards the reform of the 1988 Bankruptcy Act, the key element of the authorities’ strategy is the reduction of the automatic discharge period from the current 12 years to 3 years, which aims to make the bankruptcy process less punitive and costly for consumers, while ensuring that banks’ incentives to supply credit in future are not unduly affected. The discharge period can be extended to 8 years where the debtor has been uncooperative, dishonest or engaged in wrongful conduct. Provision is also made for income payment orders for up to 5 years from the bankruptcy discharge.

Following completion of on-going consultation with relevant government departments and the Attorney General and further refinement, the Personal Insolvency Bill is expected to be published in full by the end-April 2012 programme deadline.

Debt Forgiveness and Mortgages in Ireland

Ratings agency FITCH has said that Debt forgiveness will be “the dominant factor shaping the Irish mortgage market” if the proposed personal insolvency bill is made law.

Earlier this month, Moody’s rating agency said a quarter of all Irish mortgage debt was susceptible to being written down under proposals in the new personal insolvency legislation

The ratings agency said the proposals were “credit negative” for bonds backed by residential mortgages sold by Irish institutions.

Personal Insolvency Bill and interest rates.

In the Dail thi sweek – Enda Kenny was talking about mortgage debts and the proposed Personal Personal Insolvency Bill .
He said the ” negative equity generation” are directly impacted on by this issue. Thousands of people are in negative equity because of reckless lending processes in banks.

He also said that he “noted the comments of the Bank of Ireland which is moving back towards private funding, but I disagree with Mr. Richie Boucher, its chief executive, when he says Government personal insolvency legislation will increase interest rates for mortgage holders who are paying their way.”

Kenny continued … “The Personal Insolvency Bill is for those who have a series of difficulties across a spectrum of circumstances. It should be made clear, as the Bank of Ireland is aware, that the banks have been recapitalised to deal with mortgage distress and with circumstances where people are in serious difficulty with their mortgage. The Bill has been designed to deal with people in difficulty.”

“It is wrong to suggest, as I saw in a newspaper today, that the Personal Insolvency Bill will cause interest rates to rise for people who are paying their way and facing challenges in their mortgage. That is not the intention. The banks have been recapitalised to deal with cases in which the holders of a residential mortgage are in serious distress. It is a matter for the banks and lending institutions to sit down with individuals and work out the best prospect.

Mortgage Increases Possible if Insolvency Bill is Passed

If the new personal insolvency rules come into force in Ireland lenders could be forced to raise mortgage rates to compensate for their extra losses.

Bank of Ireland boss Richie Boucher said he was looking at raising the interest rates on variable mortgages to compensate for this added “risk”.

He said the new insolvency laws, due later this year, could mark a fundamental change in the playing field for banks ( in Ireland )and make mortgage lending more risky. He said “We price for risk,” he said, implying that the cost could be passed on to customers in the form of higher interest rates.

About a third of Bank of Ireland’s mortgage holders are on variable rates, and at a typical rate of between 3.4pc and 3.84pc are already paying almost double the interest of those with tracker mortgages.

The threat of higher interest rates comes a week after ratings agency Moody’s said up to a quarter of the mortgages in Irish banks were vulnerable to being written down under the new insolvency rules .

New Insolvency Rules could make things Worse in Ireland

Citibank have produced a report titled ‘Ireland: Tough times ahead’ – and in it they say that Personal insolvency rates could rise when the Insolvency Bill is passed and Ireland could slip back into recession.

Citibank say — “In our view, it is likely that personal insolvencies in Ireland will soar in the next year or two, with more use of default as a means of deleveraging, especially since long- term unemployment continues to rise in Ireland.”

Citibank based their assessment on what happened in the UK when similar changes to insolvencies were introduced about 10 years ago. Despite strong economic growth, the number of insolvencies in the UK doubled between 2001 and 2006.

A knock-on effect of an increase in insolvencies would be a further tightening of lending by banks.

“Rising insolvencies are likely to cause additional losses — perhaps substantial — for Ireland’s banks on consumer credit and mortgage loans, and also may feed back to rising interest rates and tighter lending standards as banks seek to protect themselves against rising credit risk.”

MABS could run the Insolvency Service

Money Advice and Budgeting Service (MABS) could end up running the new State-run insolvency service .

The insolvency service is to be set up under the Personal Insolvency Bill.
It will be responsible for helping people to manage personal debt through budgeting advice and new arrangements with lenders.

Labour TD Anne Ferris said she would seek her support for the nomination of Mabs, when insolvency practitioners address the committee next week.

Among the groups invited to address the committee next week are Mabs, Free Legal Advice Centres (Flac) and advocacy group New Beginning.

MABS has over 60 offices across the State and Ms Ferris said they seemed the “obvious choice to be the designated intermediary under the insolvency Bill”.

The Citizens Information Board currently has statutory responsibility for Mabs but Ms Ferris’s proposal would see the agency attain statutory responsibility in its own right.

Mortgage to Rent Scheme

As part of the implementation of the recommendations in the Keane Report The Dept of Environment, Community and Local Government is developing a mortgage to rent scheme on a pilot basis.
This work has been assisted by Clúid Housing Association, a number of local authorities, the Housing and Sustainable Communities Agency, AIB, and more recently, New Beginning and another lender.

The scheme is aimed at households that:

a) have had their mortgage position deemed unsustainable under a Mortgage Arrears Resolution Process

·b) agree to the voluntary repossession of their home;

c) do not have significant positive equity

d) are eligible for social housing.

In addition, the house must also be appropriate to the needs of the household need. Households availing of the scheme will become social housing tenants, paying a rent calculated on the basis of household income.
The treatment of any mortgage shortfall or residual debt will be a matter for agreement resolution between the borrower and lender.

The Keane report recommended 2 options for a mortgage to rent scheme.
The main difference between the 2 options relates to ownership of the property after the voluntary repossession has taken place.

Under the first model, after voluntary repossession has taken place the property would be purchased by an approved housing body at current market value. The household would become a social housing tenant – they would no longer be homeowners. The purchase of the property would be part loan financed, using loan finance generally obtained from the initial mortgage provider, and the Exchequer using funds available under the 2012 allocation for the Capital Advance Leasing Facility. My Department is also consulting with the Central Bank to ensure that the process through which households might be offered the option to participate in the scheme complies fully with all existing consumer protection and other regulatory requirements.

Under the second model, the lender would become the long term owner of the property after voluntary repossession had taken place. The household would become a social housing tenant of the relevant local authority and the local authority would, in turn, lease the property from the financial institution for the period of the lease. The household would enjoy the same benefits as any household already accommodated under the social housing leasing initiative in terms of security of tenure, differential rents, eligibility etc.

It is anticipated that the first transactions under the first model will take place very soon. Ultimately, the schemes will be rolled out nationally using the criteria set out above and it is hoped that all lenders will agree to participate.

Do Lenders Have to Accept New Insolvency Rules ?

The Irish Minister for Justice and Equality -Alan Shatter - was asked in the Dail on Feb 7th 2012 if he had any plans to ensure that lenders will have an obligation or incentives to accept the proposals in the Insolvency Bill

The reply from Deputy Alan Shatter was that the reform of personal insolvency law will involve the introduction of three new non-judicial debt settlement systems, subject to relevant conditions in each case. These are as follows:

· A Debt Relief Certificate to allow for the full write-off of qualifying unsecured debt up to €20,000, after a one-year moratorium period for debtors with “no assets – no income”;

· a Debt Settlement Arrangement for the agreed settlement of unsecured debt of €20,001 and over with two or more creditors;

· a Personal Insolvency Arrangement for the agreed settlement of both secured and unsecured debt of €20,001 to €3 million with one or more creditors.

The Personal Insolvency Bill will also continue the reform of the Bankruptcy Act 1988, begun in the Civil Law (Miscellaneous Provisions) Act 2011 will include, critically, the introduction of automatic discharge from bankruptcy, subject to certain conditions, after 3 years in place of the current 12 years.

Mr Satter continued to say that it was not for him to speculate as to the future conduct of any of the participants in an insolvency process.
He asaid hea was of the view that new personal insolvency laws, including the bankruptcy law reform, should provide a significant incentive for financial institutions to develop and implement realistic agreements to manage or settle debt with their customers.
He said that such agreements should in time become the norm as the most sensible and cost-effective arrangements, particularly where the issue is one of dealing with repayment difficulties for a single major debt, secured or otherwise. These agreements could include measures to address mortgage arrears.

Personal Insolvency Arrangements

Personal Insolvency Arrangements – How will they work ?

New Insolvency laws are due to come into force in Ireland in 2012.
One feature of the new rules is a Personal Insolvency Arrangement.

If you have a mixture of secured and unsecured debts that you cannot repay – you may be able to enter into a Personal Insolvency Arrangement or PIA.
Unsecured debts are those such as credit card, personal loans, overdrafts etc. Mortgages are secured debts – these might be on your own principal private residence or on a buy-to-let or investment property.

A PIA is for people with debts between €20,000 and €3,000,000 who are insolvent and it is unforeseeable that over the course of a 5 year period they will become solvent

(If you are insolvent it means you are unable to pay your debts in full as they fall due.)

A personal Insolvency Arrangement will provide a mechanism for debt settlement and restructuring if you are insolvent but have the means to make part payments of your debts over a period of years.

An application for a Personal Insolvency Arrangement has to be made via a personal insolvency trustee . They will complete a standard financial statement with you setting out your financial affairs in full. The personal insolvency trustee will advise you about your options and will assess whether you meet the eligibility criteria for a PIA. Those criteria include the following:

· You must be “cash-flow” insolvent (i.e. unable to meet your debts in full as they fall due);

· it is unforeseeable that over the course of a five year period, you will become solvent;

· a debt settlement arrangement (DSA) would not be a viable alternative to a PIA as a mechanism to make you solvent within a period of five years.

If the personal insolvency trustee is satisfied that you meet the above eligibility criteria and is satisfied that there is a reasonable possibility that a PIA would be capable of making you solvent within six 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 you from action by your creditors for a minimum of 40 working days (and up to a maximum of [60] working days, subject to extension for a further [10] working days).

The personal insolvency trustee notifies your creditors and sends them prescribed information, including information about your financial situation.
The personal insolvency trustee considers any submissions from creditors and prepares a proposal for a PIA, taking into account what you can afford to pay to your creditors while leaving you with sufficient income to maintain a reasonable standard of living.

The PIA can include things such as writing down mortgage debts , writing down unsecured debts. You cannot be forced to sell your home as part of the arrangement.

If you consent to the proposal - 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. The majority figure is expected to be 65% (by value of debt).

If your financial circumstances improve over the course of the PIA you are 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 you don’t 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 you will again be liable in full for the debts. The creditors can then take enforcement action against you or petition for your bankruptcy.

If you successfully complete the PIA, all of your unsecured debts are discharged. You will remain liable to pay the mortgage in respect of his principal private residence on the restructured terms agreed under the PIA.