Banks ‘more likely’ to strike deals to write off debt and save family homes

Banks and funds are increasingly agreeing to deals writing off unsustainable debts.

nsolvency Service of Ireland (ISI) director Michael McNaughton said increased trust in the system had led to a decline in objections from creditors to personal insolvency arrangements (PIAs).

He said those who sought protection from creditors before 2019 might have had a 50pc chance of getting a PIA, a deal under which debts can be written off and the family home safeguarded.

“Now you have a chance of closer to 70pc of getting an arrangement,” Mr McNaughton said, in comments that will give hope to thousands of people in mortgage arrears, PIAs are the most popular of three debt settlement mechanisms introduced by the Personal Insolvency Act 2012.

Before then, the only way of resolving unsustainable debt was going into bankruptcy for 12 years. A PIA allows for the settlement or restructuring of secured debts up to a total of €3m, as well as unsecured debt, over a period of up to six years.

From the introduction of the act until the end of last year, 6,134 PIAs have been granted, dealing with hundreds of millions of euro in debt.

Last year, 925 PIAs were approved. In comparison, there were only 199 bankruptcies.

The trend comes despite fears in recent years that trust in the system would be damaged by controversies.

In 2020, Mr Justice Denis McDonald called for “a change of approach” by personal insolvency practitioners (PIPs) and those advising because the system was “beset by legal issues and contested cases”.

The same judge was involved when businessman Conor Clarkson’s bid for a PIA was withdrawn in 2019 after it was discovered he had forged a document.

More recently, the Irish Independent revealed how convicted thief Tom Colton and his wife Linda failed to declare a luxury Spanish villa when they had debts of €2.7m and €2m written off respectively.

The couple are now in danger of losing their PIAs.

In recent weeks, there was further controversy when it emerged that a PIP overstated the amount of preferential debt owed to the Revenue Commissioners by publican Jay Bourke, a matter Mr Justice Mark Sanfey said he was taking “very, very seriously”.

However, Mr McNaughton said that since Mr Justice McDonald’s comments in 2020, trust between creditors and PIPs had improved and this was being borne out by statistics.

“The judge’s comments were valid and they helped. When you see weaknesses in certain applications, you call it out. He did and the PIPs listened,” Mr McNaughton said.

He said the comments brought “attention to the fact PIPs really had to be on the ball, especially when it gets into a courts process”, and that the insolvency system was based on trust and professionalism.

Mr McNaughton said there could be serious consequences for debtors who mislead their PIP and the courts.

“The Personal Insolvency Act provides you with an opportunity to get a fresh start if you have unsustainable debt. But in return for that, debtors are under an obligation to act in good faith and to make a full disclosure to their PIP of all their financial circumstances,” he said.

“If they don’t do that, a PIP or a creditor can apply to the courts if they feel there has been a material misstatement of the facts and you can have that arrangement terminated.

“So, you are back to the start. All of your debts are reinstated and you don’t get access to a PIA again.

“It is also an offence to knowingly or recklessly provide information you know is false or misleading in a material respect.”

Signs of the newfound trust between creditors and PIPs were seen earlier this year when Start Mortgages issued letters to struggling debtors. These advised of the benefits of PIAs and included details of seven PIPs that Start deemed to be “positive and supportive in their dealings with debtors and lenders”.

The ISI director, a former banker who worked on debt restructuring and insolvency cases at KBC Bank and Ulster Bank, said that when people get into financial trouble, they “tend to ignore it” and “wait until they get a letter to appear in court” before seeking help.

“They ignore it because it can be quite daunting when you are dealing with unsustainable debt,” he said.

“They tend to leave the letters unopened. They tend to not want to face the problems. Sometimes they wait until it is nearly too late.”

Mr McNaughton said part of the reason for this could be a feeling of shame. “There shouldn’t be [shame],” he said. “It is just part of commercial life. You take on a debt. You get into trouble for one reason or another. It may not be your fault at all. The system should give you a way of resolving that.

“The advice I would give is to pick up a phone and talk to a PIP. Bring your information with you and they will take it all on board and make sense of it for you. I think you will get an immediate sense of relief.

“People think their situation is impossible, but there is no situation that is that impossible.”

Mr McNaughton said there was evidence of “innovative” solutions being reached in PIAs, such as the restructuring of loans over longer periods.

This has been seen in a number of recent cases, including one where a couple’s mortgage term was extended until the wife was 115 and the husband 106. The lengthening of their remaining term from 16 years to 57 was proposed by lender Permanent TSB last year, shortly after Central Bank deputy governor Ed Sibley called for “greater innovation” in dealing with older borrowers in mortgage arrears.

In this case, and cases like it, lenders will ultimately stand to get repaid from the estate of the lenders after they die, while the debtor gets to continue living in their home.

Another emerging trend is that in cases where creditors reject a PIA, banks and funds are less likely to continue their opposition should the debtor appeal to the High Court under Section 115a of the Act.

Mr McNaughton said some institutions had been losing around 60pc of these cases and incurred legal costs.

In the first quarter of 2021, there were 80 Section 115a applications, with creditors objecting to 69pc of these. In the same quarter of this year, there were 60 such applications, but creditors objected to only half of them.

Mr McNaughton said an- other sign of increased trust was that some banks and funds were now meeting PIPs on a bilateral basis to discuss issues.

The ISI itself had been engaging with banks and funds, the Central Bank, Banking & Payments Federation Ireland and the Irish Banking Culture Board.

“I talk to them to try and convince them of the opportunities there are with the personal insolvency system. It is not something to be afraid of,” Mr McNaughton said.

“There are opportunities for banks to resolve their non-performing loan books in a much more productive way and a cheaper way than going through the courts. 

“There are still 21,000 mortgages that are in arrears of two years of more. That number if falling, but it is not falling fast enough.”

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