Insolvency versus Debt Management

There is universal acceptance that the management of personal debt, be it mortgage (secured debt) or unsecured debt is still a problem. After 7 years, we have not addressed the issues in sufficient numbers.

However, we have made more progress in the last 12 – 18 months than in the proceeding 5 years. This progress has been brought about by a number of factors.

  • Acceptance by the banks that realistic, workable and long term sustainable solutions make a difference.
  • The Central Bank of Ireland through CCMA (Code of Conduct on Mortgage Arrears) and MARP (Mortgage Arrears Resolution Process) has provided a framework to deal with borrowers in distress.
  • The creation of the Insolvency Service of Ireland (ISI) and the Personal Insolvency Act 2012.
  • The creation of specialist advisors in this area. PIP’s. (Personal Insolvency Practitioners) who are authorised and regulated by the ISI and RDM’s (Regulated Debt Managers) who are authorised and regulated by the Central Bank of Ireland.
  • The Phoenix Project, MABS, IMHO also provide an invaluable service to distressed borrowers.
  • Upturn in the economy leading to significant increases in property values.

The pillar of Government policy to address personal debt has been the various arrangements under the Personal Insolvency Act.

The latest figures from the ISI are disappointing with only 821 approved arrangements since September 2013, when the ISI started accepting arrangement. 610 of the approved arrangements were bankruptcies.

In the parallel system of MARP, there have been 109,911 mortgages restructured of which 83% (91,446) are meeting the terms of the restructure agreement. These figures relate to owner occupier family home mortgages.

In the Buy to Let area, 24,942 mortgages were restructured of which 77% (19,305) are meeting the terms of the restructure.

While the number are very significant compared to what has been achieved under Personal Insolvency arrangements, I accept that they do not address unsecured debt in some situations.

The priority for the vast majority of borrowers is addressing the issue of the mortgage on their family home. In practice, the unsecured creditor accepts that it is left in a very precarious position where the primary debt, the mortgage is addressed.  In a long term arrangement, in reality, they will accept what disposable income remains on a monthly basis to sort out their debt.

Why is the ISI not functioning at the levels anticipated and why the alternative system is succeeding (MARP?)

Personal Insolvency arrangements require Court approval. MARP arrangements in most cases mirror the process of Personal Insolvency. They do not require Court approval but there is a written agreement between the borrower and the bank.

The borrower is also given the opportunity to seek advice from an Accountant listed on the website www.keepingyourhome.ie in relation to the proposed MARP arrangement€250.00 plus VAT is paid by the bank to seek this advice.

This process is flawed and I will comment later on changes which could be considered.

Under the ISI arrangements, those seeking redress are given a figure for Reasonable Living Expenses, (RLE’s). In my opinion, the RLE’s are not sufficient. It is important to note that RLE’s exclude monthly mortgage repayments, rent payments or other debt payments.

MARP v Formal Arrangements

In the MARP process, the banks offer better RLE’s which in my opinion are more realistic and provide a better opportunity for a long term sustainable solution to be maintained by the borrower.

Comparison in RLEs are outlined below for AIB.

With an Insolvency arrangement, there is a public register of people who have entered into arrangements which last as long as the agreement is in force which ranges from 5 to 7 years.

MARP arrangements are more favourable to both the Borrower and Lender as people in debt do not want the added distress of their circumstances being exposed to public scrutiny.

This is no public record of the MARP arrangement, it is a private matter between the borrower, the bank and their advisor.

Under ISI arrangements, issues around whether a borrower can have 2 cars or a car at all, are part of the process as is the issue of private health insurance and private education.

These discussions do not generally arise in MARP arrangements as the RLE’s are higher which gives greater scope for the borrower to retain a second car, private health insurance or private education.

Under ISI arrangements, there are annual reviews of the borrowers’ financial position.

If they got a pay rise, 50% of the pay increase must go towards paying a higher repayment to the bank. Equally, if you benefit from an inheritance, 50% of the gain must be used to reduce your debt.

In a MARP arrangement, the review process is not annual, but generally every 3 or 5 years.

It is a matter of negotiation between the borrower and the bank what part if any, of a pay increase must be given to the bank.

Any inheritance is left to the borrower to decide what to do with the funds.

Informal arrangements allow for debt to be written down or written off particularly if the asset is sold voluntarily.

Ulster Banks’ announcement this week allowing for debt to be written off will be an arrangement under the MARP process.

RDM’s (Regulated Debt Managers) will address the issues of unsecured debt as part of the overall restructure.

I would like to suggest some measures which would help distressed borrowers.

I would support the proposals of the IMHO (Irish Mortgage Holders Organisation) in relation to major changes to the Mortgage to Rent (Mortgage to Lease) and the split mortgage proposal.

Negotiations between RDM’s and banks do not always provide a desired outcome for each party.

There must be an independent review service like The Credit Review Office to adjudicate in circumstances               where the borrower, their advisor and the bank cannot agree on a long term, sustainable solutions

We do not need Courts to adjudicate on MARP arrangements. They should concentrate on the ISI proposals           where agreement cannot be reached.

Access to advice from regulated or reputable advisors. There are 37,480 family home mortgages where no repayments have been made in over 2 years.

One of the issues for a lot of these borrowers is access to advice. They are not engaging with the bank.

I would propose making a payment of €750 to reputable and/or regulated advisors at the start of the process to allow them represent vulnerable borrowers who cannot afford professional help.

The Government set up a €10m fund over 2 years ago to provide advice at a cost of €250 per case when the arrangement has been offered by the bank.

Only €20,000 of the €10m has been drawn down clearly indicating that this process is not working as the only parties allowed to review the offer are Accountants. However, they are not permitted to provide advice.

It makes more sense to provide a higher payment to allow borrowers to engage at the start of the process.

We must all be realistic in our demands, have access to professional advice, an independent review and together provide long sustainable solutions for all borrowers.People must be afforded the opportunity to participate in society again.

 

MICHAEL DOWLING

PIP, RDM, QFA, CUA