Bank refund on sale of homes with debt write-down ‘fair’

A provision in new personal insolvency legislation to allow banks recoup any profit a borrower might make from the early sale of a debt-writedown home was “perfectly reasonable”, an advocacy group for struggling borrowers has said.

Responding to reports at the weekend that the provision had been added to the legislation with a late amendment and that it raised concerns about the new insolvency regime, Ross Maguire SC, one of the founders of New Beginning, said it had always been part of the legislation and was fair.

However, Fianna Fáil finance spokesman Deputy Michael McGrath has said he has concerns about the provision. And David Hall of the Irish Mortgage Holders Organisation, formerly of New Beginning, described it as "an unfair insurance policy for the banks".

Under the Personal Insolvency Act 2012, a home owner in financial difficulties can seek to put in place a six-year personal insolvency arrangement to deal with his or her debts. As part of this arrangement, the bank may write down some of the borrower’s mortgage, reducing the amount owed. But if the borrower sells his or her home before 20 years are up or before the reduced mortgage is paid out in full, the bank can reclaim the profit made on the property.

'Fairness'
Mr Maguire said the provision was introduced to avoid a situation where somebody gets a writedown from the banks and then sells a property and makes a big windfall.

“The idea of a personal insolvency arrangement when it comes to a family home is to keep people in their family homes on a sustainable basis,” he said. “It is not about enriching people at the expense of a bank, it is about fairness.”

He said the provision did not apply if the mortgage was paid off before the sale and it could be altered by the contract signed when the personal insolvency arrangement was put in place.

“It doesn’t necessarily have to form part of the insolvency arrangement,” he said.

He also said there was a provision in the Act which allowed for long-term leasing of the property. “I think any lawyer worth their salt could work out a situation of being able to circumvent the [recoupment] provision,” he said.

Misinformation
Mr Maguire said he believed the new insolvency service would provide a way through current difficulties. Lenders were afraid of the legislation and were happy for misinformation to be circulated, he claimed. This "latest episode of recent misinformation and misinterpretation" was unacceptable, and frightened the public. He advised struggling borrowers considering taking a personal insolvency arrangement to take advice from qualified persons only.

Irish Bank Federation spokesman Felix O'Regan also said there was nothing new about the provision and it was about "getting the balance right". "This was always going to be about compromises," he said.

Mr McGrath said he had been aware of the provision, but was critical of it. It meant people would not be getting the “fresh start” they had been promised after six years and the banks would maintain a hold over them for up to 20 years. This was unfair and could push more people into bankruptcy. He said he would raise the matter at the Oireachtas finance committee meeting next week.

Mr Hall said he was shocked the provision had been included in the original draft of the legislation.

Questions & Answers

What are personal insolvency arrangements?

Personal insolvency arrangements are one of four options being offered to people in debt by the Insolvency Service of Ireland. The service was introduced under the Personal Insolvency Act 2012 and will begin accepting applications for debt relief from September 9th.

Personal insolvency arrangements were designed to help people with debts, including mortgage debts, of up to €3 million. Under the arrangements, part of a person’s home mortgage can be written off by the bank. New repayments are agreed on the new mortgage figure.

Debt settlement arrangements are for people with any level of debt as long as it is unsecured, that is not attached to property. Under this arrangement, repayments are proposed over a six-year period with some degree of debt write-off and 65 per cent of creditors have to agree to the arrangements.

The insolvency service also offers debt relief notices; these allow people with little or no income to write off debts of up to €20,000.

You said four options; what’s the fourth?

Bankruptcy. The bankruptcy office has been incorporated into the Insolvency Service of Ireland under the legislation. If a person cannot pay debts and cannot or does not avail of the other options, he or she may declare bankruptcy. All of a bankrupt’s assets are transferred to a trustee, known as the official assignee.

He gathers together the assets, sells them and redistributes the proceeds to creditors. The term of bankruptcy has been shortened under the legislation and has dropped from a draconian 12 years to a much more manageable three.

Why are we talking about this today?

Because a provision in the legislation that did not get much attention previously has been highlighted.

Do I need to know about that?

If you intend applying for a personal insolvency arrangement and believe your bank will write off some of your mortgage, then yes.

How will it affect me?

If you intend to remain in your home for the next 20 years, it won’t, or if you don’t sell your home until after you’ve paid off all of the newly rearranged mortgage, it won’t. But if you want to sell your home before the mortgage is paid and before the 20 years are up, it will.

Have you an example?

Let’s imagine the bank agrees to write off half of your €400,000 mortgage today. You then only need to pay back €200,000 to the bank. Then let’s imagine the economy takes off rapidly in the next few years and your home rises in value to €300,000. If you sell it before 2033 and you have not finished paying off the €200,000 you owe, the bank can ask you for the €100,000 profit you made.

FIONA GARTLAND