What is the Personal Insolvency Bill?
The Bill introduces legal mechanisms through which borrowers can reach arrangements with their creditors on their debts which may involve writing off some of that debt. The scheme should be running by the end of the year.
What is the current situation?
At the moment, people who do not pay their debts are pursued through the courts by creditors who typically secure a judgment against them. Many people who cannot pay their debts are forced to declare bankruptcy, which up to now has lasted for 12 years.
Over the last few years Irish banks – at the behest of the Central Bank – have been reaching individual arrangements with customers in arrears. All banks have to comply with the Central Bank’s code of conduct on mortgage arrears, and try to engage with customers constructively.
Who can apply for these new debt resolution measures?
Three different schemes were announced yesterday, each one aimed at helping a different group of people. People will apply for the scheme which matches their circumstances.
What is the scheme for people owing less than €20,000?
The debt relief notice (DRN), which applies to unsecured debt of up to €20,000 including credit cards and mortgages, requires that applicants do not own a house, have total assets of less than €400 and have disposable income of no more than €60 a week. Applicants are permitted to own a car provided it is worth less than €1,200. Applicants must prove they are insolvent.
Will their debt be written off?
Yes – at the end of the three-year term that debt will be written off.
What is the scheme for people owing more than €20,000 in non-mortgage debt?
The debt settlement arrangement (DSA) allows consumers to settle non-mortgage debts within a five-year period. It is geared towards people who are unable to pay their unsecured debts, but have sufficient income to propose a reasonable level of repayment to creditors.
In some ways it is akin to an examinership process for companies whereby debtors and creditors come to an arrangement at a creditors’ meeting. At the end of the five-year period, after the debtor has followed the proposed scheme of arrangement, the remaining debt is written off.
What about mortgage debt?
The third process, personal insolvency arrangement (PIA), applies to secured debt (ie mortgages) as well as unsecured debt.
The legislation published yesterday does not include any detail as to what exact measures can be adopted by banks and their mortgage customers. Possible proposals are likely to include the following:
A distressed mortgage is split into an affordable mortgage and the balance, which is “warehoused”, although mortgage holders should note the bank can still charge interest on the warehoused segment.