FREE LEGAL ADVICE CENTRE CONFERENCE:WITH A NEW Bill to reform Ireland's outdated bankruptcy laws due to be published next week, the topic of personal insolvency is back on the boil.
Speakers at last week’s Free Legal Advice Centre conference on the topic of “legislating for personal insolvency” certainly turned up the heat.
The commonsense approach of Norway to its 1990s mortgage crisis, as told by lawyer Egil Rokhaug, made calm progress on the thorny issue seem possible.
“We had very high housing prices in Norway in the late 1980s and then we had a recession,” explains Rokhaug, who is an adviser to Norway’s Ministry of Equality and Social Inclusion and author of Norway’s debt settlement act.
“By 1993, house prices were down between 50 and 70 per cent. It was more or less the same type of problem you are facing here now.”
Bringing in a debt settlement act that year, to a country with a high rate of home ownership, Norway made the case for including mortgage debt in its new personal insolvency laws.
“We did that because it gives debtors the opportunity to keep the family home, which is very important in Norway.”
Norwegian policy recognised indebtedness as a national problem. Under the 1993 Debt Reorganisation Act, individuals can file a petition of debt settlement in order to obtain a debt-reorganisation arrangement.
The arrangement is granted if the individual, typically someone with significant mortgage arrears and other personal debts, can prove to a newly formed State agency that they are permanently unable to meet their obligations.
“We introduced a system where the debtors could get an official valuation of the home and they could adjust their mortgage down to the real value of the home and write down the part of the mortgage that was no longer effectively secured,” says Rokhaug.
In practice, a person paying a €300,000 mortgage could see their home revalued to a current market value of €150,000. To this new value, 10 per cent is added, bringing the revised mortgage owed to €165,000. The outstanding balance is then written off over a five-year debt settlement period.
Over that five-year period, the applicant pays interest on the market value of the property, plus 10 per cent.
“You only pay interest on the mortgage that is effectively secured and after the five years, the unsecured debt is gone and you start paying instalments on the new mortgage loan,” says Rokhaug.
The idea is that the individual pays as much as possible to all his creditors in that five-year period. Effectively, the part of the mortgage that is no longer secured is treated the same as other unsecured debt.
But didn’t Norway’s banks put up a fight?
“To some extent they resisted, but this was compulsory legislation,” says Rokhaug. If a bank says ‘no’ to a request for voluntary debt settlement, the individual can then present that proposal to a court for adjudication.
Rokhaug says that, in the first year of the new legislation, about half of settlements were agreed to by creditors, with half going to court. Now, 90 per cent are agreed without going to court.
He says a formula to calculate an individual’s ability to meet their obligations is set out under the Act. Things such as the number of children a person has, or whether they need a car are all taken into account.
“You can apply if your income is at the level that the Act says is not enough for a reasonable living standard, and in Norway that is quite high,” says Rokhaug. “The limit now for a single person is about €1,500 a month. But if the calculation shows that you have €1,800 then you don’t have a debt problem. But if you have just €1,000, then yes, this is not enough. You are entitled to debt settlement.”
To date, just 50,000 people in Norway have used the scheme, about 1 per cent of the population.
But debt settlement is no bed of roses. While there are no formal restrictions on further borrowing, Rokhaug says, “you are technically locked out of the possibility of borrowing more money because you have been blacklisted”.
To Irish banks which plead such a scheme would upset an already fragile banking system, Rokhaug says this has not been Norway’s experience.
“We haven’t seen any effects on the overall economy or on interest rates or bank lending. But what it has brought is dignity and hope back to families.”
He also says house prices recovered fast. By 1997, prices were back to 1988 levels and are now “historically high”, he says.
The heads of Ireland’s new personal insolvency bill show that our banks will not be compelled to write off mortgage debt. Rokhaug thinks this is a mistake. “I would not recommend that; it needs to be compulsory,” he says.
To banks that say that it’s not workable, he says they are misunderstanding the problem.
“It is clear to creditors in Norway that it is not the debt settlement that causes the losses. The losses are there long before the debt settlement because of the insolvency of the debtor. That is what causes the loss, not the debt settlement. The debt settlement is only the clean up.”
