Significant ruling helps mortgage holders in debt write-offs
High Court judgment may affect banks’ capability to split mortgages and park debt
The ruling emerged after a legal battle between KBC Bank Ireland and a Drogheda couple who fell behind on a €285,647 mortgage on their three-bed house. Photograph: Bryan O’Brien
Insolvent homeowners will have a greater chance of being able to secure the write-off of unaffordable mortgage debts following an important High Court judgment.
The ruling emerged after a legal battle between KBC Bank Ireland and a Drogheda couple who fell behind on a €285,647 mortgage on their three-bedroom semi-detached house after both lost their jobs for a time.
The personal insolvency arrangement agreed by the court means the couple, Colm and Paula Callaghan, who are in their late 30s and have three young children, can write off about €242,000 worth of debt, including €165,000 due to KBC.This will leave them with a €120,000 mortgage from KBC on a home currently worth €105,000.
‘Kicking the can’
The bank had appealed an earlier ruling by the Circuit Court granting the couple this deal. KBC wanted the mortgage to be written down only to €270,000.
This amount would then have been split in two, with the Callaghans continuing to make repayments on €135,000 of the debt. The remaining €135,000 would have been declared “inactive”and not subject to interest payments at the present time. It could be repaid later in the couple’s lifetimes, or from the sale of the house after their deaths.
Siding with the earlier judgment in the Circuit Court, Ms Justice Marie Baker rejected the bank’s objection, arguing that KBC’s proposal was “kicking the can down the road.”
More than 54,000 mortgages totalling €10.9 billion in outstanding debts were in arrears of more than 90 days at the end of last year, according to the Central Bank.
Ms Justice Baker’s ruling is expected to strengthen a customer’s hand in negotiations with banks that want to “freeze” some part of a mortgage for up to several years. This has been a preferred option for many lenders.
Instead, customers will be in a better position to push for a full and final settlement, including a possible write-off of a much larger sum of debt, within a shorter time frame – an outcome that could see Ireland’s banks having to sustain significant losses more quickly.
“This is hugely significant. Banks will have to revisit ‘warehousing’ as a go-to option as a result of this,” said Ronan Duffy, a partner at Donegal firm McCambridge Duffy which devised the couple’s personal insolvency arrangement.