Saturday 3 December 2016

Bankruptcy isn't a route for ordinary Joes or Josephines

Published 22/01/2012 | 05:00

Ireland's former richest man Sean Quinn has just succumbed to bankruptcy -- but for lesser mortals there are better ways to fight debt.

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Several other poster boys of the boom have either opted for or been pushed into bankruptcy in the face of colossal debts they could never pay back.

It might be a means to an end if you're an ex-multi-billionaire with a crumbling empire, but for the average Joe and Josephine it's less likely to be your best move.

Our archaic bankruptcy laws are getting a makeover, but Alan Shatter's promised new Personal Insolvency legislation is still at least a year away. And when it arrives, it won't be a widely used remedy for ordinary people mired in mortgage or credit card debt.

If you're sinking under the weight of indebtedness, there are ways to combat it without pressing the nuclear button of bankruptcy.

Keep debt pesterers

off your back

You can't manage your situation if you're being harried by debt collectors. New regulations introduced by the Central Bank in December rein in how debt chasers behave.

The Consumer Protection Code 2012 sets out that no bank or finance company (or its agents) can show up unannounced on your doorstep and there can be no personal visits without your permission. Creditors can only phone you about arrears three times in one month.

Check out the full code at www.centralbank.ie

Prioritise

You want to keep a roof over your head, the lights on, have transport to get to work (if you have work) and have your kids' needs covered. This may sound blindingly obvious, but many of those battling debt end up just paying whichever creditor shouts loudest. Put a stop to that and prioritise.

"Your mortgage, utility bills, food and potentially your car loan -- look after these secured debts first," advises Eugene McDarby of Money Village, a debt management firm. "Then whatever you have left over, you use that to disperse to your unsecured creditors."

Unsecured debt might include credit cards, store cards, credit union loans, bank loans, overdraft facilities, sole trader debts, or personal guarantees attached to a company where you were a director.

Find an 'honest broker'

Whether you turn to MABs or a private advisor, getting a good mediator to liaise with your creditors will help if you're in serious debt trouble.

A mediator can write to unsecured creditors on your behalf and request that they freeze interest and charges and stop any legal action.

McDarby says that his firm has a 92 per cent success rate in getting unsecured creditors to accept lower amounts on debt repayments. "For example you might owe €2,000 a month, but you only have €300 left after priority bills. We go to creditors and advise that our client can only pay a certain amount. Any money paid goes towards the balance of the debt, not just on interest, which is massively beneficial -- you're paying down real debt."

Receptiveness to restructuring debt varies depending on the bank or financial institution. Some will insist on seeing a record of several months of repayments before they freeze interests and charges. Ultimately most will accept the reality of a situation and consent to a debt plan.

A private debt mediator will take a fee from the amount left over after your priority debts are paid. This could be circa €150 a month for the first few months and then a monthly management charge of €35- €50 after that.

Investment property loan write-down

Where there is no hope of the mortgage being met on an investment house, apartment or commercial property, deny it though they may, banks are cutting deals.

McDarby cites the example of an investment property owned by a couple who have separated, where both have left the country. "Let's say the mortgage is €500,000 and it is now worth €300,000. If this property is sold, it is highly likely that the bank will write off the remaining amount owed -- depending on the bank," he says.

"The banks will only settle where they see no way out, they cannot see a payment schedule in the future." However, it is happening, particularly with certain non-Irish banks that are rushing to settle up and exit the Irish market.

Even where the bank won't agree to write down the balance of debt after a forced property sale, it can be assigned into your unsecured debt pile that you service after your 'priority debts' are taken care of each month. "Then it's highly likely that in the future it will be written down," says McDarby.

Avoid the great interest-only swindle

Mortgage lenders are increasingly letting struggling homeowners pay interest-only on mortgages for agreed periods. It's a win-win for the banks: it keeps you off their defaulter/arrears lists, and in the long term they make more money from you. The same goes for payment breaks and extensions of the mortgage loan term.

"It's something that I would try to get people to completely avoid," McDarby advises, "as it's only adding to the long-term cost of your mortgage. Two years' interest-only can add an extra €17,000 on to a €300,000 mortgage loan. If you extend your mortgage term by five years you add as much as €50,000."

You may be pretty desperate, but you should try and get a better accommodation from your bank than just interest-only and keep chipping away at the principal mortgage if you can at all.

Debt write-down through a lump sum

You may be tapped out financially, but if a third party such as a parent or a relative is in a position to offer a sum to settle a loan, it might be accepted as a full and final payment by the bank.

"In this situation, most lenders will write down 40-60 per cent of an unsecured debt," said McDarby. "The highest settlement we have achieved was a 63 per cent write-down. So for example, where a client owed €10,000 we settled the debt for €4,700."

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