Debt deals may exclude loans from credit unions
THE insolvency service has hit a new stumbling block after it emerged that thousands of financially stricken people may be unable to get credit union loans included in debt deals.
It has emerged that credit unions forced people borrowing more than €20,000 to take out a life policy on the loan.
This means that the loans cannot be included in a debt settlement arrangement (DSA), as they have to be treated as "secured loans".
This will mean people seeking to get an agreement on credit union loans will have to conclude a more expensive personal insolvency arrangement (PIA), designed to deal with mortgages and other debts.
Essentially, if life insurance is attached to a loan it means that the loan is insured and cannot be treated as "unsecured" as part of a DSA, a legal expert explained.
Experts are predicting that the community lenders are set to have huge chunks of their borrowings wiped out under the new Insolvency Service of Ireland deals.
This is because priority will be given to mortgage debts in most formal insolvency deals.
And credit unions are expected to be the big losers in bankruptcies and debt relief notices (DRNs). DRNs are new formal insolvency deals for people with no income, but debts of under €20,000.
Most credit union loans average €8,000. The problem with including credit union loans in debt settlement arrangements will only affect larger credit union loans, of more than €20,000.
Pressure on the income of credit unions is forcing large numbers of them to merge. More than half of them have made inquiries to Rebo, the state body put in place to manage voluntary mergers.
A spokeswoman for the Irish League of Credit Unions declined to comment.
Meanwhile, David Hall of the Irish Mortgage Holders Organisation claimed some credit unions were taking a hardline approach when attempts were being made to do debt deals.
Recently the regulator for credit unions, Central Bank-based Sharon Donnery, warned credit unions that many of the loans they have given to those who are now in trouble with their mortgages will not be repaid.
The regulator for the sector also said that one in five credit union loans was in arrears.
Ms Donnery told credit unions not to assume that their loans would continue to be repaid, even if repayments were being met at the moment.
Many cash-strapped consumers are known to be making payments to the credit union, even though they cannot make payments on mortgages, car loans and credit cards. People are reluctant to default on a credit union loan in case they close off their last line of credit, experts said.
Ms Donnery said: "Remember that a member may be paying you but be in debt to other creditors.
"As long as that member does not have an overall sustainable solution for their case, there is a risk that you will ultimately not get paid."