Sunday 26 October 2014

Family debt deals in jeopardy after fresh legal blunder

Flaw in law can’t be fixed until TDs return from summer holidays

Published 08/08/2014 | 02:30

David Hall
David Hall

A MAJOR flaw in the operation of the personal insolvency system will not be fixed for two months because TDs are on their summer holidays.

The problem has thrown into confusion the outcome of mortgage and other debt deals for over-burdened families.

Some lenders have been given a stronger veto over deals than was intended in the original legislation, the Irish Independent has learned.

However, a note issued by the Insolvency Service of Ireland and marked “confidential” reveals that the flaw will not be sorted out until the end of September.

Personal insolvency practitioners (PIPs) – the experts who negotiate debt deals for families – have been told that it may be advisable to hold off on finalising any new deals until the legislation is amended.

And there have been calls for the service to suspend all operations until the problem can be rectified.

TDs and senators who will need to change the law are not due back at their desk in Leinster House until September 17.

The fear is that small creditors, like credit unions, could collapse proposed debt deals by outvoting banks.

The note has been sent to 140 personal insolvency practitioners (PIPs), advising them to:

• get the courts to 
adjourn any debt deal hearings

• seek to have a protection certificate extended

• or get a creditors' meeting adjourned.

A protective certificate is a standstill arrangement which stops lenders chasing borrowers for repayment until a deal can be done and voted on at a creditors' meeting. These deals then have to be approved by the courts.

David Hall, of the Irish Mortgage Holders' Organisation, which represents debtors in financial distress, called on the Insolvency Service to halt all activities until the problem can be fixed.

He said just 27 deals involving mortgage debt, so-called personal insolvency arrangements (PIA), have been done up to June.

Mr Hall said the note meant that the system "was hobbled" by the flaw as official debt deals would be open to High Court challenge.

"The Government should take this opportunity to review the entire Insolvency Service process, including the fact that PIPs have to charge 23pc VAT to people deeply in debt," he said.

It will be the third "technical" amendment needed to the legislation which was only signed into law in December 2012.

A spokesman for the 
Department of Justice said: "The technical Bill needed to correct the potential ambiguity identified, on a prudential basis, has since been finalised.

"There has been a heavy 
legislative programme this 
Dail term, and the enactment of this Bill will be a priority 
on the return of the Dail."

Unclear wording in the act means banks and credit unions could end up with greater powers to veto debt-settlement deals. Credit unions are already reluctant to take part in the new debt deals as they tend to lose heavily.

One credit union tried 
unsuccessfully to get the courts to unravel a debt deal.

Failing to change the legislation could lead to uncertainty and court challenges.

According to the note from the Insolvency Service a personal insolvency deal (PIA) or a debt settlement arrangement (DSA) needs the support of lenders who hold 65pc of the value of the debt owed.

But the wording of the legislation could be interpreted to mean that an official debt deal also needs the support of more than 50pc by number of all lenders owed money, the memo states.

This could mean that a credit union or credit card company that is only owed a small amount of money could vote down a mortgage debt deal.

Analysis

The personal insolvency system has hit a snag that could hinder its work. We explain what has gone wrong.

Q: So, what exactly is the problem with the new insolvency service?

A: The Insolvency Service of Ireland has spotted that there is a flaw in the legislation setting up the new system.

The problem means credit unions and other lenders have more power than intended in the law to vote down official debt deals for families and individuals.

Q: What exactly is this problem?

A: According to a "confidential" memo from the Insolvency Service a personal insolvency deal (PIA) or a debt settlement arrangement (DSA) needs the support of lenders who hold 65pc of the value of debts owed.

But the wording of the legislation could be interpreted to mean that an official debt deal also needs the support of more than 50pc by number of all lenders owned money.

The fear is that small creditors, like credit unions, could collapse proposed debt deals by outvoting banks in a creditors' meetings. This was never the intention of the Personal Insolvency Act 2012.

Q: What is the implication of this?

A: As a precaution the Insolvency Service has written to 140 personal insolvency practitioners (PIPs) telling them it might be wise to get the courts to adjourn any debt deal hearings, to seek to have a protection certificate 
extended, or to get a creditors' meeting adjourned until the problem can be fixed with an amendment voted on in the Dail and Seanad.

Q: When will the defect be sorted out?

A: The general shut-down of Government for the summer means that it will be the end of September before the legislation can be amended to fix the flaw.

Q: Is the Insolvency Service accident prone?

A: The head of the service Lorcan O'Connor has denied 
that the service is accident prone. But this is the third "technical" amendment needed to the personal insolvency legislation.

And the flow of debt deals have been very low. Just 27 deals that involve mortgages - both family homes and 
buy-to-lets - had been approved by the courts up to June. The Insolvency Service has been dogged by controversy since it came into operation in March last year.

Issues around the cost of putting a formal insolvency deal, together and the veto on deals that banks have are proving controversial.

Some critics claim the new service is so expensive that only those with assets, even though they are heavily in debt, will be able to fund a deal.

Irish Independent

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