Lose health cover and second car to get bank debt deal
Published 21/03/2013 | 05:00
ANYONE seeking deals with their bank over debt will have to make drastic lifestyle changes under proposals to be announced next week.
Homeowners looking to write off mortgage debt will be told, for example, to drop their health insurance and sell off their second car.
New criteria setting out the living standards for people having debt written off will also force people to:
* Take their children out of private schools.
* Give up foreign holidays.
* Get rid of Sky Sports.
Up to 100,000 families are currently in arrears of at least three months on their mortgages, while the average borrower in trouble has four other debts.
The new minimum income guidelines will be issued by the head of the Personal Insolvency Service, Lorcan O'Connor, and Justice Minister Alan Shatter next Wednesday.
The official guidelines will set out what people can live on before being accepted for debt writedown deals to be overseen by the new insolvency service.
But it is understood the guidelines will also be used by banks for those being offered a long-term mortgage deal outside the new personal insolvency process.
Although the guidelines are not legally binding, banks will only do a deal with homeowners who cut their living standards in line with these rules.
Courts are expected to use them as a benchmark in any legal dispute where people cannot reach a deal with their banks.
This means that a family seeking a split mortgage -- where part of the home loan is set to one side for a period to reduce the monthly repayments -- will have to operate to the guidelines.
And although there will be an allowance for a basic TV package, such as Sky TV, the guidelines are likely to mean no Sky Sports.
But the fact that the guidelines make no allowance for a second family car and ban health insurance is set to be the most controversial aspect.
Experts said people in this country hold dearly to private health cover, with just 8.6pc of people dropping their health insurance since the financial crash in 2008. Some 2.099 million people have private insurance, 46pc of the population.
And battles are set to be fought with banks by parents making sacrifices to send children to private schools, particularly in parts of south Dublin where there are few non-fee paying alternatives, financial advisers said.
A senior official familiar with the new guidelines said if people wanted €100,000 to €200,000 written off a mortgage they could not expect to have a foreign holiday every year and private health insurance.
"Lots of people would like to have health insurance but for fear that they will become insolvent they choose not to take it out," the source said.
The guidelines set out how much different family units will be allowed to live on each month.
According to the new guidelines, a family in an urban area with two adults, but one income, would be allowed €896 a week.
This family has a €1,500 monthly mortgage repayment, one teenager and one pre-teen.
The new guidelines draw heavily on intensive research carried out by the Vincentian Partnership for Social Justice.
This is a religious body set up in 1996 to work for social and economic change. It is made up of St Vincent de Paul, the Vincentian Congregation, the Daughters of Charity and the Sisters of the Holy Faith.
Work on this minimum income standard was augmented by researchers from Trinity College and the Economic and Social Research Institute.
The new insolvency service is required under the new Personal Insolvency Act to produce guidelines on minimum living standards.
The service has consulted a number of bodies on what it thinks is an appropriate minimum living income for those in debt deals.
The new insolvency service will oversee a range of deals.
These include a debt relief notice, for those with debts under €20,000, a debt settlement arrangement for larger debts apart from mortgages, and a personal insolvency arrangement for mortgage and other debts up to €3m.
Those who do not reach a deal with their creditors have the option of bankruptcy, where an official assignee will dictate what they have to live on.
One finance expert, who has seen the new guidelines, described them as financial prison.
But it is understood that Mr O'Connor of the insolvency service is conscious that people will be in a personal insolvency arrangement, involving mortgage debt for up to seven years. This is why he may be willing to allow for relaxation of the guidelines over time for those who keep to their agreements.
There will also be scope for personal insolvency practitioners (Pips) to negotiate on the detail of what a family will get to live on under a personal insolvency arrangement.
"There will be an allowance for social inclusion, in other words socialising.
"So someone could decide to spend that amount of money on Sky Sports. But they then won't be able to go out for a few pints on a Friday night," the source said.