'Bankruptcy offers some people a break, their debts end overnight'
New bankruptcy regime offers distressed homeowners a way out
DEBT write-off deals are set to become the norm in 2014 as banks and borrowers cut deals to finally end the country's six-year economic freeze, experts predict.
According to insiders, negotiated debt write-offs will become a major financial theme next year, for small business owners and those struggling with mortgage debt.
A new 'common sense' approach will not mean mass debt forgiveness – but experts say deals are already being done that effectively allow co-operating borrowers off the hook for some boom-era loans.
"Write-offs are happening – and it's something we're going to see a lot more of in 2014," one top receiver and personal insolvency practitioner (PIP) told the Sunday Independent.
The 'thaw' in lenders' once-frozen response comes amid pressure from the Central Bank on lenders to make long-term settlements with borrowers or face harsh penalties.
Sources said the new bankruptcy regime set to come into effect this week had also "concentrated minds".
The new law will reduce the period of bankruptcy from 12 to three years – and is expected to trigger a wave of applications from homeowners in serious negative equity who are now unable to meet their mortgage repayments.
Ross Maguire of debt advisory group New Beginning told the Sunday Independent: "There is going to be an avalanche of people applying for bankruptcy through the courts. We have had hundreds and hundreds of people contacting us in the past few weeks inquiring about the new legislation.
"We are seeing an explosion of interest in bankruptcy. Each week we give seminars at which hundreds of people show up.
"We see lots of small and medium-sized business owners who have lost their businesses and are struggling – almost without exception, they repeat, 'I have had enough, I can't keep doing this'. That is what's common among them all, from inner-city Limerick to leafy suburbs of Dublin 6 – (they are saying) 'I can't take this anymore'.
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"Bankruptcy offers these people a complete break, debts ended entirely overnight."
Figures published last week revealed 44 people were declared bankrupt under the old regime last year.
This represented a 25 per cent increase on 2012. Of the 44 bankruptcies, just eight were triggered by people making personal application to be adjudicated bankrupt.
But this is likely to change dramatically once part four of the Insolvency Act 2012 is completed and the new regime comes into effect this week. New Beginning estimates that up to 5,000 debt-ravaged householders a year will apply for bankruptcy once the new regime beds in.
Last week it was confirmed that the first debt settlement arrangement had been reached between a borrower in the north-west and several creditors, under the country's new personal insolvency regime.
Seventy per cent of the borrower's unsecured debt was written off in the deal – the first of hundreds of write-down arrangements that are expected to be reached in the coming months.
Bankruptcy is generally seen as the option of last resort where an indebted person, who is unable to pay their creditors, seeks to be declared bankrupt.
Their assets, with the exception of necessities including the family home and car, where it is needed for work purposes, are then handed over to an official assignee who sells them and distributes the proceeds to creditors.
A creditor or creditors must be owed a minimum of €20,000 before they can apply to make someone bankrupt.
Until now, bankruptcies have traditionally been low in Ireland, mostly due to the draconian nature of the regime, where it was possible for some people to remain bankrupt for life.
However, David Hall of the Irish Mortgage Holders Association (IMHA) urged distressed borrowers considering going the bankruptcy route to get independent advice and to carefully consider all of their options.
"The key message is to engage – don't sleepwalk into repossession or further distress over debt. Don't give banks any more power than they already have," Mr Hall said.
Mr Hall revealed that debt forgiveness is now commonplace, as banks take a more "realistic" view of their customers' abilities to pay back what they owe.
"We have made many arrangements with banks where debt has been written off. It's happening on the ground already. Nobody wants to shout it from the roof, but it is happening," Mr Hall told the Sunday Independent.
"There is a massive cohort of people in middle Ireland who owe too much money but with some realistic restructuring will be able to pay off most of their loans without losing their family home."
Details of a tiny number of debt forgiveness deals that have been made public so far suggest banks are agreeing to writedowns of between 60 per cent and 70 per cent.
However, sources involved in negotiations with banks say lenders are typically agreeing to allow distressed homeowners to split their mortgages if they can afford to pay up to 80 per cent of their home's current market value.
One source told the Sunday Independent: "Basically, the banks' criteria is that if you have a €400,000 mortgage worth €200,000, you have to repay the equivalent of €180,000 – that equates roughly to a 60/40 split."
An insider said the so-called "exiting banks" are most likely to cut deals to let borrowers off a share of what they own. Exiting banks are lenders that have decided to pull the plug on future lending in Ireland and are now mainly focused on managing their exit from the country.
It can include the likes of Halifax Bank of Scotland (HBOS), now part of the Lloyds Group, and more recently Danske Bank and ACC Bank, who have all decided to pull out of Ireland. The main remaining banks are now prepared to write off or, in most cases, significantly restructure home loans and business debt as part of debt settlements, but it is very much on a case-by-case basis.
Insiders say where write-offs are happening, it is in cases where a borrower is fully engaged with a lender.