Joan Burton and banks clash on 3-year bankruptcy deal
Published 08/11/2011 | 05:00
SOCIAL Protection Minister Joan Burton has clashed with the Central Bank over how mortgage and other debts should be written off for those unable to meet their commitments.
She said people should be able to emerge from a personal bankruptcy process -- that includes mortgage debt -- within three years.
The Central Bank fears that including mortgages in new personal insolvency laws will lead to a surge of people walking away from their mortgage debts.
This, in turn, would mean more funds would have to be put into the banks by taxpayers to cover those losses.
The Department of Justice has decided to include mortgage debt in a new speeded-up bankruptcy regime, despite protests from banks.
Sources have confirmed that the Central Bank has "concerns" about the proposals.
Banks and the Central Bank fear the new scheme could make it possible for someone with €200,000 of negative equity to hand back the keys and walk away debt-free in three years.
Ms Burton said yesterday she favoured including mortgages in the new bankruptcy regime.
"There has to be a holistic approach to people's debts. Mortgages have to be part of it," she said.
She added that recent statements by the Central Bank governor, Patrick Honohan, indicated that the Irish banks had sufficient capital to withstand mortgage losses.
Ms Burton said the current bankruptcy regime was "unuseable" for ordinary people.
The new regime and the debt settlement arrangements are the Government's major policy tools for dealing with the 10,000 "unsustainable" mortgages in force. Under the current regime, bankruptcy lasts for 12 years.
However, the Central Bank fears that a bankruptcy regime along with non-court debt settlement arrangements that are too easy to avail of will lead to new losses for banks.
They fear new mortgage losses could quickly exhaust the €10bn that bailed-out banks have been given to deal with mortgage losses, and the €5bn buffers they have to deal with extra general losses.
The Central Bank is likely to advise the Government of these potential issues. Sources said that the Central Bank strongly believed that borrowers' capacity to repay should be a key consideration for the new regime.
The Cabinet is to discuss the proposals today.