New bankruptcy plan sparks bank mortgage fears
Published 07/11/2011 | 05:00
THE Central Bank is set to warn the Government against implementing proposals that could see tens of thousands of bankrupts freed from their mortgage debt within three years.
The Department of Justice has reportedly decided to include mortgage debt in a new speeded-up bankruptcy regime, despite protests from banks.
Sources last night confirmed that the Central Bank had "concerns" about the proposals.
If the new scheme made it possible for someone with €200,000 of negative equity to hand back the keys and walk away debt-free in three years, it could be used by tens of thousands of people.
Losses on their loans 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.
Strict rules governing who can and can't apply for bankruptcy could be used to avoid the scheme being overrun with applications. A version of the scheme could also see some mortgage debt "outlive" the bankruptcy period.
The new bankruptcy 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.
The Department of Justice, which drafted the new bankruptcy proposals, last night declined to comment on whether it had taken the banks' finances into account.
But the proposals will have to be approved by the Cabinet, where Finance Minister Michael Noonan is expected to caution against the dangers of bailing out the banks again.
The Department of Justice is also working on plans for non-judicial debt settlement arrangements that will allow banks and borrowers to hammer out agreements without going through the courts.
The banks have argued that mortgage debt should be outside this process, in the same way as it is left outside of the UK's Individual Voluntary Arrangement (IVA) scheme.
Senior banking sources last night said it was likely that a compromise would be reached.