Stephen Donnelly: Banks have too much wiggle room on debt law
Late Wednesday night in Leinster House the Personal Insolvency Bill was voted into existence. It has the potential to help hundreds of thousands of people, but contains one major flaw – it requires the good will of the banks. Events this week suggest that, for some banks at least, this may be in very short supply.
Here's an example of how the bill is meant to work, based on a real case. A lady in Wicklow borrowed €250k to buy an apartment in 2006. It's now worth around €70k. She had to give up her job in 2009. Her changed circumstances mean that when she finds a job, she will be able to service a mortgage of €150k. Under the new legislation, a Personal Insolvency Practitioner, PIP, would propose a deal to the bank whereby she services the €150k, and in three or four years the bank surrenders the other €100k. To ensure she doesn't profit from the deal, the PIP further proposes that if the apartment is ever sold for more than €150k, the bank gets the difference. She stays in her home, she is taken out of a debt trap which would otherwise destroy her life, she works hard and contributes to the country's economic recovery, and the bank gets far more than if it had repossessed her home and sold it.
All good, in theory. But the bill gives the bank a veto over any proposal from the PIP. Deals like this one require the banks to agree to debt surrender, or 'debt forgiveness'. So what's their position?