Chance of a fresh start for beleaguered borrowers
Published 04/06/2014 | 02:30
ONCE the Government introduced its new insolvency arrangements to help bail out financially overburdened householders, it quickly became obvious that there were some big drawbacks to the new schemes.
These centred around the cost of the new debt deals, the length it would take to exit them, and the limitations to be imposed on the family's living expenses over the term of the arrangement.
The Insolvency Service of Ireland has strict limits on what debtors can live on over the five to six years of a personal insolvency arrangement. A PIA is designed for dealing with mortgage debts and so-called unsecured debt such as a credit union loan.
Then there is the huge cost of engaging a personal insolvency practitioner (PIP) to put a PIA together. Upfront payments are often demanded by PIPs in case the PIA proposal is rejected by the banks. If the PIA is accepted, then the lenders end up picking up much of the costs of engaging a PIP over a five to six-year period. The new twist on all of this is an accelerated PIA. This is where the homeowner is returned to solvency in just three months.
In the meantime, the unsecured debt is written off, a large chunk of the mortgage debt is wiped, and there is no requirement to spend five years living on the bare minimum as set out in the Insolvency Service's minimum living expenses guidelines.
It is a quick, clean solution that gives an over-indebted householder the certainty of a formal PIA process and secures the home.
These people can get back to restoring their finances and repairing their broken credit records. They will, in time, have to deal with part of the mortgage being set aside in a split mortgage arrangement. But in the meantime they have a fresh financial start.
For the bank with the mortgage debt such an arrangement avoids bankruptcy, and repossession proceedings.
And the five years of PIP fees are saved. With a five to six-year deal, the chances of a breakdown in the arrangement are strong.
Other lenders are going to lose anyway, so the likes of credit unions may be prepared to take a hit if it restores a family to financial health.
If these accelerated PIAs deals take off, then hundreds of financially distressed homeowners could benefit.