Insolvency service needs to step in where banks refuse to tread
The debt resolution process needs to be speeded up and the balance swung in favour of distressed borrowers
Published 20/07/2014 | 02:30
When I heard, last week, about the massive upsurge in business at the ISI, it seemed as if the insolvency service was working. I couldn't have been more wrong. The ISI reported a take-off in the number of cases applying for insolvency protection. On investigation, it turned out that there were only 850 applications, resulting in 180 insolvency agreements, since the ISI opened its doors last September. That's about two agreements for each member of staff at the ISI. There are nearly as many PIPs (Personal Insolvency Practitioners) as there are agreements.
Last year, Alan Shatter, the Minister for Justice at the time, estimated there would be about 15,000 Debt Settlement Arrangements and Personal Insolvency Arrangements annually and 3,000- 4,000 Debt Relief Notices. There's a long way to go. The ISI is making a song and dance about a paltry few who have used the service. There have been 164 bankruptcy adjudications in 2014, not surprising given the amount of negative equity.
The price of justice for people who can't pay the bills can run up to €10,000 plus VAT to pay a PIP. Insolvency solutions are like a prison sentence for whole families who are forced to live on the breadline for far too long. It's early days yet and we need the ISI. If it wasn't there, the banks would be even slower.
The system doesn't work because it's predicated on punishing the victims. Bond- holders fanned the flames when the property market was overheating and they got away with it. We need practical solutions, without penance, and the timescale needs to change. If you can be in and out of bankruptcy in three years, insolvency should take no more than one.
The Central Bank said there were 35,314 cases in long-term arrears at the end of March. The ISI should focus attention on these acute cases if we are to avert a crisis. It should step in where banks refuse to tread. If those accused of sitting on the fence are bankrupt, write off their debts; if insolvent, restore them to solvency. And the banks should pick up the tab if that's what it takes.
By the end of March, financial institutions had restructured 92,442 PDH mortgages. That's 12,753 more cases since last year. Not all the solutions are sustainable, but it's getting better. The ISI's 180 arrangements pale into insignificance by comparison.
According to the Department of Finance, of cases in arrears more than 90 days, only 14,727 have been rescheduled since records began. Some 72pc have not been restructured and another 8pc got only temporary solutions. Some customers are being shown forbearance, on condition that they burn their unsecured creditors such as credit card companies and credit unions. These borrowers should try to do a deal with their other creditors.
According to the ISI, under the insolvency process the average write-down is 80-90pc. If they have to use the ISI to get it, it may cost as much as the debts themselves. Mortgage providers refuse to see this, resulting in offers that are neither viable, nor fair. Sooner or later this must change for the system to be acceptable and work.
Restructures that involve arrears capitalisation run a high risk of re-default, with more than a third being unsustainable, according to the ISI. The banks don't have enough capital to cope with the problem, in spite of what we are led to believe. This leaves those in long-term arrears cut-off from help. Split mortgages that shelve the unsustainable part of the debt have the highest rate of success, but they are still not being used enough. Banks must learn to accommodate their customers better than they have until now. Lenders engaged in reckless lending when they encouraged cautious savers to throw caution to the wind. Banks, competing for the biggest market share, broke even their own guidelines when they turned savers into speculators. The same banks sent in the receivers when the house of cards fell down, with no concern for their customers, whose lives have been torn apart.
Risky interest-only arrangements escalated between 2005 to 2008, often with 100pc of the purchase price covered. Now many are deep in negative equity, as repayments change to include capital as well as interest. Many loans will prove to be unsustainable and default is inevitable unless something changes.
The ISI is crying out for cases to stand up and say no. Maybe it's time to give them what they want, but first they need to swing the balance in favour of distressed borrowers and speed up the resolution process. Families shouldn't be put on the breadline, nobody should. You wouldn't do it to a convicted criminal. And those seeking solutions should expect the whole process to take no more than a year.
Reasonable monthly living expenses, to get any kind of deal, are set at about €1,000 for an adult. Financial institutions expect to get the rest. It's not enough to have any kind of life; there's nothing in it for pension provision to see you through retirement, unless you are very clever, a banker, or in the public sector. If you have children it goes up by about €200 to €500 depending on how old they are.
A typical family might expect to be allowed €2,500 to €3,000 a month. A single-income couple, with children, on the average industrial wage could expect to take home little more than €3,000 a month. They would need another €1,250 to pay back €200,000 over 20 years. It would cost €2,600 before tax, as 52pc takes its toll. Can the tax system expect insolvent families to lose more than half their income, when it doesn't leave enough to pay the bills? That's what will be taken from every extra euro they can find.
Single people have some hope, but it's not much. Most who turn to the ISI are in the private sector and the vast majority are couples. The 35-44 age group is hardest hit, but they are followed close by the age groups on either side. If the ISI wants to be swamped with applications, the rules will have to change. Meanwhile, those who are waiting for lenders to do the right thing need to look at the solutions the ISI offers. It got off to a slow start because the system is flawed, it's time to fix it.
James Fitzsimons is an independent financial adviser specialising in tax and financial planning