How Personal Insolvency Arrangements (PIA) work

A dairy farmer and his wife who were in danger of losing their family home and farm have secured their property after Kilkenny Circuit Court approved a Personal Insolvency Arrangement (PIA) to resolve their debts of over €1m. We outline out how Personal Insolvency Arrangements (PIA) work

Under the terms of the PIA, Start Mortgages, who are owed €388,000 - secured on the couple's home in Tipperary - had a reduction in interest from 5.45pc to 3pc with an interest-only payment for a period of six years.

Pepper Finance DAC, owed €387,000, and Everyday Finance DAC, owed €123,000 - both secured on the farmland - also had interest-only payments for a six-year period fixed at 2.63pc and 2pc respectively. When the six years are up, all three secured creditors will be paid for a further 19 years until the farmer is 75.

Unsecured creditors, who are owed circa €220,000, will be paid and written off over the six-year period. There is no interest accruing on unsecured debt in a PIA.

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The PIA, thought to be the first involving a farm family, means the couple will be able to stay in their home, valued at €220,000, and retain their farm, valued at upwards of €1.5m.

The farmer, who was represented in the case by Gary Digney from PKF-FPM accountants, told the court via his counsel Keith Farry that any alternative to the proposed PIA such as the sale, surrender or repossession of the property would result in him being made homeless and the farm being repossessed.

Digney (pictured) said PKF-FPM is seeing a substantial increase in judgements being sought, receivers being appointed and bankruptcy proceedings being brought in relation to farms and farm debt.

This case was referred to Mr Digney by the ICMSA as part of their assistance programme to farmers in debt.

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"All of these strategies invariably seek to take the farm and lands from farmers, and as quickly as possible. However, in a PIA, with the benefit of court protection, a Personal Insolvency Practitioner (PIP) can propose an arrangement which deals with any arrears on debts, extends the term of the loan, reduces the interest rate, and, in certain cases, reduce the debt.

"This applies for all secured debts and includes farm debts. Many recent high-profile cases - such as Ronan Ryan and Frank McNamara - focus on huge debt and high-profile celebrities, however the legislation works for regular citizens and farmers too.

"For example, a PIA can restructure a farm loan, clear the arrears and move it back on to a performing 20- or 30-year basis, allowing the farmer to repay debt without the threat of losing their farm.

"In many cases, farmers just need time to repay their debts. However, over the last few years, it has proved impossible to reach agreements with banks - often because of not being able to speak to someone with the authority to reach an agreement.

"Now, it is proving even more difficult to deal with investment funds, who tend to have a short-term strategy and are unwilling to enter into long-term arrangements. Government is aware of the problem.

"An experienced PIP will assess the specific circumstances and bring together a specialist team to protect the family farm.

"Crucially, in cases where a farm is about to be repossessed or sold, the PIP can apply for a protective certificate to allow time for a proposal to be put forward."

ICMSA president Pat McCormack said his association had worked closely with Mr Digney and were satisfied that his course of action for farmers affected in this way was practicable and achievable.

"We've worked with Mr Digney closely and co-formulated this approach because we see it as the most farmer-facing solution. In our opinion, it's right there, it's proven and it works," he said.

"We've worked with Mr Digney on several cases and observed his procedure on many more and we're satisfied that his option is legally and financially sound, while also demonstrating an understanding of the specific needs of a farm family.

"Our focus is always on coming forward with workable solutions and Mr Digney's approach is based on and proceeds from that same place.

"We're absolutely confident that this is going to be a way forward for many farmers in this quandary."

 

Case Study: How Personal Insolvency Arrangements (PIA) work

A Personal Insolvency Arrangement (PIA) is a debt resolution mechanism introduced in 2012 for people who cannot afford to pay their personal debts.

The PIA applies to the agreed settlement and/or restructuring of secured debts, as well as unsecured debts over a period of up to six years.

PIA Case Study

Mr and Mrs Murphy have a property with a mortgage of €500,000. The property is valued at €250,000. The mortgage has been in arrears since 2010. The interest rate is 4.65pc. They have a Credit Union loan and credit card debt. The Murphys have little disposable income and their loan has been sold to a vulture fund.

The Solution:

* Mr & Mrs Murphy meet a PIP.

* The PIP assesses the household income and expenses (Reasonable Living Expenses).

* Mr & Mrs Murphy are insolvent and, even with the best will in the world, can not afford to repay their debts in full.

* The PIP assesses what they can sustainably afford.

* The PIP, based on the income and expenditure profile of the family, determines they can only afford to repay a mortgage loan of €250,000.

* A PIA is proposed and the home mortgage is written down from €500,000 to €250,000.

* The mortgage term is extended until age 68 for Mr and Mrs Murphy.

* A sustainable, affordable mortgage payment going forward is determined.

* The interest rate is reduced to 3pc and fixed for the term of the mortgage.

* A PIA can last from one day to six years depending on the level of disposable income into the household.

* Mr & Mrs Murphy have no disposable income to fund a long-term arrangement.

* A relative introduced a lump-sum payment of €5,000 in full and final settlement of the debt.

* The PIP proposes a 12-month PIA where the lump sum is paid into the PIA. The 'negative equity' (€250,000) and all of the unsecured debt (Credit Union €20,000 and credit card €3,000) is written off under the PIA (in exchange for the €5,000).

* The unsecured creditors (€273,000) are paid €5,000 for the debt being written off - that is circa 1.83 cent in the euro in full and final settlement.

* This accelerated lump-sum PIA lasts 12 months.

* After the PIA, the Murphys have a normal performing mortgage of €250,000 at a fixed interest rate of 3pc until they are aged 68. All of the negative equity and all of their unsecured debt have been written off.

The above example is a fairly straightforward PIA scenario; a farming case tends to be a much more complex situation, but the same legislation can be applied to help farmers dealing with vulture funds and other debts to save the family home and also the family farm.

Gary Digney is a personal insolvency practitioner with PKF-FPM accountants based in Balbriggan, Co Dublin. email: g.digney@pkffpm.com

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