Debt deals could be more trouble than they're worth
Tomorrow is the first day in the history of the State that you'll be able to apply for a government-backed out-of-court debt deal.
The deals – which can be struck through the State's new insolvency mechanism, the Insolvency Service of Ireland (ISI) – should allow distressed borrowers to get to grips with their debt nightmares, avoid bankruptcy and, if all goes well, to start afresh.
"The ultimate benefit of the service is that a person is returned to solvency and given the second chance that everyone deserves," said ISI head, Lorcan O'Connor.
"The new arrangements are designed to keep people in their homes."
There is no guarantee, however, that the new debt deals will be successful.
The deals are expected to include debt write-offs, particularly for homeowners in negative equity. So far, the banks have fiercely resisted writing off debt for homeowners and the chances of the banks reversing this policy once people start applying for the deals are slim.
The new deals also come with many drawbacks – so tread carefully before you pursue one.
If you want to strike a debt deal under the ISI, you must hire an authorised debt expert – known as a personal insolvency practitioner (PIP) – to negotiate on your behalf. You could have to pay thousands of euro to this expert – a hefty bill if you're struggling to make ends meet. Some PIPs plan to charge a consultation fee of several hundred euro and preparatory fees of thousands, according to the Free Legal Advice Centres (FLAC), which offers legal advice to people in debt. Despite the cost, there is no guarantee that the debt expert will be able to negotiate a successful deal for you.
There are about 30 PIPs on the ISI's register – which doesn't offer much choice to hard-pressed debtors, according to David Hall, director of the insolvency experts, the Irish Mortgage Holders Organisation.
Debt experts are concerned debtors could be hit with upfront fees when hiring a PIP. If a bank or creditor refuses to accept a deal put to them by a PIP, the PIP still has to be paid – so upfront fees could be the only way the practitioner could have to ensure he gets paid for his work.
"It's unclear how a PIP will be paid – no one knows if there will be a pot of money for a creditor to pay fees to a PIP [for any deal negotiated on behalf of a debtor]," said Hall. "The legislation which sets up the ISI does not stop a PIP charging someone upfront."
This could in turn make it hard for those in dire financial straits to hire a PIP – as some debt negotiators could cherry-pick their clients to ensure they get paid.
"For those on a limited income, we think there may be a difficulty getting an appointment with a PIP," said Paul Joyce, a senior policy analyst with FLAC who was on the previous government's debt review group a few years ago. "It's likely that insolvent debtors who have a lot of debt – but plenty of assets, will be dealt with quickly. Ordinary consumers – without such assets – could find it hard to get an appointment."
NAMING AND SHAMING
If you try to strike a debt deal under the ISI, your name will be included on a public register – even if you don't secure a deal.
So if you've got a nosy neighbour, he or she could check the register to see if you've run into problems with debt. Furthermore, if you fall behind on the repayments under your debt deal, these missed payments will also be recorded on the register, warned Hall, who described the register as "unnecessary".
As well as leaving you open to a bruised reputation, a public register could go against you if you're self-employed and competing for a contract – or indeed, if you're trying to attract investors for your business.
The register, however, is similar to those which have been established in other countries, according to the ISI's O'Connor. "When you look at other countries which offer alternatives to bankruptcy, every one of them has a register," said O'Connor. "These countries include New Zealand, Scotland, Canada, England, Wales and Norway."
Could you get by on €58 a week for food and €29 a week for your social life? If you're single, this might seem impossible – €29 is unlikely to cover half of the cost of a date or night out, for example. Yet this is exactly how much you're expected to spend on food and social life a week if you're a single person living alone who signs up to a State-backed debt deal, according to the ISI's spending guidelines.
These guidelines set out what the ISI considers to be a 'reasonable' standard of living for those who strike a debt deal. If you're a married couple with two pre-school children, you'll need to survive on €113 a week on food to meet the guidelines, €28 a week on "savings and contingencies", and about €19 a week on health. Any parent with young children knows how much of a struggle it would be to meet these spending guidelines. One doctor's bill alone could set you back €55 – more than the combined weekly budget for health and contingencies.
The ISI says its guidelines are flexible. "The ISI will not be prescriptive in terms of what the applicant [for a debt deal] can or cannot spend their money on," according to the guidelines. However, the guidelines add that "where an applicant spends in excess of what is considered to be reasonable under these guidelines", it will "become necessary" for the debt negotiator to look at the applicant's spending.
It's clear that you will have to meet very stringent spending guidelines if you sign up to a debt deal under the ISI. You're unlikely to be able to hold on to a second car or private health insurance – and holidays will be a thing of the past.
Furthermore, as the debt deals will usually last for between five and seven years, you'll be living on the breadline for some time. "Five to seven years is a long time to live on a minimum income," said Joyce. "We would be concerned that people can last the course."
When you sign up to an ISI debt deal, any pay rise, inheritance or lump sum you receive before the end of the deal comes back on the table. Your deal usually lasts for between five and seven years – and for each of these years, the arrangement is reviewed. "If a debtor gets a pay increase, that would be reflected in the arrangement," said O'Connor. "The increase in profit would be shared [between the debtor and creditor]. Similarly, there may be a deterioration in the borrower's situation – if that happens, the arrangement is adjusted so the creditor gets less."
Even if you meet the terms of a debt deal and live a frugal lifestyle for five to seven years, your bank could still chase you for more cash 20 years after you signed up to the deal. Banks have a 20-year window to claw back any debt they wrote off for struggling borrowers – if the borrower sells their home within that time and makes a profit in doing so. This effectively means that a debt could follow you to the grave if you die within 20 years of signing up to a deal.
"There may be a claim against the estate but this is a legal call," said O'Connor.
THE LESSER OF TWO EVILS
Some insolvency experts recommend striking a deal with your bank without going through the ISI as doing so would free you from the constraints which come with an ISI deal. However, striking a deal outside the ISI also means you won't be entitled to the protection given to debtors under personal insolvency law.
If you're struggling – and can't reach an agreement to resolve your debt, the ISI's debt deals could be your only way to avoid bankruptcy. If this is the case, you can't afford to turn your nose up at these deals.
"With bankruptcy, there's no guarantee you'll keep your home," said Hall. "Tough spending allowances will follow. You won't be able to be a director of a company for three years. You'll need the permission of your bankruptcy assignee [the official who handles your bankruptcy] before you leave the country."
You'll also face bankruptcy fees running into thousands of euro.
"There are costs involved in bankruptcy," said Joyce.
"At the very least, it will cost between €1,600 and €2,000 to apply for bankruptcy. That's a lot of money if you're insolvent and you've already paid a fee to try to get a debt deal – but couldn't secure a deal."