Insolvency service needs kick-start so that stubborn banks act
Just four arrangements on distressed mortgages shows the costly system isn't working
WE paid millions to set it up and it will cost millions every year to keep it going – but so far the Insolvency Service of Ireland (ISI) has only approved four PIAs (Personal Insolvency Arrangements) for distressed mortgages.
Even at this early stage, with 176,000 residential mortgages in arrears and most of them having been strung along by lenders for years, if only 1 per cent of cases were facilitated you would expect to see about 2,000 PIAs by now, with 10,000 or 20,000 cases following close behind. The system doesn't work and it's easy to see why.
The ISI's own charges are small enough, but for someone who can't afford to pay the bills, any charge is too high. You cannot enter the system without engaging the services of a Personal Insolvency Practitioner (PIP). Their costs have been estimated at about €5,000, but they could be more. They may even require a payment up front, especially as there is no guarantee that a case will be accepted by the ISI and there is a lot of work in assessing and evaluating a case to make an application. At least with bankruptcy, you can do it yourself without the professional fees.
If you get into the system, that guarantees nothing either. A large majority of your creditors must approve the arrangement. For unsecured creditors such as credit card debts and personal loans it could mean that the debt is written off entirely. The main reason for applying to the ISI is to seek protection from creditors who can't take no for an answer and refuse to accept that the financial crisis has left you no choice but to default, or seek a compromise.
According to its Statistical Report for the first quarter of 2014, there have been 523 applications to the ISI. Some 320 of these include mortgage debt and the rest relate to unsecured debts of which 82 are relatively small.
There are about 50 new applications a week and on that basis there could be another 2,000 applications this year if the numbers are steady. There are numerous other contacts and enquiries to the ISI, but few convert into finding solutions, at least not yet.
There are about 90 staff in the ISI so it's not as if they are under-resourced. It's there for a purpose but its objectives are not being achieved and if things don't turn around soon it will become nothing more than another government quango that wastes our scarce resources.
Maybe we expect too much from the ISI. After all, creditors don't have to go along with it if they don't want to. It's not as if banks are providing better alternatives. With the exception of a handful of cases that secured debt writedowns, banks have abandoned distressed borrowers who are in arrears.
Up to March, the courts had issued 70 protective certificates. This protects the debtor (borrower) from their creditors for 70 days while a PIP formulates a plan to put to the creditors. So far, 55 arrangements have been approved and apart from the four PIAs involving mortgage debt, there were seven DSAs (debt settlement arrangements) and 44 DRNs (debt relief notices). To date, DRNs dominate the approved arrangements.
A DRN is suitable for someone with very low income and essentially no assets worth talking about. For debts of no more than €20,000 a DRN could be the solution. They are simple to deal with and you don't need an expensive PIP, an AI (Approved Intermediary) will do and you can access them through Mabs. If your circumstances change within three years, you could be asked to give something back.
For unsecured debts over €20,000 and mortgage-related debt, the process is slower. While the individual may be insolvent, they can own assets too and creditors, even unsecured, want to get back what they are owed. They've held out for five years and they are not giving up without a fight. Someone needs to light a fire under them to get a move on, but the ISI is powerless to do anything. Earlier this year the Minister for Finance said that the Central Bank could force banks to be fair, but we haven't seen that happen yet.
The 523 cases currently being considered by the ISI account for debts of €193m. The biggest group (45 per cent) relate to mortgages on people's homes, 36 per cent are made up of other debts with financial institutions. Only 2 per cent relate to credit unions. Revenue debts make up another 2 per cent and they can only be included in an arrangement if Revenue agrees.
Writedowns for mortgage debts have been sought for up to 39 per cent of what's owed, the average being 19 per cent. This is coupled with an average proposed debt writedown of 93 per cent for unsecured debts under a PIA. In the case of a DSA, where none of the debts are secured, the average writedown requested is 77 per cent, but this can vary widely.
The systems are in place to help those in trouble, but until the banks co-operate and take responsibility for their own part in creating the mess, little will change. Banks have washed their hands of the problem, the Government has done the same and the ISI misjudged how borrowers would react. The reality is that banks won't do anything they are not forced to do. Distressed customers expect this to change. Surely there's a competent bureaucrat who can stir things up and make the system work.
James Fitzsimons is an independent financial adviser specialising in tax and financial planning