How the bill will take effect for banks and debtors
The Personal Insolvency Bill will force a dramatic change in the behaviour and attitude of the banks when it comes to indebted householders.
• THE BANKS
Banks will now do their damnedest to avoid having people who owe them money they cannot repay ending up bankrupt, or availing of new non-court debt write-downs.
If you are one of the 116,000 homeowners struggling to repay your home loan your bank will now offer to make it easier for you by splitting some of your mortgage, offering to buy a stake in your home, putting you on interest-only for three years or helping you trade down to a smaller home.
Lenders fear that if they do not meet those in arrears half way some will go the bankruptcy route, leaving little or nothing for the bank.
But despite that, there are still likely to be at least 10,000 people who will get debt settlements (for unsecured debt) and personal insolvency arrangements (for secured debt up to €3m).
Around 3,500, who have little or no income, will likely avail of a special deal to have debts below €20,000 written off.
All of this means the banks are winners and losers. They will be winners because they will still get to call the shots on any debt write-off deals. And they are winners because there will be no office where consumers who feel they are being treated unreasonably by the bank in debt-deal negotiations can appeal to.
But banks are losers too. Much capital will be written-off, particularly on buy-to-let and large residential mortgages.
Banks will also be losers in that they will no longer have the absolute right to enforce full repayments where people have the means to repay their debts.
Consumers who avail of the new legislation will both gain and lose from it.
Take someone with a large residential mortgage, credit card debt and a few buy-to-let investments.
Their income has shrivelled to a fraction of what it was during the boom.
They cannot meet the agreed repayments, and they have tried and failed to come to a voluntary deal outside the remit of the new insolvency legislation.
One option would be to file for bankruptcy. Here the bank would get very little as most of the assets, and maybe even the residential house, would be sold for little or nothing in a fire sale.
A bankruptcy trustee would rule the consumer's life for three years. But even after the three years they may have restrictions placed on their financial activities.
• THE COMPROMISE
This means a personal insolvency arrangement would suddenly look attractive to the bank and to the householder if the debts can't be dealt with by extended interest only or some other agreement.
But there will be no free lunch here either. A detailed financial disclosure -- effectively a statutory declaration -- will have to be made.
The proposal will have to be approved by those who control 65pc of the debts.
This means the lenders will dictate what will be written down.
They will probably demand all the buy-to-lets are sold. And the lenders will decide what the family will live on and how much should be paid back over a five-year period.
If the deal is adhered to then an agreed amount can be written off after six years.
However, the experience in the US is that large numbers of restructured loan agreements often fall back into arrears.
End up in arrears for six months on a personal insolvency agreement and you will be forced into bankruptcy.
This means we can expect a lot of bitter disputes between heavily-indebted households and banks once the new law is in force.