In the war on household debt, it was a good week. Last Monday evening, the first Debt Settlement Arrangement (DSA) was signed off in court. Under the arrangement, about 70 per cent of the debt will be written off.
DSAs are one of the new processes introduced by the Personal Insolvency Act, and are for unsecured debts over €20k. The man in question is reported to be a public sector worker in his 40s from Donegal, with a six-figure debt he could not pay. For the next five years he'll retain enough of his earnings to work and maintain a reasonable standard of living. His remaining income will be used to service the debt. At the end of the five years, the majority of his debt will be written off, permanently. The man was supported throughout by the non-profit New Beginning, and the Personal Insolvency Practitioner, or PIP, was Ronan Duffy of McCambridge Duffy.
Grant Thornton is one of the commercial firms putting this type of agreement together. Its phone has been hopping since Tuesday morning. When the media reported Monday's deal, more and more people realised that the new laws may, for the first time, give them a way to restructure their unsustainable debts. The profile of the people coming to Grant Thornton is highly varied – men and women from all walks of life, from homemakers to teachers to carpenters to lawyers. From all ages and all parts of the country.
This is great news, not just for the people making those phone calls, but for the entire country. Every week I meet people in Wicklow who have unsustainable loans and mortgages. All are stressed, many are not sleeping. Some describe their experience of the past few months, or even years, as being slowly suffocated. Parents are terrified of their children getting sick, because they don't have the money for a doctor – many earn too much to qualify for a medical card, but have nothing left after the debt payments are made. The growing debts, the continuous phone calls, the letters, take over their lives.
The human cost is immense. But so is the economic one. I don't imagine many of them are at their most productive at work. And the entrepreneurs among them – who should be creating jobs – aren't.
There are now 240,000 mortgages in Ireland either in arrears, or restructured-not-in-arrears (read interest-only or something as useless). About 650,000 people live in those homes. And that's just the number for mortgages – I've no idea how many more people have non-mortgage loans they can't pay back. But whatever the number, it means a large portion of our working population could not possibly be at their working best – and to get out of this economic crisis as quickly as possible, we need them to be.
Each case is different, but the DSA signed off on last Monday sets a valuable precedent. In writing off about 70 per cent of the total debt, it sends a powerful message to people facing unsustainable debts, that they should get in touch with one of the organisations working in this field. In the commercial space are companies like Grant Thornton and Irish Mortgage Brokers, as well as individuals setting up as PIPs. There are also many social enterprises, such as New Beginning, Mabs, the Irish Mortgage Holders' Association and the Phoenix Project.
And there's been more good news. On Wednesday, the first Personal Insolvency Arrangement (PIA) came before the courts. This is the new process dealing with both secured and unsecured debt, and so is the one relevant to people struggling with their mortgages. The case is reported to involve a family with debts over €600k. This is said to include unsecured debt and mortgages on their family home and a buy-to-let property. The court issued the first protective certificate for a PIA, which is one of the steps in the process. The family's PIP now has 70 days to seek an agreed restructuring of the debt with the various creditors.
As with the DSA, the family must be left with enough of their income to have a reasonable standard of living, with the rest going to debt repayments. The legislation specifies that the family home should be protected and that the arrangement can last no longer than six years. At that point, a portion of the debt, both unsecured and mortgage debt, could be written off.
Many more PIAs are being prepared, and the word from the practitioners is that the banks seem to be finally accepting that they have to make meaningful deals.
A lot of this is undoubtedly due to the real threat of bankruptcy which can now be made by borrowers. The insolvency legislation reduced the bankruptcy period from 12 to three years. The cost of declaring bankruptcy is being halved. In bankruptcy, all debts are immediately written off, so lenders are likely to get less than they would through a DSA or PIA.
Needless to say, the banks are still dragging their heels in important ways. For example, they are refusing to write down mortgages on family homes unless the family agrees to a voluntarily surrender of the home. This is explicitly contrary to the spirit of the insolvency legislation. In the many hours of debate in Dail Eireann last year, Justice Minister Alan Shatter was very clear that he expected unsustainable mortgages on family homes to be written down, where necessary, with the family staying in the home.
As people become more comfortable with the bankruptcy option, the banks may have to start acting differently. In many cases, the banks would lose far more by evicting a family and forcing them into bankruptcy than by leaving them in the home and reducing the mortgage.
As the first cases under the new insolvency legislation filter through, the number of mortgages in arrears continues to rise. On Thursday the Central Bank released the latest figures, showing that arrears for both owner-occupier and buy-to-let mortgages increased by about 2,000 from July to September.
It is a mark of spectacular Government incompetence that, five years into a mortgage crisis, the number of mortgages in arrears continues to rise. Even worse, if the approach to date were to continue, then even when the arrears numbers do fall, most borrowers would be no better off.
To date, the Government has allowed the banks to use extend and pretend restructures. In the case of Bank of Ireland, chief executive Richie Boucher admitted to me at the Finance Committee earlier this year that at least 90 per cent of the offers made by that time would result in higher overall payments from the borrower to the bank. This has a knock-on effect for the wider economy, as ever more cash is sucked out of the economy for another 20 to 30 years.
However, if enough people engage with the new insolvency legislation, things could begin to work out a lot better. It is true that the legislation is flawed – for example, Ross Maguire of New Beginning told me that, for the amount of work that went into last week's DSA, the PIP involved could have processed 137 cases in the UK, where McCambridge Duffy also works. Nonetheless, the new Irish processes, backed up by a quicker and cheaper bankruptcy process, may, finally, be giving those with unsustainable debts just enough bargaining power to lead to genuinely sustainable debt restructuring.
Time will tell, but the initial signs are promising. The new insolvency processes offer hope, for the first time, to a great many people in Ireland. As such, that is new hope for the whole country.
Stephen Donnelly is the Independent TD for Wicklow and East Carlow