Drowning in debt
by Mark Ryan
 
 

A Personal Insolvency Practical Guide and Case Study

This would reflect the mood of the people who I have met over the last few years since I became a licensed Personal Insolvency Practitioner (PIP) in August 2013. It still surprises me that following our meeting they almost always tell me how much better they feel after sharing their problems and how they now understand that there are solutions to dealing with their debts. This meeting is the first big step on their journey to returning themselves to solvency. I have to admire the people that I meet as it must be tough opening up to a complete stranger about their problems and then telling the story about how they got to where they now find themselves. I would like to think that after they meet with me that they feel that someone is finally in their corner and that I have their back no matter what happens from there on.

 

Under the personal insolvency legislation, the PIP effectively steps into the person’s shoes and starts dealing directly with their creditors on their behalf. This means the letters, phone calls and any legal proceedings will stop to allow time (70 days) for the PIP to make a proposal to their creditors to resolve their debts. In most cases this will involve a substantial write down of debt.

 

One important statistic from the recent report to Q4 2018 which was issued by the Insolvency Service of Ireland (ISI) was that 95% of those who avail of the Personal Insolvency legislation retain their family home whilst also returning to solvency. Although the number of people who have availed of the new personal insolvency legislation is still quite low (just over 5,300 to date) we would estimate that there are a couple of hundred thousand people out there who need help and advice on how to resolve their indebtedness.

 

There are over 500 PIA arrangements that were rejected by creditors that are currently being appealed to the insolvency courts. The appeals process is very slow but there have been a number of PIA arrangements that were rejected by creditors which have been subsequently approved by courts. I have had a number of successful appeals approved in the last 12 months.

 

It is important to note that although there are currently over a 100 licensed PIP’s nationwide the ISI confirmed that less than half of these licenced PIPs are active and as such have the relevant experience of how the personal insolvency legislation works. As you only get one shot at availing of the legislation to resolve your debts it is extremely important to choose an advisor carefully, and it is advisable to ask a PIP how many cases they have dealt with and how long they have been operating as a PIP.

 

The Government launched a debtor’s support scheme in 2016 called ‘Abhaile’. This is a government funded scheme that allows a debtor to meet with a PIP for a ‘free’ consultation to assess their case and provide advice to the debtor in writing on how they can avail of the personal insolvency legislation to resolve their debts. My advice for anyone that is worried about any type of debt is to contact an experienced PIP advisor through the ‘Abhaile’ scheme to get professional advice on how to sort out their problems.

 

I have set out below a number of questions that I get asked regularly by clients that I meet.

 

1. How does it work and what is the term for each arrangement?

 

PIA – Up to a 6-year term for secured and unsecured debts (extendable to 7 years in certain circumstances).

DSA – Up to a 5 year term for unsecured debts only (extendable to 6 years in certain circumstances).

DSN – 3-year term for debts less then € 35,000

 

Accelerated Arrangement - Under the legislation there is also the option of an accelerated PIA or DSA.

 

This involves a lump sum payment (for example through family member support) payable normally within 3 to 12 months from the date the arrangement is court approved. For a DSA arrangement to be approved it must have 65% of creditors voting in favour of the proposal at a creditors meeting. For a PIA arrangement to be approved it must have 65% of creditors voting in favour of the proposal at a creditors meeting. In addition, for a PIA to be approved creditors representing more than 50% of the value of the secured debts, participating and voting at the meeting, must vote in favour of the proposal and creditors representing more than 50% of the value of the unsecured debts, participating and voting at the meeting, must vote in favour of the proposal for a PIA.

 

2. What are Reasonable Living Expenses (RLE’s) and how are they calculated?

 

They are cost of living expenses for the standard term of the arrangement (5/6 years). They would allow someone to live a basic standard of living but not a normal standard of living. In my experience these allowances would be 30%/40% lower than a person would normally live on outside of a PIA/DSA. These allowances are also used in bankruptcy for the assessment of a 3-year income payments order.

 

For example: a family of 2 adults and 2 children in secondary school, with a car in the household, would look like this:

 

Net income (take home pay after taxes)                                € 5,000

RLE’s

  1. Total Set Costs                                   € 2,240
  2. Childcare                                             €   500
  3. Mortgage Payment                             € 1,250
  4. Special Circumstances                       €        0

Total RLE allowances                                                             € 3,990

Net Dividend available to creditors (per month)                € 1,010

 

This is the maximum dividend a debtor can offer to their creditors over the 5/6-year term of the relevant arrangement regardless of whether their debts are € 50,000 or € 50m.

 

3. How the family home is dealt with in a personal insolvency arrangement?

 

A core part of the legislation is the protection and retention of the family home.

 

As stated above 95% of debtors who avail of the legislation retain their family home.

 

The Principal Private Residence (PPR) loan can be restructured in a number of ways as outlined below. It will give certainty to the debtor as regards their financial position in to the future, once the arrangement has been completed.

In most cases it will involve a write off of the mortgage on the family home.

 

Below is an analysis of how 128 cases which involved a family home mortgage were resolved under successful PIA applications.

 

2 - Mortgage to Rent

2 - Permanent Interest Rate Reduction

2 - Reduced Payment

3 - Payment Moratorium

5 - Voluntary Surrender

6 - Temporary Interest Rate Reduction

10 - Unchanged

17 - Interest Only

31 - Arrears Capitalisation

34 - Principal Reduction

49 - Term Extension

59 - Split Mortgage

 

4. What do you think of Vulture Funds in the context of recent announcements made by the main banks to sell on non-performing loans?

 

They are a necessary evil and they are not new. They are investment funds that buy ‘bad loans’ from banks at substantial discounts and their goal is then to recover as much as possible from the borrower.

 

They have a very commercial attitude, but you need a good advisor to assist you with the negotiations. They don’t want a long-term relationship with borrowers unless they must. They will honour contracts they have purchased if they are being complied with or you can show that it’s in their interest to support a long-term restructure. It can get very personal if the debt is a family home.

 

Based on recent news announcements the main banks are considering selling on a further 25,000 to 30,000 ‘bad loans’ in early 2019.

 

Borrowers would still be entitled to court protection through the Personal Insolvency legislation and I would strongly recommend that they speak with an active and experienced PIP to understand their options.

 

5. Split loans have been in the news recently – can you explain what they are?

 

The easiest way is with an example.

 

A property was purchased in 2008 for € 500,000 with a 100% mortgage. This property is now worth € 250,000 and the outstanding debt now stands at € 460,000 with arrears. Under the Code of Conduct on Mortgage Arrears, the bank could propose to split this loan as follows:

 

Loan A:  € 250,000 repaid under an affordable mortgage term and monthly repayment

Loan B:  € 210,000 parked at 0% interest charged on the loan; but it will be repaid from the sale of the property or a lump sum payment at the end of the mortgage term.

 

This obviously would leave the individuals homeless at one of the most vulnerable times of their lives should they not be in a position to pay the lump sum at the end of the term. It would likely lead to them having to rely on the State to provide them with housing. I would estimate that there are over 100,000 split loans in the country.

 

Based on recent Central Bank statistics there were over 70,000 loans (10% of the total loans) in arrears at the end of 2017. 48,000 loans were in arrears by more than 90 days.These individuals should consider if the personal insolvency legislation would be suitable for them to resolve their debts.

 

6. How are Revenue dealt with under the personal insolvency legislation?

 

Under the legislation Revenue are a Preferential Creditor but they can opt in to an arrangement to be treated as an unsecured creditor. In most cases revenue partially opt in to an arrangement and they are treated partly as a preferential creditor and the balance is treated as an unsecured creditor.

 

In the case of the preferential debt it is repaid over the 5/6 year term. The unsecured debt portion will allow Revenue to share a dividend pro rata with the other unsecured creditors and the balance of the debt is then written off at the end of the 5/6-year term. No further interest or penalties are applied to the Revenue debt that is included in the arrangement.

 

This would be in stark contrast to a Phased Payment Arrangement which we as accountants would frequently assist our clients with in dealing with Revenue tax arrears on behalf of our clients. I have set out a case study below that includes Revenue debt and which shows how I would resolve a case using the personal insolvency legislation.

 

PIA Case Study – Fred and Wilma Flintstone

The scenario below is based on all their assets and debts being held jointly. I have included notes below on how we would deal with the hardcore debts.

 

Step 1 - Overview

 

Assets                                    Values                                                    Liabilities               Notes

PPR                                        € 250,000                                              € 400,000              Includes Arrears of € 25,000

Buy – To – Let (BTL)              € 235,000                                              € 475,000              Property is in Receivership

Car                                          €    3,500                                               €           0

Savings                                   €    1,500                                               €           0

Credit Union                         €       2,500                                               €  25,000                               

Credit Card                                       n/a                                                €    7,798

Business Debts                                n/a                                                €   52,500               Loans and Overdraft

Judgment Mortgage                         n/a                                                € 150,000               BTL sold 2 years ago

Personal Overdrafts                         n/a                                                €     7,500                              

Revenue Debts                                n/a                                                €   50,000               I.T., VAT and PAYE/PRSI

Personal Guarantees (PG)              n/a                                                €  250,000              Business PG

Total:                                      € 492,500                                            € 1,417,798

 

Step 2 – How the debts are treated and restructured in a PIA

 

Note 1: PPR – It is proposed the PPR loan will be reduced to € 250,000 in line with the CMV. The Tracker Rate will be retained and repayments of € 1,250 p/m over 20 years to clear this restructured debt in full.

Note 2: BTL – This asset will be surrendered, and the residual debt will form part of the unsecured debts.

Note 3: Credit Union – Set off will be applied and the net balance of € 22,500 will be included as an unsecured debt.

Note 4: Judgment Mortgage – This debt has been charged against the PPR and BTL. As there is no equity in either the PPR or BTL this debt will be treated as an unsecured debt.

Note 5: Revenue Debts – Revenue agreed to Opt in to treat 25% of the debt as preferential and the balance of 75% will be treated as an unsecured debt. The preferential debts will be repaid over the 6-year PIA term.

Note 6: The legislation includes an annual review clause whereby if the debtors combined net monthly income (after taxes) increases above € 100 this will be shared on a 50/50 basis with the unsecured creditors.

 

 

Step 3 – Resolution of Residual Debts

 

Assets                                                    Net Residual Debts                             Notes

PPR                                                                         € 150,000                              Residual Debt on PPR loan above CMV

BTL                                                                          € 275,250                              CMV less Costs for Sale of Asset (15%)

Credit Union                                                             €   22,500                              Set off applied     

Credit Card                                                              €    7,798             

Business Debts                                                       €   52,500             

Judgment Mortgage                                                € 150,000                             

Personal Overdrafts                                                 €    7,500                             

Revenue Debts                                                        €  37,500                              Revenue Opt in at 75%

Personal Guarantees                                              € 250,000             

 

Total:                                                                      € 953,048                                                             

 

Step 4 – Monthly Dividends available to Creditors in PIA

 

                                                                                During PIA                                            

                                                                                (6 years)

 

Net Income                                                              € 5,000                                                 

 

Total Set Costs                                                       (€ 2,740)                                               

(based on note above)

PPR Loan                                                               (€1,250)

Preferential Debts – Revenue                                 (€   174)                                

PIP Mgt Fees                                                          (€   200)                                

 

Total Allowances                                                    (€ 4,364)                                               

 

Net Surplus/Dividend (p/m)                                  €     636                                                 

 

 

Step 5 – % Return to Unsecured Creditors in PIA

 

Net Dividend (72 months)                                    € 45,792

 

Total Unsecured Creditors                                   € 953,048

 

% Total Dividend (72 months)                                 4.8%  

 

Step 6 – Debtors Monthly Financial Circumstances Post PIA (this is for the years after they exit their PIA))

                                                                               

Post PIA                                

                                                                                 

Net Income                                                            € 5,000                                                 

 

RLE’s                                                                    (€ 3,600)               

(Increased post PIA by 30% to reflect

a normal living expense allowance)

 

PPR Loan repayment                                              (€1,250)

Preferential Debts – Revenue                                (  €      0)

PIP Mgt Fees                                                         (  €      0)

 

Total Allowances                                                    (€ 4,850)

 

Net Surplus/(Deficit) (p/m)                                       € 150 

 

Note:

 

As can be seen from the above after the 6 year term of the PIA in which the debtors have offered the maximum of their income less allowances and they have fully complied with the terms of the legislation, this effectively returns them to solvency and to what would just be considered a normal standard of living.

 

Regards

Mark

 

Note: This article also featured in the recent CPA Accountancy Plus magazine.