Issues to Consider when contemplating a Personal Insolvency Arrangement

As some banks are starting to do “full and final” settlements with debtors, it follows that the debtor should firstly try and reach such an agreement with the banks.

A trend in recent years has been for banks to sell off non-performing loans.  Some of the banks selling the loans were very reluctant to engage in any type of debt forgiveness, whereas the purchasing funds have been more pragmatic in doing deals. Accordingly, a debtor might decide to wait for his loans to  be sold before attempting to negotiate a debt forgiveness deal. A problem with this approach is that it can almost take a full year for the loan to be sold and the purchasing fund gets its “feet under the table” and to even commence negotiations.

A key issue to consider is how stressed the debtor is by his financial circumstances, and how soon does he need a resolution. If he is highly stressed, and the stress levels are affecting his health, then he may decide to bite the bullet early, and seek a PIA as quickly as possible.

A debtor must meet certain criteria to be eligible for a PIA. We set out below the main criteria:

• The debtor’s secured debts must be less than €3 million, or, alternatively, if the secured debts are above €3 million, then all of the secured creditors must agree to participate in a PIA. [If the debtor has various secured creditors totalling more than €3 million, then he might decide to sell a certain number of properties to reduce his secured creditors to less than €3 million so that he can guarantee himself a chance of doing a PIA. For some debtors, the €3 million limit will prevent them from entering a PIA. It is possible to have a situation whereby 5 secured banks, who are owed, say, €8 million wish to enter a PIA, but are blocked from doing so because a trade supplier with a judgment mortgage of €5,000 refuses to consent.]
• The debtor must be domiciled in this state, or within the previous twelve months he must have resided in the state or had a place of business in the state.
• At least one of his creditors must have a charge on property situated in the state.
• The debtor must be insolvent i.e. he must be unable to pay his debts as they fall due.
• The debtor must have cooperated with the creditors who are secured creditors in respect of the family home for at least six months. Alternatively, the PIP may certify that even if the debtor had participated in a mortgage arrears process, that the debtor would be unlikely to become solvent within a period of five years.

It is now not possible for banks to veto a “reasonable” PIA if the debtor had a debt which was secured over their family home and in respect of which the debtor, on 1 January 2015, was in loan arrears with their payments or the debtor, having been, before 1 January 2015, in arrears with their payments, had entered into an alternative repayment arangement with the secured creditor.

Whilst there may be little “wriggle room” in defending a straightforward cash loan advanced to the debtor in a personal capacity, there may be “wriggle room” in defending a bank’s call on a personal guarantee, due to “technical” defences. Accordingly, it is advisable to obtain expert legal advice (from an experienced solicitor/Counsel!) as to whether the PG is valid.

A particular area of contention can be “Joint & Several” guarantees. There are many situations that if all parties contributed their share towards a call on a Joint & Several guarantee, that all parties could remain solvent. However, some of the joint guarantors may be already insolvent themselves. and thus the burden falls on the remaining guarantors, which might trigger their own insolvency.

A critical issue in respect of Joint & Several guarantees is that if another guarantor pays more than his pro-rata share, then he would be entitled to sue his co-guarantors for their relevant contribution.

The debtor should carefully review his employment contract and/or (if relevant) the regulations of his profession or regulatory body and assess what impact, if any, an application for a PIA would have on his job/profession. Some employers may use the application for a PIA as an opportunity to dismiss an employee.

Some professional bodies e.g. the Law Society and Chartered Accountants Ireland, require members to notify them of PIA’s.

If the debtor only owes money to one Bank, then he may not be able to enter a PIA. The Banks have clearly indicated that they will not deal with the costly and cumbersome procedure of a PIA when they can negotiate directly with a debtor. However, with the removal of the banks’ veto in a PIA, it may be possible to force a “single” bank to engage in a PIA in certain circumstances. If the debtor is multi-banked, i.e. that he has loans with several Banks, then he is a much better candidate for a PIA.

An issue for a debtor to consider is what would happen if he only continued paying his house mortgage, but ignored all of his other creditors.

For example, if a debtor owed €500,000 on his own home, which had a market value of €200,000, but the house mortgage was on interest only for the next 20 years, and if he owed €2 million to his other creditors, what would happen?

The likelihood is that the other creditors would obtain judgement against him and register judgement mortgages against his interest in the family home.

However, the judgement mortgages would fall away after 12 years, and the debtor would no longer have a liability to the creditors. In the meantime, he could pay interest on his house mortgage, and hopefully at the end of twenty years the house would be back in positive equity with the help of inflation.

We have a number of clients who have adopted a strategy of “doing nothing” on the basis that their family home is so “protected” by negative equity that other creditors are unable to enforce any judgments that they might obtain against them.

It is possible that some of the debts are statute barred and not recoverable by the creditors.  The normal statute of limitations for “normal” debt is 6 years i.e. the creditor has 6 years from default to issue proceedings; otherwise they are prohibited from issuing proceedings.

The Statute of Limitations on contracts relating to lands is normally 12 years. There are some “tricky” rules over what constitutes default.

Sometimes, in order to get a deal over the line, it might be necessary to introduce “third party” monies to the settlement pot. Such monies can come from family or friends. If such monies are used, then careful consideration needs to be given to any Capital Acquisition Tax issues arising.

If a debtor is multi-banked, then he must carefully assess the impact of one bank issuing proceedings against him, and seeking judgment mortgages against all of his un-encumbered property.

One of the key ingredients in reaching a settlement with a bank can be the ability to provide them with a lump of cash from the sale of unencumbered assets and/or the sale of assets with positive equity. Obviously, if a debtor allows one bank to obtain judgment and register judgment mortgages on his unencumbered properties, he will then have fewer chips to negotiate with. One way to block legal proceedings would be to commence the PIA process, as the bank would be prohibited for at least 70 days from progressing its proceedings.

However, the debtor may strategically decide to allow one bank to register judgment mortgages on all of his properties, so that the other banks are “squeezed” out. The debtor might then be able to do a deal, in due course, with that particular bank (on the basis that it is very expensive for creditors to actually enforce judgment mortgages, and the bank might do a full and final settlement in return for voluntary sales of some of the properties.)

In some cases it might suit a multi-banked debtor to “force” a smaller creditor to issue proceedings against him, and just prior to judgment being obtained approach the larger banks and advise them that unless they support a PIA that the smaller creditor will effectively take all his remaining unencumbered assets, thereby depriving the larger banks of valuable assets.

A judgment mortgage can be “lifted” from properties provided a Protective Certificate is issued within 3 months of the judgment mortgage being registered. The judgment mortgages will remain lifted if the PIA is successful.

It is probable that the debtor’s credit rating is already in tatters with the Irish Credit Bureau. However, the rating maintained by the Irish Credit Bureau is only accessible to the Financial Institutions who subscribe to it, and it is not available to other creditors such as utility companies, trade suppliers, credit unions, department stores etc.

If a debtor applies for a Protective Certificate, then his name, address and date of birth will be shown on the public registers maintained by the Insolvency Service of Ireland on their website, therefore damaging his “public” credit rating.

Even if the debtor’s application for a PIA is rejected, and his name is removed from the ISI website, the likelihood is that the fact that he applied for a Protective Certificate will be recorded on other credit reference databases, such as Dun & Bradstreet.

Some debtors tend to grasp short term solutions, when they should really be looking at a 20 year business plan for themselves.

If a debtor is aged 57, he really needs to ask himself if he will be able to pay off a mortgage of, say, €700,000 by his retirement, or is he better off trading down now to a smaller house. In addressing this issue, the debtor will have to make assumptions about interest rates. Interest rates are currently at an historic low, but how long will they remain at that level?

A PIA is a negotiated contract between a debtor and the Banks. If the PIA is silent as to what happens when a secured asset, such as a family home, is sold, then the provisions of the Personal Insolvency Act 2012 kick in. Under the legislation, the Bank may claw back any loan that was written off and that was subsequently recovered through a sale of the property for a period of up to twenty years. In reality, a debtor may attempt to negotiate a reduced claw back period with the Bank. A key issue for the debtor is whether he is better off going Bankrupt today, discharging himself from Bankruptcy in due course, and then buying the property back, and obtaining the full benefit of any future rises in property.

The legislation also provides that if a debtor improves his house, say by building an extension, that the Bank may get the benefit of that improved value if the house is sold within twenty years, unless the debtor had obtained the Bank’s consent to building the extension. If a debtor does make a request to build an extension to his property, then the Bank can not unreasonably withhold consent.

Aside from the banks’ statutory entitlement to claw backs, many PIAs in respect of the family home now have split mortgages in place i.e. the mortgage is split into two parts: one part is paid off and the other part is “parked” on the property.

If the debtor is expecting a large inheritance, he needs to consider if he should go bankrupt now, [preferably in the UK with its shorter discharge period] so as to protect the inheritance from the clutches of a longer term PIA.

A big issue for some debtors will be whether their pension income can be captured by a PIA for distribution to creditors. Under the legislation, it is expected that anyone entering a PIA whose pension commences within seven years and six months within the application date of the PIA, that their pension income will be caught and incorporated into the PIA. In particular, the tax free lump sum of 25% that is normally available to pensioners upon commencing a pension may be caught.

Another timeline to watch out for is that if the debtor made “excessive” payments into his pension plan within three years of the application date, that those payments may be reversed.

Essentially, there will be two types of PIAs: “Lump Sum PIAs and “Income Type PIAs”. A Lump Sum PIA is where the debtor realises his unencumbered assets and the Bank accepts the proceeds in full and final settlement. An Income PIA is where the Banks accept payments of surplus income earned by the debtor over a period of six/seven years.

Many of our clients have advised us that they would find it impossible to live on the monies which have been set out by the Insolvency Service of Ireland. While the reasonable living expense guidelines are only guidelines, it is expected that the Banks would expect debtors to take significant pain. Some debtors might be reluctant to take such pain for an extended period of time.

Income type PIASs depend on secure employment. If a debtor loses his job in, say, 4 years’ time, his PIA will collapse, and he will be back to square one.

One of the variables as to whether a PIA will complete is whether the tax payer remain tax compliant or not. If the tax payer does not remain tax compliant, then the PIA will collapse.

Whilst the general media’s interest in who is obtaining PIA’s has waned, it is always possible that a journalist may be in court on the days when the PIA is being processed and decides to report it.

Some company search companies (such as vision-net) now provide “alert” facilities to subscribers that send out a notification whenever  a protective Certificate is issued or if a PIA succeeds (or fails.) The notifications are sent out to subscribers who have carried out searches on the individuals.

This article summarises the basic issues that a debtor considering a PIA should consider. Obviously, the more complex a debtor’s affairs are, there will be more complex issues to consider and more opportunities to develop advanced strategies for debt resolution. As we are expert at such strategies, we would be happy to discuss such strategies at a consultation.

For further information please contact Jim Stafford or Tom Murray on 01 661 4066

Jim Stafford and Tom Murray are authorised to act as Personal Insolvency Practitioners by the Insolvency Service of Ireland.