Slightly shortened version of yesterday’s Irish Independent article : Charlie Weston Personal Finance Editor – 21 March 2013
Anyone seeking deals with their bank over debt will have to make drastic lifestyle changes under proposals to be announced next week.
Homeowners looking to write off mortgage debt will be told, for example, to drop their health insurance and sell off their second car. New criteria setting out the living standards for people having debt written off will also force people to:
* Take their children out of private schools.
* Give up foreign holidays.
* Get rid of Sky Sports.
Up to 100,000 families are currently in arrears of at least three months on their mortgages, while the average borrower in trouble has four other debts. The new minimum income guidelines will be issued by the head of the Personal Insolvency Service, Lorcan O’Connor, and Justice Minister Alan Shatter next Wednesday. The official guidelines will set out what people can live on before being accepted for debt writedown deals to be overseen by the new insolvency service. But it is understood the guidelines will also be used by banks for those being offered a long-term mortgage deal outside the new personal insolvency process. Although the guidelines are not legally binding, banks will only do a deal with homeowners who cut their living standards in line with these rules.
Courts are expected to use them as a benchmark in any legal dispute where people cannot reach a deal with their banks. Although there will be an allowance for a basic TV package, such as Sky TV, the guidelines are likely to mean no Sky Sports.
But the fact that the guidelines make no allowance for a second family car and ban health insurance is set to be the most controversial aspect.
Experts said people in this country hold dearly to private health cover, with just 8.6pc of people dropping their health insurance since the financial crash in 2008. Some 2.099 million people have private insurance, 46pc of the population. And battles are set to be fought with banks by parents making sacrifices to send children to private schools.
A senior official familiar with the new guidelines said if people wanted €100,000 to €200,000 written off a mortgage they could not expect to have a foreign holiday every year and private health insurance.
The guidelines set out how much different family units will be allowed to live on each month. Accordingly, a family in an urban area with two adults, but one income, would be allowed €896 a week. This family has a €1,500 monthly mortgage repayment, one teenager and one pre-teen. The new guidelines draw heavily on intensive research carried out by the Vincentian Partnership for Social Justice. Work on this minimum income standard was augmented by researchers from TrinityCollege and the Economic and Social Research Institute.
The new insolvency service is required under the new Personal Insolvency Act to produce guidelines on minimum living standards. Those who do not reach a deal with their creditors have the option of bankruptcy, where an official assignee will dictate what they have to live on. One finance expert, who has seen the new guidelines, described them as financial prison. But it is understood that Mr O’Connor of the insolvency service is conscious that people will be in a personal insolvency arrangement, involving mortgage debt for up to seven years. This is why he may be willing to allow for relaxation of the guidelines over time for those who keep to their agreements. There will also be scope for personal insolvency practitioners (Pips) to negotiate on the detail of what a family will get to live on under a personal insolvency arrangement.
It’s been said that a personal insolvency arrangement is only fair where both sides are unhappy with the arrangement! If a 200k debt write down is on offer on a 500k mortgage, then having a modest lifestyle for up to 7 years and keeping the property may be an attractive option. After the 7 years you continue paying off the 300k reducing balance mortgage and you will be in a better position to afford the “luxuries” you missed during the 7 years. The insolvency legislation requires further tweaking however to remove the right of the bank to come back in the future looking for more money. This could happen if the property is sold for more than the outstanding loan balance say in 10 or 20 years time!
Unfortunately this kind of arrangement is unlikely to be available to self-employed people as a P.I.A. arrangement requires a stable salary. A deal would have to be negotiated outside of the insolvency service as the only other option for self-employed people with mortgage debt is bankruptcy.
Good Financial Housekeeping