Tipp FM Legal Slot – 3rd September 2013
John M. Lynch, Personal Solvency Practitioner on Banks Clawing Back Mortgage Debts & The Insolvency Process
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Last week we spoke to John Lynch who is now a Personal Insolvency Practitioner and was the first solicitor registered by the Insolvency Service of Ireland. The ISI is due to begin accepting insolvency applications this Monday – 9th September, but there has been recent controversy surrounding the area. John, is it the case that homeowners who enter into Personal Insolvency Arrangements (PIAs) may have to end up handing over some of the proceeds of the sale to the bank within 20 years?
There has been much negative speculation during the past few days about the Banks’ right under the legislation to claw back mortgages that have been written off for up to 20 years. It was suggested that the banks had influenced the Insolvency Act and made an amendment to it to the effect that they could claw back any extra profits from the sale of assets up to 20 years.
This provision has been there from the outset; it’s not new. Section 103 of the Personal Insolvency Act has set up a way to value the assets. This is particularly important where an asset is in negative equity.
How is the market value of the asset determined?
Under the legislation there are three steps:
- A PIP, a creditor and a debtor can agree a value;
- If they can’t agree a value, they try to agree to appoint an independent expert;
- If they can’t agree on an expert they refer the matter to the Insolvency Service of Ireland who appoints an expert and that expert determines the market value.
The market value needs to be established for the new arrangement.
In what situation may the banks be entitled to claw back the written off debt?
The claw back only comes into effect if someone makes a profit on the sale of their home.
If someone sells an asset as part of the insolvency arrangement the banks get the sale proceeds or loan value.
If they cannot sell the asset a benchmark has to be decided on as to the realistically value of the asset.
If a value is put on an asset and it is not sold as part of the insolvency process, but at a later date when the borrower has returned to solvency it is sold, at a profit, then the banks would be entitled to claw back a portion of the proceeds for the amount that was written off.
The asset could be worth significantly more than the original market value at this stage.
This is a reasonable provision, particularly where the Act make provision for the owner taking the benefit of improvements. The claw back only comes into effect if someone makes a profit, above the original market value, on the sale of their home when they are solvent. It is not a charter for the Banks to make someone insolvent.
The primary objective of the Act is to let individuals stay in their homes and s. 103 does not change that.
Effectively, it has nothing to do with going from insolvency to solvency.
If the person holds on to the asset for more than 20 years – they can hold on to the profit.
The 20 years exists so that there is fairness on both sides – it’s not an unlimited open ended time frame – this very common in legal scenarios.
The new PIA, which will apply specifically to mortgage holders and those with secured and unsecured debts of €20,000 to €3 million, is NOT a charter for the Banks to keep someone insolvent.
If you have a mortgage that you can’t pay, you are on social welfare, and you have no disposable income, what can a person do?
I have come across this regularly as a PIP.
As a lawyer I am used to pro bono work. There has to be some mechanism for people who have no disposable income whatsoever. When you are doing your arrangement you would make some provision; you would do a certain amount of work to get them in to a position of solvency and when they are in a position of solvency an arrangement can be made where a sustainable fee is spread over a period of time.
This legislation is grounded on social policy; the whole reason for social policy is that we are trying to put this country back up on its feet and everyone is entitled to benefit from it.
I am a advocate for this piece of legislation because if after five years enough people have gone through the process we will have a different country at the end of it.
Remind listeners again, when will you be submitting applications to the ISI?
The ISI is starting next Monday (9th September) and we have a number of target cases to submit to see how it will work.
As a Personal Insolvency Practitioner I will be acting independently and my function will be to bring people from insolvency back to solvency. If I have a situation where the only way to do so is to force bankruptcy then as a lawyer and a PIP I will do this.
It is expected that up to 15,000 people may avail of the new deals under the Insolvency Service.
