The Personal Insolvency Act 2012 (hereinafter the 2012 Act) has not been fully implemented yet. All sections referred to in this piece refer to sections of the 2012 Act unless otherwise stated. Many of the rules in the Bancruptcy Act 1988 (hereinafter the BA) continue in force. There are good summaries of the 2012 Act found on the net including here.

The 2012 Act is in reducing the bankruptcy period from 12 years to 3 years (the official assignee often agrees an income payment agreement which can last up to 5 years therefore in many cases the bankrputcy may in effect be 5 years). In addition the 2012 Act provides 3 statutory mechanisms whereby a debtor can eliminate or reduce his debts. These include a debt relief notice, a debt settlement arrangement or a personal insolvency arrangement (hereinafter PIA). The only mechanism under the 2012 Act that can be used for secured debt, such as a mortgage, is a PIA or bankruptcy.

Using PIA to deal with mortgage debt

Before the PIA route is considered the debtor must go through any mortgage arrears resolution process available (MARP) in respect of any principal private residence (PPR) for 6 months and the show the process has not been successful (s.91.1.g). Details of the requirement of such a process are set out here.

At that point the debtor can go to a registered personal insolvency practitioner (hereinafter PIP) who draws up a proposal for a PIA. The proposal will be based on an analysis of assets and liabilities and will usually provide for a 6-year plan at the end of which all of the debt will be cleared with the exception of the PPR if desired, albeit with unsecured creditors getting a dividend of less than 100% of the debt owed. 65% in value of the creditors must agree. In addition 50% of the secured creditors and 50% of the unsecured creditors must agree.

As part of the plan proposed by the PIP, the bank must tell the PIP what it's preferred method of dealing with the asset is and this must be taken into account by the PIP in drawing up the proposal (S. 102). A non-exhaustive list of options as to the PIP's proposal in relation to secured assets includes (s.102.6):-

a. A period of interest only payments; an extension of the mortgage term; the release of equity by the debtor in return for a reduction in the debt.

b. A reduction in the principal sum due. The debt cannot be reduced below the value of the secured asset unless the bank agrees. Where the bank agrees to this, the amount of that reduction is to be treated as an unsecured debt for the purposes of the PIA (s.102.11). Also, there is a clawback for the bank if the property is later sold at a value greater than the valuation made as part of the PIA.

c. Sale of the secured property. The secured creditor (unless he agrees otherwise) is paid at least either the value of the sale or the amount of the debt whichever is the lesser (s.103.1). The amount owed minus the sum realised on the sale is treated as an unsecured debt and gets the standard dividend under the PIA (s.102.5).

In relation to the principal private residence  of the debtor (hereinafter the PPR), the PIA must allow the debtor to remain in the PPR unless the debtor waives this or the PIP deems the cost of remaining in the PPR disproportionately large taking into account inter alia the reasonable living accommodation needs of the debtor and his dependants and the cost of providing alternative accommodation.

One concern astutely pointed out by Paul Joyce (Sunday Business Post 14/4/13) is that the debtor must have put proposals to the bank before the PIA process commences. If the bank refused those proposals at that stage why would the bank accept them at PIA stage. As against this, the debtor may threaten that, failing agreement on the PIA, the debtor will go to bankruptcy.  Whereas the bank may not have agreed to such measures before that threat, they may see those measures now as being better for them than bankruptcy, with its associated costs (I have been told that the OA's costs are often 15%-17% of the assets – if the PIP can beat those costs this might make the PIA more advantageous). Also it may be that a friend or relative of a debtor might contribute to the pot of money to encourage acceptance of the PIA, which money will not be included if he goes to bankruptcy.

Another concern is that revenue debt is an excludable debt – revenue can choose that the debt is excluded form any PIA before the proposal is even put to the creditors. If revenue adopted that stance and there was significant revenue debt, there mightn't be much attraction for the debtor to enter the PIA process and he might just go straight to bankruptcy.

Bankruptcy

The bank has three options when a bankruptcy order is made (BA Schedule 1 r.24):-

a. Stay outside the bankruptcy. If payments are being made by the debtor satisfactory to the bank and are part of reasonable living expenses as adjudged by the OA then the mortgage debt could continue during and after the bankruptcy. Alternatively the bank might enforce the security by possession and sale and if there is a shortfall, claim the shortfall as an unsecured creditor in the bankruptcy process. This is usually the preferred option.

b. Furnish an affidavit of proof to the official assignee stating the value of the security and claiming the balance as an unsecured creditor. The OA might then sell it and give the money less expenses to the bank. Alternatively the bank could call on the OA to sell and if the OA does not do this within 3 months the bank has a right to sell. Alternatively neither the OA nor the bank sell the property and the debtor comes out of the process with a mortgage debt of only the valuation placed by the bank ie. in effect a debt write down.

c. Surrender the security and claim the entire amount owed as an unsecured creditor.

In order for the debtor to ensure there is no mortgage debt after bankruptcy, he must either surrender his property prior to bankruptcy or ensure OA surrenders it during bankruptcy (which is OA's decision). Otherwise there is a risk that option a. will be exercised by the bank and mortgage and the debt will continue after the bankruptcy, which debt would not be written down.

A separate problem arises if the property is held jointly with another who has not been made bankrupt. In a husband and wife situation, it is normal for the wife to have an equitable interest even if she is not on the title deeds and it is in her interest to apply to court for such a declaration if there is a desire to keep the family home at the end of a PIA or bankruptcy process. In this scenario the official assignee (hereinafter OA) takes only the interest held by the bankrupt and has 3 main options:-

  • Get the wife to convey her interest to him.
  • OA conveys his interest to the co-owner. In a negative equity situation it is common for the OA to convey his interest to the wife for a nominal fee especially where the wife was a party to the mortgage and remains liable for the debt anyway.
  • OA applies for sale in lieu of partition under section 31 of the Land and Conveyancing Law Reform Act 2009. The proceeds in excess of the amount owed would then be divided equitably between the wife and the OA after the mortgage is paid off.

Even if the wife has no legal or equitable interest in the family home, the OA must apply to court for sale of the family home and the court can postpone the sale having regard to inter alia the interests of the spouse and dependents. It is thought that this requirement does not apply to sale by the bank as opposed to sale by the OA (Sanfey & Holohan p. 207).

Restructuring Waterfall

In May 2013 a new pilot scheme was announced by the Central Bank. The details are available here. The scheme is not a creation of the 2012 Act. Where borrowers and lenders elect to be part of the scheme, a third party service provider (hereinafter SP) will analyse the borrowers financial situation who will propose a restructuring of debt. It only applies to where there is a mix of secured and unsecured debt. Restructuring that might be proposed by the SP will depend on the ability of the borrower to pay either the secured unsecured debt in the short, medium and long-term. Solutions could include extending the term of the secured and/or unsecured debt, reducing interest rates on debt, and significant mortgage restructure which could include split mortgage, negative equity trade down and other solutions. The scheme is designed for those who would not meet the requirements of a PIA or bankruptcy.

Conclusion

It remains to be seen whether the PIA process will be successful in dealing with mortgage debt. Since the banks will most often veto the PIA, much depends on the willingness of the banks to agree to the solutions as at a. to c. above. As part of any PIA proposal, a debtor may be very happy to hand back any property owned if it gave them a fresh start within 6 years.

Given the bankruptcy period is now 3 years instead of 12 years, it will be a more attractive option for debtors. It may still be seen as less attractive than the option taken by many to locate their centre of main interest (COMI) in the UK and seek bankruptcy under that jurisdiction where the bankruptcy period is 1 year. Going through the bankruptcy process should see an end to secured and unsecured debts accrued up to the date of bankruptcy if that is what is desired.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.