herald

Wednesday 20 September 2017

Q&A What is the plan -- and how does it affect you?

THE Government is proposing to introduce a new debt settlement scheme that would allow thousands of heavily-indebted people to write off at least some of their borrowings. If you are one those with unsustainable loans, should you apply?

Dan White attempts to answer your questions.

1 What is the plan? Details are still sketchy but it would appear that the Government is proposing a debt resolution scheme that, in return for allowing individuals avoid the stigma of bankruptcy, would force them agree to repay a proportion of their debts over an agreed period of between five and seven years.

2 Who is this scheme aimed at and how many people might qualify? More than 140,000 mortgages, almost a fifth of the total, are either in arrears and/or have been restructured. However, the scheme is aimed at a much narrower group, about 25,000 people, whom the government believes have unsustainable mortgages or other debts.

3 What advantages will the debt resolution scheme have over bankruptcy? Under current Irish bankruptcy law, bankrupts who don't fully repay their debts are barred from running a business or operating a bank account for 12 years. Anyone entering the new scheme would avoid these restrictions.

4 Will mortgages be included in the scheme? That's literally the €64bn question. The banks have been lobbying fiercely to have mortgage debt excluded from the debt resolution process. The compromise seems to be that mortgage debt will be included in the scheme, but will have to be repaid over a period of up to seven years.

5 Does that mean that, if I enter the scheme, I will get to keep my home? Unfortunately it would appear not. All of the indications are that people who enter the debt resolution scheme will be forced to give up their homes.

6 But surely that would be a price worth paying to avoid the 12-year restriction period if I went bankrupt? Maybe, maybe not. With the trickle of Irish people declaring bankruptcy in the UK, where the restriction period is just one year, now threatening to become a flood, the Government is proposing to reduce the restriction period for bankrupts in Ireland to three years.

7 If I declare bankruptcy will that include mortgage debt? Yes. In bankruptcy all debts, including mortgages, are wiped.

8 So why should I keep paying a large proportion of my mortgage for up to seven years when by declaring bankruptcy I will be able to walk away from my homeloan after just three years? You are not the first person to ask that pertinent question. The Government is split down the middle on this issue with the Department of Finance, which effectively owns the banks, campaigning hard to prevent any relief for those over-indebted homeowners, while the Department of Justice wants to take a more liberal line.

9 But surely any debt resolution scheme that took a soft line on mortgages would encourage people who can afford to repay their homeloans not to do so? The issue of so-called "strategic defaulters" that is, homeowners who can afford to repay their mortgages but are refusing to do so in the expectation of widespread debt write-downs, seems to lie at the heart of the Department of Finance's opposition to the scheme. However, while much has been heard of strategic defaulters, little has been seen of them, which leads many of us to wonder if they belong in the ranks of urban myth rather than financial reality.

10 So if I have unsustainable debts would I be better off applying for the new scheme or waiting for a more liberalised bankruptcy system to be introduced? Unless the Government changes its policy very shortly and cuts over-extended homeowners some slack, many people would be much better off opting for a three-year bankruptcy, rather than going through the seven-year debt resolution process.

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