Ireland’s new insolvency legislations have not worked out as well as the state hoped. Just a fraction of the 15,000 expected to sign up for the arrangements have done so. Thousands say they simply can’t afford the costs. One Wicklow-based PIP (Personal Insolvency Practitioner), Eric Hendy, said fees for advisors could be as much as €20,000 depending on the complexity of the arrangement.
Insolvency could make you bankrupt
This could be the impetus behind the Minister for Justice’s recent and unexpected announcement that the term for bankruptcy in Ireland will be reduced from 12 to three years. Alan Shatter also said that the cost of becoming bankrupt will be reduced from €1,450 to €750. While this doesn’t include court fees which can be anything between €2,000 and €6,000, several organisations, such as the Irish Mortgageholders’ Association and Free Legal Advice Centres (FLAC) have said they will do this at no cost to the individual.
Shatter also offered a light at the end of the tunnel to current bankrupts:
"Bankruptcies currently existing for three years or more at today’s date will be automatically discharged after a further six months have elapsed."
Bankruptcy, the preferred option?
For many individuals, the announcement will mean that bankruptcy will become the preferred option to the insolvency service. Although only unsecured loans, such as those from credit unions and hire purchase loans are wiped out, the very mention of bankruptcy from distressed homeowners could be enough to make banks offer more favorable deals on mortgages in distress. At present, a personal solvency arrangement of around six years is generally recommended when a family home is involved.
Senior Policy Researcher with FLAC, Paul Joyce, said the insolvency service legislation was flawed. He expected thousands would now apply for bankruptcy. Meanwhile, Lorcan O’Connor, director of The Insolvency Service of Ireland said:
"We now have a full suite of debt solutions available to people who are insolvent that will ensure they can return to solvency in a fair, transparent and equitable way."
Experts warned those looking to take the bankruptcy route to be aware that it could be very difficult to ever obtain credit again, saying that in many cases, it’s much easier to come to a deal with your creditors.
Investec shelves mortgage lending plan
The question is, what effects could changes to the insolvency and bankruptcy laws could have on the Irish economy? Investec plc (LON:INVR) (OTCMKTS:IVTJF), the South African-owned bank, has just shelved its plans to offer up to €300 million in new Irish mortgages.
The CEO of Investec, Michael Cullen, has said that the company views the Irish mortgage market as increasingly uncertain because of changes to repossession and insolvency laws; specifically, that the changes make it harder for banks to repossess properties if they are Personal Dwelling House (PDH) loans.
Cullen said that Investec was still interested in entering the market but was concerned what would happen if the loans went bad.
Many believe that Cullen’s decision could have been influenced by the subject of strategic defaulters. Recent statistics from the banks show that currently as many as one in five mortgage holders behind with payments are strategic defaulters.
Poor market conditions
It’s a blow to homeowners and those looking to get on the property ladder. The mortgage market has shriveled with the exit of institutions such as Halifax/Royal Bank of Scotland Group plc (ADR) (NYSE:RBS) (LON:RBS), Irish Nationwide, Danske Bank A/S (CPH:DANSKE) (OTCMKTS:DNSKY) and Rabobank’s ACC. A bank levy introduced by the Finance Minister, Michael Noonan, has also made the sector less attractive.
Investec plc (LON:INVR) (OTCMKTS:IVTJF) would have been the first new lender in the Irish market since the start of the financial crisis in 2008 and had indicated that it was prepared to offer low priced variable rate mortgages based on income, rather than traditional loan to value metrics.
Investec plc (LON:INVR) (OTCMKTS:IVTJF) already has a presence in the Irish market with its stockbroking offering and the Irish balance sheet is not hindered by loss making tracker mortgages, so it could conceivably compete on rates offered by state-controlled lenders such as Permanent TSB Group (OTCMKTS:ILPMY) and Allied Irish Banks PLC (ADR) (OTCMKTS:AIBYY). These are mandated to lend at government-imposed levels, often lower than privately owned rivals.