Key Post Insolvency Service Case Study shows a PIA lasting only 4 months

In April, the Insovency Service published some scenarios for PIAs. [broken link removed] I am surprised that these have not generated much comment.

This bit from Case Study 1 is especially interesting.

Given that the unsecured creditors will avail of the €9,000 as a lump-sum settlement for John’s unsecured debts, and considering John has no repayment capacity for the remaining unsecured debt, this PIA is a short-term arrangement, which will last four months. The PIA will be terminated once the land is sold and all parties have been paid.

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John has a mortgage of €300k on a property worth €250k and unsecured creditors of €100k. He has a piece of land worth €10k. In effect, the piece of land is sold and the proceeds given to the unsecured creditors. After extending the mortgage by 5 years, there is nothing left for the unsecured creditors, so the PIA lasts only 4 months. At the end of 4 months, the unsecured loans are written off and John has a a mortgage of €300k on a house worth €250k.

I have been stressing that PIAs don't necessarily last 6 years and the very first example of one is for 4 months only.

The reason that the PIA only lasts four months in this case is because John has no available funds to pay to unsecured Creditors after reasonable living costs are deducted from his income. The idea is that the land is sold and the proceeds distributed to Creditors within the four month period. On the other hand if John did have a surplus on his disposable income, then the PIA would run for the full six years.

This is just an example by the ISI. There is nothing to say that the unsecured Creditors will run with this. I think there is a high chance that they will consider that the secured Creditor is being treated "unreasonably"preferentially, and veto. Maybe a fairer proposal would be for John to go interest only on the mortgage for a few years to increase the dividend to the Unsecured Creditors.

I fully understand that secured creditors need to be treated in preference to unsecured creditors however the unsecured creditors will be looking at their dividend to decide if they will veto or not. If the proposed arrangement says that the dividend to the Unsecured Creditors will be a mere 10% or 12%, then its hard to see how they will agree to that while the secured creditor escapes virtually unscathed.

Hi Dr

Maybe a fairer proposal would be for John to go interest only on the mortgage for a few years to increase the dividend to the Unsecured Creditors.

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I fully agree with you.

I think that this proposal from the ISI is mad. But I find it very interesting that they give a 4 month PIA as their first example. In most of the public discussion, people are saying "PIAs last for six years". And I have been arguing that 6 years is the maximum and that PIPs should propose much shorter ones where they are appropriate.

I have analysed the case in more detail here

Case study Insolvency Service's PIA Case Study John