# Would changing the bankruptcy term to one year reduce repossessions?



## Brendan Burgess (6 Mar 2015)

I am struggling to see how a shorter term will lead to fewer repossessions.

The banks repossess homes in two situations
1) Where the mortgage is unsustainable
2) Where the borrower refuses to engage with the lender.

Ross Maguire has consistently made the point that bankruptcy can be used to get rid of the unsecured debts e.g. credit unions.  These guys are not threatened by repossession except where they are showing a preference for paying their unsecured debt ahead of the mortgage.  As they are unlikely to be repossessed, shortening the term won't reduce the number of repossessions in these cases. 

If there is positive equity in the house, the lender can still repossess it and sell it.

If the husband goes bankrupt, his wife will usually be still responsible for the mortgage and the house. If she can make her repayments, the bank won't care about the husband going bankrupt.

Will the threat of bankruptcy force the lender to grant a PIA more easily?  I doubt it. If a borrower engages and if a mortgage has any chance of being made sustainable, the lender will offer a deal outside a PIA.


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## Jim Stafford (6 Mar 2015)

Brendan

You ask a very relevant question.

Shortening the bankruptcy period would lead to fewer re-possessions for the following reasons:


The reasonable living expenses ("RLEs) established by ISI are very frugal, and are easily exceeded, which means most people end up with a 5 year Income Payments Order ("IPO") made against them.  (Particularly people who own existing houses.)
The Official Assignee will only allow bankrupts make mortgage payments equivalent to the market value rent of a house "appropriate" for the size of the family living there.  In assessing the level of rent, the OA uses web sites such as Daft.ie.  In some parts of the country, 4 bed houses could be rented for, say, only €500 per month.  Thus, a family that was previously paying a sustainable mortgage of €1,200 a month, are only now allowed to pay €500 a month mortgage payment.  The bank will not accept €500 a month for 5 years, and will therefore re-possess the house.  However, if the bankruptcy and IPO period was reduced to 1 year, the bank might be patient.
Many people facing bankruptcy are self employed.  They is simply no motivation for them to work up to 70 hours a week (which many self employed people do) when all of their income above their RLEs is taken off them.  Therefore they work less hours, can't pay their mortgage, and the house ends up being re-possessed.
Some bankrupts are in a position to earn up to €12,000 a year tax free from the "rent a room scheme".  However, in a bankruptcy this money is collected by the OA. If the bankruptcy period was reduced to 1 year, then the bank could be paid an extra €48,000.

Jim Stafford


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## michaelg (6 Mar 2015)

But if the house is in negative equity the bank also loses.
Also won't more repossessions drive down the price of properties overall, so the banks lose again.
Nobody really wins in bankruptcy ? But at least the debtor stops getting calls and has certainty.


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## Brendan Burgess (13 Mar 2015)

Jim

I understand point 4, but it must be rare.
The only other one of those explanations I follow, is point 2.
The bank is happy to accept €1,500 a month.
The OA says pay no more than €500.
The bank says "Ok, we will repossess"
If bankruptcy is reduced to one year, the bank will say "OK, pay €500 for one year and then €1,500 per year after that"

So this is a case where the bank would welcome the bankruptcy period being reduced to one year.

If the bankruptcy writes off the unsecured debt owed to the credit unions, thus making the mortgage more sustainable, it could also result in more bankruptcies which would be welcomed by the banks.


*Consider the most typical cases of family home repossessions:*
The borrower simply refuses to engage with the lender. They pay nothing and they refuse any contact.  They may do this because they know that their mortgage is completely unsustainable.
The lender applies for a repossession order to force them to engage with them.
After engagement, it becomes clear that the borrower will never be able to pay the mortgage, so the home is repossessed anyway.

Changing bankruptcy to one year will not change this.

*Changing the rules of the PIA could reduce repossessions *
The lender has a veto on the PIA. If the court was allowed to write down debt or impose a split mortgage, then it would reduce repossessions.

I was initially opposed to this.  Now, I would support it if it is a two way process. If the court decides that the mortgage is unsustainable or that the borrower is not paying what they could, then the court would order an immediate repossession without any of the repeated court hearings.

So this would actually increase repossessions and not reduce them.


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## Jim Stafford (13 Mar 2015)

Brendan Burgess said:


> *Changing the rules of the PIA could reduce repossessions *
> The lender has a veto on the PIA. If the court was allowed to write down debt or impose a split mortgage, then it would reduce repossessions.
> 
> I was initially opposed to this. Now, I would support it if it is a two way process. If the court decides that the mortgage is unsustainable or that the borrower is not paying what they could, then the court would order an immediate repossession without any of the repeated court hearings.
> ...




Brendan

Here are typical figures based on  a "live" PIA case:

Market value of Home €200,000 (House in a rural area)
Loan on house €400,000
Actual Value of mortgage that couple could afford to pay: €250,000

The client, who has held the same job for at least 10 years,  has payment capacity to take on a mortgage of €250,000 over 25 years at 4%.  This has been offered to the bank, who have rejected it out of hand.  They have now instructed solicitors to issue repossession proceedings.

I have clearly demonstrated that the bank would be at least €50,000 better off (before you even consider the legal costs of repossession, sheriffs, security, insurance, auctioneers fees, legal fees for selling  etc)  Add in the costs to the taxpayer of dealing with having to re-house the couple if their home is seized etc.

Changing the rules would reduce repossessions , not increase them.

Jim Stafford


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## Brendan Burgess (13 Mar 2015)

Hi Jim

I can see how changing the rules on PIAs might reduce repossessions.  Some independent body might impose a solution on the the bank in this case.

But how would changing the bankruptcy term from 3 years to 1 year help your client?

Brendan


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