# Sunday Times case study



## Brendan Burgess (28 Apr 2013)

In today's Sunday Times, two insolvency experts were given a case study and asked what the client should do under the Insolvency Legislation. 

I haven't read their recommendations yet. Nor should you. Think what you would advise before reading the experts' opinion.

Peter & Alice 



Home value|€300k
Mortgage|€500k
Personal Guarantees to bank|€100k
Personal Guarantees to creditors|€100k
Credit Union loan|€25k
Credit Card|€10k 
Net income |€6,200 per month
Kids|Aged 10 & 16 
The guarantees arise from a business which failed 
They have secured employment since the business failed 

"They are unable to pay their mortgage and contribute very little towards their other debts"


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## Brendan Burgess (28 Apr 2013)

Here are my initial thoughts before reading their solutions


The Insolvency Service Reasonable Living Guidelines give the following guidelines for a two adult household with a car




Couple|€1,400 
Child at secondary school|€500
Child at primary school|€300
Total |€2,200I don't know why they can't pay their mortgage? 

Even at 4.5% SVR, the interest would be less than €2,000 per month. This leaves them with €4,000 per month or €1,800 after paying the interest on their mortgage. 

If they did not have the personal guarantees there would be no need for any arrangement. They would be in negative equity and have high debts, but they would not need any sort of deal. 

Let's work through various options. 

*Option 1 - A Personal Insolvency Arrangement 

*I don't think that they would be able to retain their home under a PIA. They paid €1m for it in 2006, so it would seem to me to be in excess of their needs.  They could presumably sell the home and rent. 

Having said that, a PIP would probably conclude that a €300k home is reasonable for them. 

So maybe try a PIA.  Treat the negative equity as an unsecured debt and you have €430k of unsecured debts.  Pay  interest only on the mortgage and pay €1,800 per month against the unsecured debts for 6 years that is €120,000 after the PIP's costs, so the unsecured creditors get 25% paid off over 6 years. 

They get to keep their home, but any increase in the value can be clawed back.

*Option 2 - Sell the house and enter a Debt Settlement Arrangement 

*If they sell the house, they will have €430k of unsecured debt. 
They will have €4,000 per month towards rent and paying their creditors. 
If they rent for €1,000 per month, they will have €3,000 for their creditors or €180,000 over 5 years. 

*Option 3 - Go to the UK for bankruptcy 
Option 3A - Go bankrupt in Ireland 

*I don't see why they would subject themselves to a DSA over 5 years. 
So they might propose a DSA over 3 years and if that is rejected, go to the UK. 

They obviously have reasonable jobs in Ireland and they would have to factor in whether they could earn this amount again if they leave Ireland and return. 

*Option 4 - Try to do a voluntary arrangement. 

*If their guarantee and their mortgage is with the same bank, then that creditor will have €300k out of a total of €435k or 70% of the creditors, enough to push through a DSA or a PIA.  They could use this to offer something to the other creditors. 

Maybe a mortgage moratorium for 12 months where they use their spare cash to pay the unsecured creditors after which the unsecured creditors write off the remaining balance. This leaves them with a mortgage of €530k on a house worth €300k and no other creditors. 

*What will the bank's attitude be? 
*If I was their banker, I would suggest a voluntary arrangement along the above lines. If the other creditors refused, I would support a PIA along the following lines: 

1) Reduce the mortgage to €300k - 
 Let's say they are 45, so they have 25 years to repay the mortgage 
That would be a monthly repayment of €1,600 which would be around €1,100 interest and €500 capital
2) Pay off the unsecured debts over three years with the balance.

The advantage to the bank is that if they will be well able to afford the mortgage repayments and if they sell the house, the bank may get a clawback.


*My recommendation 
*This couple has good earnings power but are insolvent. They should go to the UK and go bankrupt.  A lot of disruption up-front for 18 months, but they come home debt-free with a clean start. 

If they insist that they want to keep their home,  try a voluntary arrangement with a split mortgage.  
If the creditors don't agree, try a PIA and hope that the bank won't veto it.


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## T&R (28 Apr 2013)

The living guidelines do not take in to consideration the need for a second car which would be needed if they live in a rural area and work in opposite directions to each other. That expenses would need to be added on to their living expenses.


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## Brendan Burgess (28 Apr 2013)

Paul Carroll's solution : PIA 

Reduce the mortgage to €350,000 (€2170 per month over 20 years) 

Total spend: €5,000 a month ( allow for two cars and health insurance as Peter has a pre-existing condition) 

Leaves €1,200 for unsecured creditors
They would pay €1,000 per month  or €72,000 over 6 years




mortgage shortfall|€150,000
Guarantees |€200,000
Other |€25,000
Total|€375,000
€303,000 to be written off at the end of 6 years.

"If they sold their home during a PIA for more than the amount owing on their mortgage, the bank would be entitled to up to half the difference. However, if they delayed the sale until the PIA is complete, there would be no clawback"   Is this correct? I thought that there would be a clawback for a long number of years after the PIA is completed. 

"The bank does better than they would do under bankruptcy so they won't veto this"


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## Brendan Burgess (28 Apr 2013)

Steve Tennant:  Debt Settlement Arrangement 

The mortgage would be restructured consensually outside the formal insolvency process. 



 €325,000|repayment| 
€175,000|interest only|
Total monthly||€2,552
This leaves them with €1,200 per month for other creditors or €75,000 over 5 years of a DSA towards the €225,000 of unsecured debt. They write off €150,000 at the end of 5 years.


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## Brendan Burgess (28 Apr 2013)

This is a very interesting exercise

I hadn't considered a DSA for the unsecured debts, while dealing with the mortgage outside the DSA. 

The problem with Steve Tennant's proposal is that, after 5 years,  Peter and Alice are still in negative equity of around €200k. 

The advantage is that the unsecured creditors and bank are very likely to approve it. 

All round, it's probably the fairest solution to everyone. 

If I was Peter and Alice, I would prefer the PIA as I am out of negative equity in 6 years or  UK bankruptcy as I would be clear in 18 months.


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## Dr.Debt (28 Apr 2013)

Still a lot of information missing here, ie the interest rate on their mortgage etc etc

I would recommend a PIA to this couple.

1) Pay interest only on their mortgage for the length of the PIA
Lets say 1800 per month

2) Living expenses - Lets say 2200 per month

This leaves 2200 per month to pay unsecured creditors for six years which is a total of 158,400. Total unsecured debt is 235,000
Unsecured creditors will recover 67% of their debt. The couple will get to keep their home. At the end of the PIA period the couple should have substantial capacity to start paying down the capital on their home loan rapidly.


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## Dr.Debt (28 Apr 2013)

Paul Carrolls option involves writing off 150,000 of the mortgage. I think the bank will baulk at the idea of writing off 150K for a couple earning 6200pm (NET).
A better option for the bank would be to veto the proposal, repossess the house and hound the couple for the 200K NE. My guess is that the bank will veto this one.

The DSA option is better but the unsecured creditors will not be happy getting back so little while the mortgage is being paid in full. The unsecured creditors are likely to veto.


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## ClaireM (28 Apr 2013)

This couple have good earnings, going to the UK and going bankrupt could have long term negative implications for their careers and future earnings potential.

It is also generally much more disruptive to their lives than staying in their home and restructuring their debt.


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## Brendan Burgess (28 Apr 2013)

ClaireM said:


> This couple have good earnings, going to the UK and going bankrupt could have long term negative implications for their careers and future earnings potential.
> 
> It is also generally much more disruptive to their lives than staying in their home and restructuring their debt.



Hi Claire

Which is why I said


> A lot of disruption up-front for 18 months, but they come home debt-free with a clean start.



Financially, this would seem like by far the best option for them.  They get rid of €425k of unsecured debt in 18 months. 

They would be stuck in a PIA for 6 years.

If their finances improve withing the 6 years, they won't see much benefit as they will have to pay it over to the creditors. That would be disruptive to me.

And any increase in the value of the property over the following 14 years would go to the lender, if they sell it.  

They lost their business in the last couple of years and have managed to get good jobs since. Sounds as if they could do it again. 

I think that the right approach is to outline the possible options to the borrowers and show them the pros and cons of each.  They have to decide.


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