# Personal Insolvency Arrangement - how it works



## Brendan Burgess (25 Jan 2012)

Requirements for a PIA:


The debtor has debts between €20,001 and up to a maximum of €3m
The debtor is cash flow insolvent (i.e. unable to pay their  debts in full as they fall due) and it is unforeseeable that over a 5  year period the debtor will become solvent
A DSA would not be a viable alternative to restore the debtor to solvency over a five year period
The PIA must be approved by at least 65% of creditors in value  and at least 75% of secured creditors and 55% of unsecured creditors
A debtor will only be able enter into a PIA once in his lifetime
 The effect of a PIA:


An approved PIA will be binding on all relevant creditors and will provide for payment of debt over a 6 year period
To the extent that they are not provided for in the PIA, all other debt obligations will remain
A PIA may be varied or terminated in certain circumstances
Creditor objections to a PIA may be taken to the Circuit Court  on specified grounds including where the PIA unfairly prejudices the  interests of a creditor and where there is a material inaccuracy in the  debtor’s Statement of Affairs which causes a material detriment to the  creditor

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From the Department of Justice briefing papers

_ *How might a **Personal Insolvency Arrangement work in practice**?  *



> My summary of this narrative
> 
> 
> 
> ...


 *Again, let us take the example of John*

  John has a number of unsecured debts, such as credit card, personal loans, overdrafts etc. These unsecured debts amount to €50,000. He also has a mortgage on his principal private residence for €300,000. His principal private residence is a house valued at €200,000. John also has a buy-to-let mortgage on an apartment that he bought as an investment. That buy-to-let mortgage is for €250,000 but the value of the apartment is only €150,000. John is self-employed and his income has fallen substantially over the past three years so that he is now unable to meet his debt payments as they fall due.





  John has tried unsuccessfully to reach an accommodation with his mortgage lenders to restructure the loans. John contacts a personal insolvency trustee and completes a standard financial statement setting out his financial affairs in full. The personal insolvency trustee advises John as to his options and will assess whether John meets the eligibility criteria for a PIA. Those criteria include the following:



John must be cash-flow insolvent (i.e. unable to      meet his debts in full as they fall due);
it is unforeseeable that over the course of a [5]      year period, John will become solvent;
a debt settlement arrangement (DSA) would not be a      viable alternative to a PIA as a mechanism to make John solvent within a      period of [5] years.
 
  If the personal insolvency trustee is satisfied that John meets the above eligibility criteria and is satisfied that there is a reasonable possibility that a PIA would be capable of making John solvent within [6] years, the personal insolvency trustee applies to the Insolvency Service for a protective certificate. The Insolvency Service carries out certain checks in relation to the application and issues a protective certificate which protects John from action by his creditors for a minimum of [40] working days (and up to a maximum of [60] working days, subject to extension for a further [10] working days).

  The personal insolvency trustee notifies John’s creditors and sends them prescribed information, including information as to John’s financial situation. The personal insolvency trustee considers any submissions from creditors and prepares a proposal for a PIA, taking into account what John can afford to pay to his creditors but leaving him with sufficient income to maintain a reasonable standard of living.

  The proposal provides for the following treatment with respect to John’s debts:



John to make payments totalling €20,000 to      unsecured creditors over 6 years representing 40% of the amount due.
The principal amount of the mortgage in respect of      John’s principal private residence is written down to €250,000 and is      restructured so that the term of the loan is extended by 5 years, thereby      reducing the monthly repayments further.
John is to sell the buy-to-let apartment under the      supervision of the personal insolvency trustee. The proceeds of the sale      (€150,000) are paid to the buy-to-let mortgage lender. The shortfall due      to that lender (€100,000) abates in equal proportion to the unsecured      debts (i.e. 40%) and so John makes further payments to that lender      totalling €40,000 over 6 years.
 
  If John consents, the personal insolvency trustee then summons a creditors’ meeting to vote on the proposal. In considering whether to vote in favour of the proposal, the creditors take into account whether the financial outcome for them under the PIA is likely to be better than the estimated financial outcome for them in alternative scenarios such as enforcement or bankruptcy. 

  If the specified majority of creditors vote in favour of the PIA and no creditor objects to it in the Circuit Court, the PIA comes into effect and the Insolvency Service registers it in the Personal Insolvency Register.

  If John’s financial circumstances improve over the course of the PIA (e.g. if he receives an inheritance or his income increases materially), John is obliged to notify the personal insolvency trustee and the terms of the PIA may be varied to provide for increased payments to the creditors. 

  If John subsequently decides to sell his principal private residence and property prices have improved since he entered into the PIA, there is a clawback of the uplift in value up to a maximum of the amount that has been written off under the PIA (i.e. €50,000) but disregarding any improvements made to the property since the date of its valuation for the purposes of the PIA.

  If John does not abide by the terms of the PIA (e.g. there is a 6 month arrears default in making the payments due under the PIA) the arrangement will fail and John will again be liable in full for the debts. The creditors can then take enforcement action against John or petition for his bankruptcy.

  If John successfully completes the PIA, all of his unsecured debts and the shortfall due in respect of the buy-to-let mortgage are discharged. John remains liable to pay the mortgage in respect of his principal private residence on the restructured terms agreed under the PIA.


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## Brendan Burgess (25 Jan 2012)

*Personal Insolvency Arrangement - worked example*

This example is incomplete without giving us information about John's actual income.

All we know about it is that it is sufficient to pay off the mortgage in full after extending the period by 5 years.

 [FONT=&quot]He sells his buy to let for €150k and repays the shortfall of €40k over 6 years.[/FONT]
  [FONT=&quot]He also pays the balance of €20k on his unsecured loan over 6 years. [/FONT]
  [FONT=&quot]He extends his mortgage by 5 years and pays the capital off over the remaining period. 
[/FONT]
[FONT=&quot]What will be his repayments after this deal? 

[/FONT]

 [FONT=&quot]€60k unsecured over 6 years| €833 per month[/FONT]
[FONT=&quot]250k mortgage @4% over 25 years| €1,319 per month[/FONT]
[FONT=&quot]Total repayments| €2,152 per month[/FONT][FONT=&quot]
[/FONT]
[FONT=&quot]
[/FONT]


[FONT=&quot]So what was his position before the PIA?
[/FONT]
 [FONT=&quot]
  [/FONT]
   [FONT=&quot]The interest on all his €600k of loans at 4% would be €2,000 per month. He is probably getting around €500 per month in rent on his investment property, so his net outgoings could be as low as €1,500.  
[/FONT]


[FONT=&quot]So his repayments are higher than the cost of servicing the interest on his loans before the PIA.  
[/FONT]


[FONT=&quot]*This is a terrible example to use...*[/FONT]


[FONT=&quot]This guy is not in an unsustainable position. 
[/FONT]
[FONT=&quot]He can afford to pay the full interest on his loans.[/FONT]
[FONT=&quot]He can afford to pay €652 per month towards reducing his negative equity. 
[/FONT]
[FONT=&quot]
[/FONT]

If I was the buy to let lender here, I would veto the scheme and propose the following: 

1) Take a payment holiday on both mortgages
2) Write €30k off the unsecured loan but pay the €20k as a priority. 
3) John pays what capital he can off the mortgages 

There is simply no need for a write-off of any capital on the mortgage *in this case.*

If John can repay capital, he doesn't need a write-off. 


Brendan


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