# My final submission to the LRC



## Brendan Burgess (28 Jan 2010)

_Tomorrow is the deadline for submissions. Has anyone else made a submission? Here is mine. I have split it over two posts. 

The email address for submissions is info@lawreform.ie 
_*
Personal Debt Management and Debt Enforcement *

  A personal submission by Brendan Burgess 

    26 January 2010 

  The opinions expressed in this submission are my own and should *not* be interpreted as the views of the contributors to Askaboutmoney.com where a wide range of views has been expressed.

*The LRC should issue a consultation paper with provisional 
recommendations on home ownership and mortgage debt before issuing its final report *

  Almost 90% of personal debt in Ireland is mortgage debt. Any changes in the legislation may well have unintended consequences for home owners who are not overindebted. The issues around this must be teased out in greater detail. 

  The consultation paper makes many provisional recommendations in other areas, but no provisional recommendation has been made on mortgage debt or home ownership. In fact, the consultation paper does not even set out various options to be considered. 

  The LRC should make provisional recommendations and/or set out the options relating to mortgage debt and allow for further limited consultation before publishing  the proposals in its final report. 

  Accordingly, most of my submission will address this key issue.

*Summary *

  1)The proposed debt settlement schemes should not weaken the security of mortgage lenders because of the risk that this would increase the cost of mortgages for all borrowers.
  2)A person’s home must be a part of any debt settlement scheme.
  3)There is no easy solution to dealing with substantial negative equity.
  4)A person’s pension should be part of a debt settlement scheme. 
  5)The legal process of debt collection and repossession should be simplified, clarified and speeded up.  If lenders know that they can enforce a mortgage easily, they may be more willing to participate in debt settlement schemes. 
  6)A  borrower’s participation in a debt settlement scheme should form a permanent part of their credit history.




*1)      The proposed debt settlement schemes should not weaken the security of mortgage lenders because of the risk that this would increase the cost of mortgages for all borrowers. *

  Irish consumers benefit from a very favourable mortgage market. Interest rates have been comparatively low. There have been few repossessions. The banks  have generally shown flexibility towards borrowers in arrears. Irish mortgage  holders can pay off a mortgage early without penalty. Borrowers have been able to borrow a high percentage of the value of their homes over a long period of time. It has been relatively easy for borrowers to release equity in their homes for other purposes. 

  This favourable treatment of the great majority of Irish borrowers must not be put at risk to facilitate a minority of borrowers who are in arrears. If the value of a bank’s security is threatened, the result could be higher interest rates, more conservative lending practices and maybe even a more aggressive stance on repossessions by the banks. 

  For example, allowing an overindebted borrower in negative equity to write off their negative equity could have very serious implications for others. While this would give the borrower a fresh start, it would push up the cost of mortgages for all borrowers. It would also encourage borrowers in negative equity who can afford their mortgage repayments, to artificially create a financial position where they could avail of debt settlement. 

*2)      A person’s home must be a part of any debt settlement scheme where there is positive equity*

  A person participating in debt settlement is getting a huge benefit from having their debts written down. They should not be able to get this concession without taking some pain. 

  Where a person has *substantial positive equity* in their home, then this must be available to pay off any debts. It would be perverse to exempt a person’s home. Such an exemption would encourage a person who anticipates a financial problem to prioritise payment of their mortgage in preference to payment of other debt, which would be written down in a debt settlement. This would be using the debt settlement process as a form of financial planning. 

  Where a person has substantial equity in their home, repayments could be suspended completely as part of a debt settlement process. Interest on the loan could be rolled up. This would leave more money available to pay the other unsecured creditors. The banks would not lose out as their security would be still intact. The banks would have to be confident that they could easily enforce the mortgage if the debtor was unable to resume their repayments at the end of the process. 

  If there is *no substantial equity* in the home, the outcome will depend on whether the borrower can meet the interest payments on the mortgage. If the borrower cannot meet the interest payments then the house should be sold. 

  If the borrower can meet the interest repayments with the possible assistance of the government’s Mortgage Interest Supplement then the mortgage should be switched to interest only.  The government should review the rules of the Mortgage Interest Supplement to facilitate such arrangements. 

*3)     There is no easy solution to dealing with substantial negative equity 

*Every approach to negative equity will have serious implications for others. 

If the house and mortgage are left outside the debt settlement scheme, the borrower will be left with huge borrowings which they might not be able to service which makes the fresh start meaningless. 

  On the other hand, if the house is sold and the borrower has the shortfall on the mortgage written off, it would be very unfair to people who have negative equity but who are not overindebted. It would act as an incentive to these people to create the conditions to make themselves qualify for debt settlement.

  It is very difficult to find a  balance which gives a person a fresh start while at the same time not discouraging struggling debtors from trying to meet their obligations.  Perhaps a borrower could earn a *qualified fresh start* after 5 years. They would be free of their other debts, but the  mortgage deficit would remain for a further 5 years and all the person’s disposable income would be paid towards it. They would have an unqualified fresh start after ten years. 

*4)     A person’s pension should be part of a debt settlement scheme. *

  A participant in a debt settlement scheme gains huge advantages from it. They should not be able to benefit from a substantial write-off of their debts while they have a valuable pension fund asset. 

  If the employee or the employer is contributing to a pension fund, they should stop contributing so that the borrower has more funds available to pay their debts. A pension fund is simply another way of saving and it is inappropriate for the person to be saving while having their debts written off. 

  If a debtor has a defined contribution pension scheme, then the fund should be available to pay off any creditors as part of the scheme. 

  Cashing a defined benefit pension scheme is much more complicated as early encashment may be very disadvantageous to the debtor. As an alternative, the creditor, especially if it’s a mortgage provider could be given a charge on the lump sum available from such a scheme on retirement.

*5)    The legal process of debt collection and repossession should be simplified, clarified and speeded up.  If lenders know that they can enforce a mortgage easily, they may be more willing to participate in debt settlement schemes. *

  Mortgage lenders must be encouraged to participate in debt settlement schemes. In general, banks have shown great flexibility to borrowers in arrears who engage with them. Where the borrower has substantial equity in their home, the lender should feel confident in granting a  mortgage holiday. Where there is no equity, but the borrower can meet the repayments, the bank should feel confident in switching to interest only. 

  To encourage this flexibility from mortgage providers, the enforcement process should be simplified so that it can be achieved in a simple non-judicial manner. If a lender knows that they can repossess a home at the end of an unsuccessful process, they will be far more likely to participate in such a process. 

  This could be achieved by agreeing to give the mortgage lender a repossession order as part of the debt settlement scheme. The order  would have a stay of three or five years on it subject to the compliance of the borrower with the debt settlement scheme. 

  Where unsecured creditors have participated in good faith in a debt settlement scheme, but the debtor has not complied with the agreement, the unsecured creditors should have an option to register their debt as a second charge on the debtor’s home where there is positive equity. While this option exists at the moment, it should be simplified. 


*6)       A  borrower’s participation in a debt settlement scheme should form a permanent part of their credit history.*

  It is perfectly reasonable for a potential creditor to discriminate on the basis of credit history. Where a person is participating or has participated in such a scheme, this should be noted permanently on their credit history. 

  A debtor who does not participate in a debt settlement scheme but who struggles over a number of years to pay off their debts would have a bad credit history. It would be unfair to allow someone with a history of debt settlement to have a clean credit record, while someone who has paid off their loans without the benefits of a scheme, would have a bad record.

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## Brendan Burgess (28 Jan 2010)

*Case studies to illustrate potential negative outcomes where debt settlement is too easy*

  Say the final scheme is as follows: 

  1)A debt settlement period of two years
  2)The credit record to omit any mention of a successful debt settlement scheme
  3)A person’s home to be excluded from the scheme 
or
  4)Any shortfall on a person’s mortgage to be included in the scheme
  5)Pension fund to be excluded from the scheme*

Case study 1 – substantial negative equity *
  I have a secure job earning €60,000 a year and I have a mortgage of €400,000 on a house worth €200,000. I have a defined contribution pension fund worth €70,000. My employer has announced a voluntary redundancy scheme. 

  In the run up to the debt settlement scheme, I should make the maximum possible contributions to my pension fund as these will be excluded.

  I take advantage of the voluntary redundancy scheme and enrol in college for 3 years. I fritter the redundancy money or put it in someone else’s name.

  I apply to my mortgage provider for a payment holiday. 

  I run up €30,000 on a variety of credit cards. 

  The above scheme would allow me to sell my home as part of the scheme and effectively write off all my debts as I would have no income while in college. I would come out of college after three years with a  clean credit record, a decent pension fund, better qualifications and no negative equity to worry about. 

  A responsible borrower on the other hand would retain their job and would struggle indefinitely with negative equity. 

*Case study 2 – substantial positive equity *
  I have positive equity in my home – a €200,000 mortgage on a €400,000 house. I am on a salary of €60,000. I have an investment property which I can’t let which is in negative equity of €100,000.

  I take advantage of a voluntary redundancy scheme and use the proceeds to pay off my home mortgage. I go back to college and run up more debts. I apply for the debt settlement scheme and write off the debt on my investment property. I come out the other end with better qualifications, a small mortgage and a clean credit record. 

  A responsible borrower would use the redundancy payment to pay down their mortgage on the investment property.


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