# Houses, Mortgages and Debt Settlement



## Brendan Burgess (13 Jan 2010)

I am drafting my initial thoughts on this critical topic. This post contains the LRC sections on the subject. There is very little on mortgages when you consider  that around almost [broken link removed] is mortgage debt. It is also very little in the context of the problems of negative equity. 

The replying post, is my first stab at a submission.

_5.158 The Commission invites submissions as to the assets which should be exempted from distribution to creditors under formal bankruptcy procedures._

*The Protectio**[FONT=&quot]n of the Debtor’s Home[/FONT]*
5.159 The issue of the forced sale of the home is an extremely complex question. A requirement to sell the family home would not comply with the humanitarian/rehabilitation and social welfare theories of insolvency discharge, and may not be economically rational in all circumstances.The other side of this argument is that a creditor will usually hold the debtor‘s home as security and their legitimate interests must be considered.

5.160 No general consensus exists across Europe as to the appropriate treatment of this issue. This can largely be attributed to the different housing policies prevailing in different countries. The most common response is not to provide special protection for the home. Thus under Dutch law payments towards a mortgage loan are explicitly excluded from exempted living expenses, and the practice code on exempted income and assets suggests that in most cases a debtor should sell his or her mortgaged home and find alternative accommodation.

5.161 Some countries‘ laws however permit a debtor to keep his or her home under certain circumstances.

In Denmark, the debtor will only be required to sell the family home where the expenditure on housing is unreasonable and where the debtor can find less expensive accommodation elsewhere.

The Swedish Supreme Court has stated that a debtor must sell his or her home only if this would benefit the creditors either by realising a substantial equity in the home or by significantly reducing the debtor‘s living expenses.

A similar argument has been previously presented in Ireland by the Free Legal Advice Centres, where it has been suggested that a debt settlement should aim to protect the debtor‘s home, but that the debtor may be required to sell his or her home and move to less expensive accommodation in certain circumstances where the debtor has a large equity in the home and the home‘s value is high.

A similar approach exists in France, where the over-indebtedness commission or judge will only require the sale of the debtor‘s home where the debtor would not have to spend a similar sum on alternative accommodation.Under French law if the debtor does however sell his or her home and this does not satisfy the mortgage debt owed, the debtor receives a discharge of the deficiency obligation owing.

In Norway, it appears that mortgage interest only is paid during the course of the debt settlement repayment period, and that the repayment of the principal is suspended until this period ends.

An alternative approach could be for a part-payment of the principal, such as 50% of each instalment, with the remainder to be paid once the plan is completed.

5.162 It should be noted that the protection of the debtor‘s home was a priority under the IBF-MABS _Pilot Debt Settlement Scheme _described above, and debt settlement plans were always designed with this goal in mind. In addition, section 61 of the _Bankruptcy Act 1988 _provides that the Official Assignee may not sell the bankrupt‘s family home without a court order, and that the court may postpone the sale of
the home having regard to the interests of the bankrupt‘s creditors, spouse and dependants.

5.163 The Commission recognises the importance of protecting a debtor‘s home, while also acknowledging the legitimate interests of creditors in enforcing their securities and in recovering as much of the debt owed as possible. The Commission thus invites submissions as to how these interests can be best reconciled through the approach taken by debt settlement legislation to the question of the sale of the debtor‘s home.

5.164 _The Commission invites submissions as to the approach the proposed debt settlement system __[FONT=&quot]should take to the debtor’s home. The Commission in particular invites views as to the circumstances in which the debtor’s home should be protected from s[/FONT]__ale, and the circumstances in which the debtor may be required to sell his or her home_.


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## Brendan Burgess (13 Jan 2010)

These are my initial thoughts, informed by many of the comments on other threads in this forum and particularly this one.

*Principles *
  Irish home buyers benefit from very low mortgage rates because the loans are secured on the home and this reduces the risk to the lender. Nothing should be done to reduce the value of this security, as it would push up mortgage rates for everyone and probably make mortgages more difficult to get. 

  Mortgage providers should facilitate debt settlement schemes by switching the loans to interest only and, in some circumstances, allowing the interest to roll up. In return, the law should be changed to make the repossession process simpler and quicker and cheaper for both the lender and the borrower. 

  Consideration should be given to make it easier for unsecured lenders who have participated in a failed debt settlement scheme to register a second mortgage on the family home. 

*Positive equity and debt settlement. *

  Scenario 1
  Home value: €500k
  Mortgage €300: 
  Other debt: € 50k 

  Permanently reduced income and unlikely to be earning sufficient to pay off either debt. 

  It seems clear that the solution here is to sell the home and pay off both debts. 

  It would be wrong to ring-fence the home and mortgage and do a debt settlement on the other debt. Permitting such a proposal would encourage people to allow their other debts to expand in advance of applying for debt settlement while making normal capital and interest repayments on their mortgage. 

  Scenario 2
  Home value: €500k
  Mortgage €300: 
  Other debt: € 50k 

  Struggling to make repayments but could do so if given breathing space. 

  The mortgage provider is at little or no risk here. Their loan is well secured. 
  The Debt settlement could allow for a holiday on mortgage repayments to allow the other debt to be repaid first. Many people pay off their mortgage first although it’s the cheapest form of lending. Whereas they should be paying off expensive loans such as credit cards or loans from credit unions. 

  This does weaken the mortgage lender’s position as it increases the loan to value ratio. However the courts should recognize the mortgage provider’s participation in the settlement in any future repossession proceedings.

*Negative equity and debt settlement *

  Scenario 3 
  Home value: €300k
  Mortgage: €500k
  Other debt: €50k
  Permanently reduced income. Unable to service debts

  The home should be sold and the proceeds applied to pay off the mortgage. This would leave €250k of debt subject to a debt settlement scheme. 

  One thing which cannot be allowed is that the €550k be subject to debt settlement and the home is excluded. This would leave the home owner, mortgage free after 5 years. 

  Scenario 4 
  Home value: €300k
  Mortgage: €500k 
  Well able to service the repayments on the €500k mortgage 

  I would argue that this person should not be able to avail of debt settlement as the negative equity is not a pressing problem for them. 

  However, the homeowner in Scenario 3 would be in a better position in 5 years’ time than the homeowner in Scenario 4. Scenario 3 will be debt free while Scenario 4 will probably still have negative equity. This would discourage responsible behaviour by people in negative equity. They would be better off moving to a lower paying job and racking up non mortgage debt.


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## Brendan Burgess (13 Jan 2010)

It is surprising that the piece on homes and mortgages is so small.

But it is also surprising that they make no proposals in this area. They outline the pros and cons of some of the options, but this is as close as they come to actually expressing a view:



> 5.163 The Commission recognises the importance of protecting a debtor‘s home, while also acknowledging the legitimate interests of creditors in enforcing their securities and in recovering as much of the debt owed as possible. The Commission thus invites submissions as to how these interests can be best reconciled through the approach taken by debt settlement legislation to the question of the sale of the debtor‘s home.


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