Case study Insolvency Service's PIA Case Study John

Brendan Burgess

Brendan Burgess

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I think it's worth looking at these [broken link removed] as a guide to see how the ISI is thinking.

1 . J O H N ’ S ST O RY

John is an IT consultant who earns a monthly net income of €3,510. He is married to Mary who does not work outside of the home in order to take care of their children. They have two children at Primary School (aged 7 and 8). They have a family car, which is required for John’s work, and is valued at €5,000. John bought his Principal Private Residence (PPR) ten years ago. It is worth €250,000, but the outstanding mortgage is €300,000. John owns 3 acres of agricultural land, which is valued at €10,000 and has no loans against it. John also has a total of €100,000 in unsecured debt consisting of a Personal loan (€75,000) and credit card debts (€25,000). His monthly debt commitments are as follows:

• Mortgage repayment on his PPR of €2,222

• Unsecured debt repayments of €1,500

John has co-operated with his bank under the Central Bank Code of Conduct on Mortgage Arrears in relation to his PPR for the last six months, but has been unable to agree a sustainable repayment solution. John is unable to pay his debts in full as they fall due and acknowledges he is insolvent.

John meets with a Personal Insolvency Practitioner (PIP) and provides full details of his financial circumstances so the PIP can understand his financial position.




Net income|€3,510
Reasonable living costs|€1,689
Available for debt servicing|€1,821

a) The PIP is satisfied that John meets all the eligibility criteria for a PIA, and submits an application for a Protective Certificate (PC) to the Insolvency Service of Ireland (ISI) on John’s behalf, including a Prescribed Financial Statement (PFS).

 b) ISI and Court are satisfied with John’s application and issue a PC. John’s name, address, year of birth, and date of issue of the PC will be added to the Public Register of PCs on the ISI website. The PC offers John and his assets protection from legal proceedings by his creditors while he is applying for a PIA.

 c) The PIP has 70 days to develop a proposal, get it voted by the creditors and submitted to the Court for assessment.

 d) John agrees to the PIA proposal developed by the PIP (Details of potential PIA solution set out below in point 5).

 e) Creditors representing 65% or more of John’s total debt participating at the creditors’ meeting agree to the proposal (i.e. first threshold needed for creditors’ approval). This includes creditors representing 50% or more of John’s secured debt (i.e. second threshold needed for creditors’ approval), and creditors representing 50% or more of John’s unsecured debt (i.e. third threshold needed for creditors’ approval) (see appendix A-voting rights table for more information).

 f) The PIP records the creditors’ meeting results and sends them to the ISI and each of John’s creditors. No creditor appeals at any point of the process.

 g) The ISI and the Court carry out final reviews of John’s case and approve the PIA.

 h) John’s details are placed on a Public Register of Personal Insolvency Arrangements. (This includes his name, address, year of birth and the date of coming into effect of the PIA).




5. P O T E N T IA L P IA S O L U T I O N FO R J O H N P R O P O S E D B Y P I P

The PIP identifies €1,821 as the long-term sustainable monthly repayment on John’s PPR mortgage. To achieve this, the PIP proposes a term extension of five years. The term of the John’s mortgage cannot be extended further due to John’s age. The PIP also proposes that the land be sold immediately and the proceeds used to repay a final settlement of the amounts due to the unsecured creditors.

John’s monthly income and expenses after PIA restructuring


net monthly income|€3,510
Total Set Costs|€1,689
Rescheduled mortgage payment|€1,821
Available to unsecured creditors|0

John has now enough income for Reasonable Living Expenses (including mortgage). There is
€10,000 available to unsecured creditors from the proceeds of the sale of the land.

For the purposes of this scenario, it is estimated that the PIP’s fee is split between John’s secured and unsecured creditors. Therefore, John’s unsecured creditors will receive €9,000 on a proportionate basis as part of the PIA.

Given that the unsecured creditors will avail of the €9,000 as a lump-sum settlement for John’s unsecured debts, and considering John has no repayment capacity for the remaining unsecured debt, this PIA is a short-term arrangement, which will last four months1 . The PIA
will be terminated once the land is sold and all parties have been paid.




6. J O H N ’ S P O S IT IO N A F T E R ME E T I N G H I S D UT IE S A N D O B L IGA T IO N S UN D E R T H E PI A

a) PPR Mortgage is sustainable.

 b) Unsecured creditors get €9,000, a return of 9% based on amounts outstanding at the date of the Protective Certificate.

 c) John’s remaining unsecured debts of €91,000 will be discharged at the end of the
term of the PIA.

d) John is solvent.
 
I think that this is a crazy solution

John has a mortgage of €300,000.

Let's assume he is on a Standard Variable Rate of 4.5% with 15 years to go. (This would give €2,300 per month in repayments)

The interest on his mortgage will be €1,100 per month ( 13,500 per year)

The PIA has his paying €1,800 per month.

In other words, John will be repaying €8,500 capital off his mortgage every year while hanging his unsecured creditors out to dry.

John does have a problem, and he needs a solution.

He should go on interest only for 6 years.
Instead of paying €8,500 in capital repayments to the mortgage provider over that period, he should pay the €51,000 to the unsecured creditors. Adding the proceeds of the sale of the land, and he pays the unsecured creditors a total dividend of 60%.

The unsecured creditors should veto this.
 
To be honest I don't really understand the scenario. Some questions

Who is going to pay the PIP?

IF 1821 is what's left over, does adding 5 years to the mortgage reduce the 2222 to 1821

The example is very bad on the NE, here on AAM it's rare indeed to have NE of only 50K

In addition the vast majority of them seem to have 35 year mortgages so there is no possibility to extend the term.

What is the age limit for the Insolvency service, is it 65, for one part of a couple, or the main/only earner etc.

I'd have advised John to sell the land and pay it off the mortgage

Why would the bank not have first call on the proceeds of sale of the land

Most importantly

What happens if mortgage interest rates go up, all we've seen is the ECB coming down and Irish rates going up. It's too tight this, no room at all for change in lifestyle or extra family cost, such as new taxes, or new child. It's not long term proper planning. It would work if the 1821 was guaranteed to pay back the mortgage. That would require the mortgage company to agree to fix the rate.

What happens if John's car conks and he needs a new one to get to work, what happens if he has to pay for a funeral or an operation.
 
The main reason for the given solution in this case (in my opinion) is two fold

1) The mortgage cannot be extended any further due to John's age
2) A main requirement of the PIA process is that John is solvent at the end of the process

If you put John's mortgage on interest only as Brendan suggests, for 6 years ,then obviously no capital is being repaid during this time. This means that at the termination of the PIA , John has 51000 of "capital arrears" to repay over the remaining life of the mortgage. John clearly does not have the capacity to repay this 51K which would imply that he is still going to be insolvent at the end of the PIA process. This is not acceptable to the ISI.
 
Bronte said:
Who is going to pay the PIP?
Click to expand...

That is covered in the full case study, but it is a side issue, so I didn't include it in this example.

IF 1821 is what's left over, does adding 5 years to the mortgage reduce the 2222 to 1821
Click to expand...

They don't give the interest rate or the term remaining. But it's roughly right if you assume 15 years left and 4.5%


The example is very bad on the NE, here on AAM it's rare indeed to have NE of only 50K

In addition the vast majority of them seem to have 35 year mortgages so there is no possibility to extend the term.
Click to expand...

It is one example. We tend to focus on people who have 200% LTVs but there are actually few enough of these. There are many people in some low negative equity.


What is the age limit for the Insolvency service, is it 65, for one part of a couple, or the main/only earner etc.
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Why should there be an age limit at all? If John reaches 65 and he can afford to pay the interest on his mortgage, that is fine. It is wrong for the Insolvency Service to assume that the mortgage must be paid off by age 65.

I'd have advised John to sell the land and pay it off the mortgage

Why would the bank not have first call on the proceeds of sale of the land
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Why would they have first call? They have first call on the sale of the house but not on any other assets or income.



What happens if mortgage interest rates go up, all we've seen is the ECB coming down and Irish rates going up. It's too tight this, no room at all for change in lifestyle or extra family cost, such as new taxes, or new child. It's not long term proper planning. It would work if the 1821 was guaranteed to pay back the mortgage. That would require the mortgage company to agree to fix the rate.
Click to expand...

Good point. If all PIAs were stress tested at 2%, few would work.

What happens if John's car conks and he needs a new one to get to work, what happens if he has to pay for a funeral or an operation.
Click to expand...

He will go into arrears on his mortgage again.
 
Dr.Debt said:
If you put John's mortgage on interest only as Brendan suggests, for 6 years ,then obviously no capital is being repaid during this time. This means that at the termination of the PIA , John has 51000 of "capital arrears" to repay over the remaining life of the mortgage. John clearly does not have the capacity to repay this 51K which would imply that he is still going to be insolvent at the end of the PIA process. This is not acceptable to the ISI.
Click to expand...

At the end of the process, John would be well able to afford the interest payments on his mortgage, so he would be cash-flow solvent which is the test under the Act.

Negative equity is not a measure of solvency under the Act, nor should it be.

This crazy solution arises because there is no definition of sustainable mortgage or because of the general assumption that a mortgage is only sustainable if the borrower is mortgag-free at age 65, which is nonsense.
 
Brendan, Being able to afford the interest on the mortgage is NOT the test under the act (surprising as that may be) The test is whether the Debtor can pay their financial commitments as they fall due. In this case the extra 51 K of deferred capital would put John in a position at the end of the PIA, where he would not be able to pay his mortgage as it falls due. Being solvent at the end of the PIA arrangement is an absolute requirement of the Act.
 
Hi Dr Debt

If the bank changes the loan to interest only, he can comfortably meet his payments as they fall due.

Brendan
 
Interest only doesn't solve the problem and would not be acceptable as the final outcome of a PIA. The idea of the PIA is to resolve the debt problem permanently within the 6/7 years allowed.
 
Hi Dr

If a borrower can pay the interest on their mortgage comfortably, then their mortgage is sustainable.

We don't tell someone who is renting that their accommodation is unsustainable because they won't own their own home mortgage free on retirement.

Brendan
 
Brendan, I can only tell you what the act says and the apparent ISI approach to this. Whether its fair or not is a whole other discussion

I suppose there is some merit in imposing a goal that tries to ensure that people can stay in their homes and be mortgage free in retirement. That sounds civilized to me. In Johns particular case it looks like he will be out of negative equity at the end of the PIA but he will still owe the bank 250K. He's not exactly
getting off light either. If I was the PIP here I think I would be trying to get the bank to write down the debt to about 270K and go for interest only on the 1st two or three years of the PIA. This would increase the dividend to the unsecured debtors significantly and still leave John solvent at the end.
 
I can only tell you what the act says
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Where does it say it in the act that the mortgage must be paid off by retirement?

I suspect that is the thinking behind it, but I don't recall the Act making any such definition.

Brendan
 
No it doesn't say it anywhere in the act but it does say that the debtor must be solvent at the end of the PIA.

If the Debtor is to be considered solvent then he must be considered able to meet his mortgage payments as they fall due to the end of the mortgage life.

It follows that if the Debtor enters retirement somewhere along the way that this may affect his ability to meet his mortgage repayments as they fall due.

Therefore I would assume that if the Debtor has good retirement income and is able to meet his mortgage payments out of that retirement income then there is nothing to stop him having a mortgage in retirement if the bank is willing to go along with that.

The reality for most people however is that their income will reduce in retirement and I think that is the main point here.
 
If I have a mortgage of €100k on a house worth €200k when I am 65, I am solvent.

John in this case can be made solvent by the bank switching to interest only and writing off 40% of the unsecured creditors.

Brendan
 
Brendan Burgess said:
That is covered in the full case study, but it is a side issue, so I didn't include it in this example.

assume 15 years left and 4.5%



Why would they have first call? They have first call on the sale of the house but not on any other assets or income.


Good point. If all PIAs were stress tested at 2%, few would work.


He will go into arrears on his mortgage again.
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Pip being paid

I'm still missing how the PIP is going to be paid. It seems John doesn't pay it, but the unsecured creditors take a reduction of 1K in the amount to be paid to them from the proceeds of the land sale, so how does the bank do the same for the 4K. How does that work in cash terms as in who pays over the money to the PIP. The only place I see the 5K coming from is the 10K land sale.

Short mortgage term remaining

You've assumed a mortgage term remaining of 15 years, are not most mortgages in trouble the one's bought in the period around 2005 to 2007 on 35 year terms at nearly 100% borrowings - I don't know this but someone who follows statistics on this must know and the insolvency service surely are basing the scenarious on it. Most people with only 15 years remaining would have more of the difficult period worked out, as in the largest interest portion is now done and they are starting to make inroads into the capital amount.

In 2013 with 15 years remaining, assumes either a 20 year mortgage, so purchase in 2008, no cannot be 2008. Take a 25 year mortgage, that's 2003 or 30 years is 1998.

What is the peak years for purchase at the height on long mortgage terms. Must be around the 2007 mark. As someone who bought in 1998 is unlikely to have NE and those who purchased in 2008 are not the ones in trouble.

Interest rate rises

There is a hugh big problem there so if interest rate rises are not factored in. It's then inevitable that there will be failure fairly quickly (based on the fact banks need to make larger profits to get back on track - quite a viscious circle this).

Who has first call on the land proceeds

Yes legally the bank does not have first call on the land sale figure. But if you are in Marp, you're already at the beck and call of the bank, and presumable in arrears, and the bank can call your loan in, to stop this they might insist on you paying them the sale proceeds.

Length of PIA

How long would this be for, does John have to live on the basic amount of 1689 for the rest of his life? (I'm not debating about whether 1689 is adequate, I accept that the insolvency service has decided this is the minimum for a family to live on).

Would John be better off walking away from the property, paying 1K in rent, and taking his chances with the bank and creditors going to court to get an instalment order. Would he have a better quality of life?

I'm looking for the incentive for John to enter this arrangement. When one compares it to the UK bankruptcy option, it's a no brainer to me. I'd rather live on gruel for a year in the UK then be literally having the insolvency service/bank dictating my every spend and chances of fincial security in life for my remaing life.

People can do porridge for a year or two, but if you force them into this long term it will not work. And I don't see how it would be good for society. Maybe I've missed something in how this is going to solve John's problems.



Is there a scenario where there is no other asset ? What happens then to the unsecured creditors.
 
Hi Bronte

They go into the payment of the PIP in detail in the actual case study. As I say, it's a side issue.

15 year term remaining. Agreed, it's a very artificial example. But it's the example they use.

Length of the PIA


Given that the unsecured creditors will avail of the €9,000 as a lump-sum settlement for John’s unsecured debts, and considering John has no repayment capacity for the remaining unsecured debt, this PIA is a short-term arrangement, which will last four months. The PIA will be terminated once the land is sold and all parties have been paid.
Click to expand...
There is your answer. I was so surprised at this, that I have a separate thread on it.

I am now confusing myself with two threads on the same case study
 
Well it is confusing which is why I too am trying to figure it out.

If the PIA ends after 4 months, then the benefit to John is that he no longer owes the unsecured debt.

But he still has the mortgage, now on a longer term. But it's on a knife edge, with any fluctuation in interest rates, even 1% can have him struggling.

Another issue, child allowance and new taxes. If one decreases and the other increases - which is where we are heading. Then I only see further problems for John, his basic amount has to stay the same, as it's the minimum so the only way he can fund changes is by not paying part of his mortgage.
 
Hi Bronte

This is a fantastic deal for John.

After 4 months, his unsecured creditors get written off.

If his finances deteriorate further, he will just have to reduce his mortgage payments.

But this is a great solution for him.
 
But he can only avail of one PIP can't he so if he goes into arrears again what is the solution?
 
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