Hi Matthew
I don't agree with his analysis of the first option
"The lender has three options. The first is to stand outside the bankruptcy and recover any debts, if necessary by repossessing the property.
...
Under the first option the bank believes that staying completely outside the bankruptcy leaves it entitled to full repayment of the €300,000 mortgage.
Under this scenario the bank is playing a long game, receiving some sort of mortgage repayment and waiting for the property to appreciate to a level permitting the sale and the repayment of the €300,000 mortgage in full.
The bank, however, has a big legal problem. From the moment the bankrupt is adjudicated as bankrupt, the bankrupt is no longer legally obliged to repay the loan. The bankrupt does not own the property.
In effect, the loan has now become a non-recourse loan, meaning the bank can only recover the value of the property and cannot recover anything from the bankrupt.
Outside of any possible share-out, the bank cannot recover any of the negative equity of €100,000. The bankrupt may be paying up to stay in the property and avoid a repossession and sale, but legally, the bankrupt cannot repay the mortgage.
What happens when the person is discharged from the one-year bankruptcy or when the reasonable living expenses rule runs out?
If the bankrupt and their spouse are able to get loan finance to buy the property at a market value of €200,000, they may be better off forcing a sale by stopping paying the bank and buying it.
It is cheaper to have a mortgage in some places than to rent. For the banks this could put them in an awkward position.
There may well be billions of euro worth of such negative equity shortfalls on their loan books which have yet to be fully realised."
I doubt if the bank believes that it is entitled to the full €300,000 mortgage. It is more likely that the bank hopes to be repaid the full €300,000.
Of course the bank can recover more than the €200,000. As the article points out, the Official Assignee will allow the bankrupt to pay the rental equivalent in mortgage payments. As rent is usually much higher than the interest on the mortgage, the mortgage payment made by the bankrupt and by the former bankrupt, may well be enough to gradually repay some of the capital.
It's unlikely that the former bankrupt will be able to get a mortgage to buy their former house. It's possible that the spouse may get such a mortgage. But in most cases, they can't get a mortgage and as rent would be much higher, they are far better off paying the ordinary mortgage repayments. Of course, in some few cases, they will be able to get a relative to buy the house or to lend them the money to buy the house.
Don't forget that the bankrupt no longer has any obligation to pay his unsecured creditors, so they may well be in a better position to make the full capital and interest payments on the mortgage.
And at any time, the lender can rely on its security and apply to repossess the home.
"There may well be billions of euro worth of such negative equity shortfalls on their loan books which have yet to be fully realised."
The banks have fully provided for the losses on their home loans. In fact, they have over-provided and are now writing back the losses.