The OA's views on the impact of reducing bankruptcy to 1 year on keeping the family home

[Brendan Burgess]

I have taken this very important extract from a paper by Chris Lehane. He used the terms "mortgagee" and "mortgagor" in the paper, which I have changed to "lender" and "bankrupt". I have highlighted bits in red.


1.2 Family Home and Bankruptcy Period

Lender’s Perspective

As Lenders will always seek to recover full repayment of their mortgages they will always wherever possible stay outside the bankruptcy process. From Lender’s perspective staying outside the bankruptcy process in a rising property market, allows its security appreciate and it will either get an increasing value for it as long as it holds off foreclosing or better still for it full repayment in time of the mortgage. (It can of course where appropriate equally agree to a PIA that will provide for a sustainable mortgage repayment schedule for both Bankrupt and Lender but that is outside the subject-matter of this paper).


The decision of a Lender on whether to foreclose or not, is dependent on the capacity of the Bankrupt post adjudication to pay the mortgage on terms acceptable to it and then on whether such mortgage payment (as stated at 5.1.2.3 above) can be allowed by the Official Assignee as a reasonable living expense.The Lender is not affected by the length of the bankruptcy period.A reduction in bankruptcy period from three years to one year bankruptcy term would certainly benefit debtors. It would reduce the period they are subject to bankruptcy restrictions, the period within which the Official Assignee can claim after acquired property and may well involve the reduction in period he can seek income payment contributions. None of these factors however, are significant for a Lender considering whether to grant relief to a Bankrupt, as none of them may produce any value for it.


Furthermore as stated at 5.1.2.3 as most voluntary surrenders by debtors of family homes and possession orders have been and tend to be pre bankruptcy, bankruptcy has not been and is not the intervening event which has caused or causes the loss of the home but is simply the process through which debtors have (mainly subsequently) had their unsecured debt written off. The order of loss is as follows:

Ø Pre adjudication if the property is surrendered or possessed by Court order, then clearly the Bankrupts have then lost the property.

Ø On adjudication of the bankrupt(s) the unascertained (where property unsold) negative equity is written off against the bankrupt(s), and

Ø Post adjudication the negative equity will crystallise when the Lender subsequently sells the property and it can then claim for the shortfall as an unsecured debt in the bankruptcy.

 

[Brendan Burgess]

Bankrupt’s Perspective

From a Bankrupt’s perspective, if he is interested in staying in his family home, he is in a better position post adjudication to pay his mortgage with his commitments to pay all his other debts written off. As mortgage payments are allowable as part of reasonable living expense in bankruptcy, he will be allowed pay reasonable mortgage payments and if he wants to stay in his house he will be so allowed, if the payments are reasonable. Similarly the length of the bankruptcy period will not be a significant factor for the Bankrupt in whether he can stay in his house, since as stated above, that depends on whether he has the capacity in bankruptcy to pay his mortgage and the 3 main benefits of the reduction will not significantly benefit the Bankrupt to make an unsustainable mortgage sustainable. If mortgage is unsustainable post adjudication, then reduction of bankruptcy period from three years to one year with income payment commitment for three years, will clearly have no effect in making it sustainable. What may well however be the most significant change if the bankruptcy period is reduced from 3 years to one year, is debtor attitudes to handing back the keys of the family home and then going bankrupt, crystallising the full negative equity therein, as bankruptcy will clearly be more attractive for reasons above stated. With majority of persons who have surrendered their homes voluntarily, having done so prior to being adjudicated bankrupt, they clearly for whatever reason have lost out on possibility if they so wished of retaining their home in bankruptcy.


With majority of persons who have gone into bankruptcy and sought to retain their homes being successful in being allowed make their mortgage payments to extent agreeable to Lender and OA and retaining their family homes, it is clearly important for such persons bankrupting themselves, to wait until they are assessed post adjudication, before surrendering family homes.


Clearly some of these people will decide it is in their best interests to surrender their family homes, some will have delayed too long before engaging with their Lenders and some circumstances may be impossible to resolve, because there is simply no income to pay the mortgage and willingly or unwillingly the houses are lost by surrender or Court order prior to adjudication. It is clearly of utmost importance that all insolvent persons seeking to resolve their financial difficulties obtain the best advice possible on the full range of insolvency processes available to them. If bankruptcy is the best option for them then they should be professionally advised on all aspects of the process, how quickly they should apply for bankruptcy and in particular at the earliest possible time, on whether it is in their interests to seek to retain the family home or surrender same to the Lender. They should have their circumstances post adjudication analysed to see whether with all their other unsecured debt repayment commitments ceasing on bankruptcy, they could afford to keep their family homes rather than surrender same, which they might otherwise unwisely do under pressure from creditors pre bankruptcy.

 

[Brendan Burgess]

Let's look in a bit more detail at a borrower who is struggling with their mortgage and wondering if bankruptcy would help them to keep their family home.

The main way in which bankruptcy helps a person to keep their family home is if it gets rid of other unsecured debts. So someone with a reasonable income, a family home and a few buy to lets in negative equity and maybe some old Revenue debts.
The home loan lender would welcome bankruptcy in this case as it makes the home loan sustainable. However, as the home loan lender is often the lender on the buy to lets, they might not welcome it.

If a borrower simply has a family home which is unsustainable because their income is not sufficient to pay the mortgage and they are unable to agree a restructure with the lender, then bankruptcy won't change anything. The lender will seek possession whether the borrower goes bankrupt or not.

And, of course, for the 20,000 or so people who are deliberately defaulting on their mortgages, bankruptcy will not help them keep their home. Most of those can keep their homes by resuming mortgage repayments.

If a couple who own a house jointly have separated, and he is adjudicated bankrupt, then he is freed of his liabilities but she remains fully responsible for the whole mortgage.

 

[Brendan Burgess]

But it's absolutely clear that the argument that reducing the bankruptcy period to one year will give the family with a mortgage on their home a weapon to threaten the bank with, has absolutely no foundation.

They will be able to threaten their other creditors such as buy to let lenders, the Revenue, the Credit Unions and their business creditors.

 

[Silvio Dante]

Brendan,

I disagree,
If a wife of a bankrupt finds herself in court facing repossession on basis that she cannot make repayment at present or can only meet an amount that doesn't satisfy the lender.

Scenaro 1:
Husband is bankrupt for next three years and likely subject to income payment restrictions for a further three to five years.
Court will see a very bleak scenario of their situation improving in any realistic timescale to satisfy lender.

Scenario 2:
Husband is bankrupt for next twelve months with no income payment restrictions thereafter.
Couple can argue to court that in 12 months time the joint income of the couple is likely to materially increase again with the material increase pledged directly to the lender when/if it materialises.
I would be very confident any court would allow a 12-24 month stay if presented with 2nd scenario, so I think it is far from "having no foundation"

Assuming this government stays its course it is now almost certain bankruptcy will be reduced to one year.
It is far from certain I agree that the income restrictions thereafter will be abolished and I agree that is a big issue in determining whether a bankrupt has a slightly stronger hand with its house lender or massively stronger one.

For what it's worth I feel the income restrictions will be lifted completely or at least reduced.

Why?
1. Some in FG and Finance in particular have twisted Willie Penrose's bill to try to thwart it by saying "it's not a panacea fro the arrears crisis.
Penrose made no such claim, his motivation for change is a legal and moral one that bankruptcy should be a short sharp exercise when nothing else works to allow the bankrupt to start again after his assets are properly divided among his creditors.
It should not involve any element of purgatory where a bankrupt who has given all his assets to the OA has to sit in total limbo for between 3-8 years usually unemployable and living off the state.

2. The composition of the finance committee who will decide what this bill will do in law.
Take a look at it
R Boyd Barrett
Lab x 2
Pearse Doherty
Michael Mc Grath

And FG x 4

The first five are all publicly backing Penrose and that is why I believe 1 year bankruptcy with maybe a further 1 year income restriction (but only in agreed scenarios, for most bankrupts it will be total discharge after 12 months ) will be the outcome of their discussions and will be law by October

PS
Brendan,

Is your second post above Chris Lehane speaking or your thoughts on matter?
The first post appears to address the probability of income restrictions going while the second post assumes they are staying.

 

[Brendan Burgess]

Is your second post above Chris Lehane speaking or your thoughts on matter?
The first post appears to address the probability of income restrictions going while the second post assumes they are staying.

Both the first two posts are Chris Lehane's

Brendan

 

[Brendan Burgess]

Hi Silvio

I think what you are forgetting is that the Official Assignee allows the bankrupt to make reasonable mortgage payments - the equivalent of renting an appropriately sized home.

So the lender usually allows such borrowers to remain in their homes. They just ignore the bankruptcy.

You could construct a scenario like this:
Mortgage: €1m
Value of home: €600k
Bankrupt's income: €200k a year.
OA allows €1,500 per month in mortgage payments.

With one year bankruptcy and no Income Payments Order, I am sure that the lender would wait so that they would recover the shortfall. But the wife should go bankrupt in this scenario as well and get rid of the €400k shortfall.

So one year or three years wouldn't really matter that much to retaining the house.

A payment of €1,500 a month or €15,000 a year would be enough for most lenders to not attempt repossession.

Brendan

 

[Brendan Burgess]

The Official Assignee has restated his assertion that the duration of the bankruptcy won't affect the retention of the family home.

 

[MikeL2007]

Thanks for the extracts Brendan. The only real counter arguments for the 'No' side I can see for reducing the term are:

- Increases the risks of strategic defaulters, i.e. makes it a more appetising option. (However as has been pointed out may times, there is a shorter option available 2 hours up the road)
- Decreases the revenue for lenders, they will get a third of the payments from debtors as the payment cycle is now shorter for those bankrupts that are making payments

Can anyone think of any more?

Mike