Why debt is no longer the end

The payment was made by former Cork entrepreneur Barry Harte to his unsecured creditors in exchange for a write-off of his staggering debt, the remnants of a once-€650m organization that collapsed spectacularly after the 2008 economic meltdown.

It represents the largest write-off on a legacy Celtic Tiger debt ever after it was negotiated through the State Insolvency Service (ISI) mechanism. The highest relief to date was €133m granted to former Irish rugby manager Pat Whelan in 2018.

Both men qualified under a personal bankruptcy agreement, a limitless tool available to failed debtors, allowing their creditors — typically banks, tax authorities and private investors — to soak up the balance of loans due for a relatively small amount.

The only other option would be bankruptcy, where they would get nothing at all. It is a judge who makes the decision, often after years of arguing, legal writing and court appearances.

Since its inception, the ISI has helped resolve thousands of deals through its regulations, and thankfully, mere mortals qualify alongside the mega-millionaires.

In the past six months, 596 people have been granted debt relief totaling €224 million, mostly to banks and other financial institutions for business, personal and defaulted mortgages.

Applicant profile statistics indicate an almost 50/50 split between males and females. Many are business partners or couples who got caught up in the housing crash after building property portfolios in hopes of cashing in on rising prices – 56 percent are aged 35 to 54 and 42 percent work in the private sector. Only 13 percent describe themselves as “self-employed”.

With the cost-of-living crisis very real now and interest rates rising, the financial pressures will mean an unwelcome start to 2023 for many, so let’s take a look at how you, just like the super-rich, can get into debt for help.

types of solutions

Four negotiated settlements are available and which one a debtor is eligible for depends on their circumstances and the nature of the debt (see below). The most common is the PIA – Personal Insolvency Arrangement – which includes mortgage debt.

At a lesser level, a debt relief notice or debt settlement is for those with “unsecured” debt, which is debt that is not backed by a home, so it is typically personal and credit union loans.

Finally, there’s bankruptcy, a fairly drastic solution and less commonly used. Here there is absolutely no chance of repayment to the debtors. Bankruptcy used to mean 12 years of poverty, now it’s only 12 months that gives people a fresh start.

Rules

Securing a debt solution comes with strict rules about future spending. Successful applicants usually have to live with set budgets or funds for several years.

Any assets they have can be sold to meet their obligations, but crucially, 98 percent of them remain in their family home, through a mortgage restructuring or by becoming renters instead. It means their kids can stay in school, their neighbors might not get any wiser, and it keeps them from ending up on long housing lists or becoming homeless. This is their main reason for starting the process and most will report their immense relief at the deal and happily agreeing to the terms.

First steps

The ISI has created a concise website of its services, which it operates with support from the Money Advice and Budgeting Service (Mabs).

Backontrack.ie carefully guides debtors through the options available and has a super ‘reasonable living’ calculator that anyone can use – even if you don’t have any debt. Finding the right solution is done through a Personal Insolvency Practitioner (PIP) – available in each county and usually attorneys or accountants registered with the service.

PIPs are paid, but debtors can receive a coupon for a free “Abhail” consultation if they are in mortgage arrears, and their total fee is then included in the total amortization schedule agreed with the court. A list of PIPs accepting coupons can be found on the website.

Most people start their journey through Mabs (mabs.ie or 0818 072000). Or they can find a PIP via the ISI information line (01 764 4200) or text GETHELP to 50015. From there they are guided through the process, but most report that sharing and understanding their burden is the most important step.

One PIP told me the sheer sense of relief for customers making the call was unpredictable. Make it your New Year’s resolution for 2023 as your debt overwhelms you.

Four Debt Solutions

For people with low income, few assets (e.g. not a homeowner) and debts under €35,000.

These debts are usually personal loans and credit cards. Full write-off of debt once valuation via Mabs is agreed. All creditor correspondence is processed by officials.

• Debt Settlement Agreement (DSA)

For people with unsecured debts over €35,000 but no mortgage arrears.

Allows debt to be partially written off and the balance paid over a period of time under supervision. All creditor correspondence is closed and processed by officials.

• Personal bankruptcy order

Both secured (mortgage) and unsecured debt. Unlimited solution that writes off some unsecured debt, restructures mortgages to keep people indoors and redirects disposable income after essential living expenses to service debt. Under supervision for several years.

OGH insolvency solution for debts over €20,000 with little prospect of repayment. Ownership of property, possessions and excess income is transferred to an official assignee who is sold for the benefit of creditors. Lasts a year if bankruptcy cooperates.

Visit www.isi.gov.ie or mabs.ie for more information.