Debt Write-Downs?

The Sunday Business Post reports that the sentence in the programme for government referring to individual debt likely refers to the potential introduction of individual voluntary insolvency arrangements in Ireland. Worth some discussion of this in the context of the ongoing concern about negative equity in Ireland.

link here

19 thoughts on “Debt Write-Downs?”

  1. Funny, I was just talking about this very subject today.

    Christmas is going to be one hell of a write-off this year with all this hanging over people. Did a straw poll with both colleagues and then extended family to check the first results were believable…… Average cut in Christmas spending this year is to be around 50%. Nobody looking to rack up any more personal debt that’s for sure.

    Makes you wonder why anyone wants to get credit flowing again? There seems to be no call for it among consumers.

    UK style IVA’s eh? There’s a whole ‘advisory’ business in this over there.

  2. Read about America considering chapter 13 for households and using bankruptcy judges to effect a similar aim.

    From what I understood they were looking to allow the principal on the first home’s mortgage crammed down to the current market value.

    Such a move would preclude foreclosures.

    What is the likelihood that the principals for Irish mortgage will be dropped in a structured way and what might be the consequences of such a move.

    Considering the huge personal debt in the south of Ireland then it would appear that a structured way of handling that is needed.

    we owe the greens a nod, if not a vote, surely for this issue (their co-conspirators crowd would only respond two years late)

  3. Irish law in this area is 50 years out of date, and probably 20 years behind the UK.

    There’s almost certainly a mountain of personal debt problems that have been pushed further down the pipe while the NAMA issue is being dealt with.

    It’s nice that the government is thinking of updating the law, but why does every problem in this country have to become a crisis before anone does anything?

  4. I’m also wondering about the unfortunate people who have lost their job more recently, the redundancy money/savings have now been spent on paying the mortgage for the past few months and they are unable to continue to pay their mortgage today.

    I wish I had some hard data on this because I suspect it’s a rapidly growing problem.

    Given that we are unlikely to see any legislation in this area until next year at the earliest, might it be too little, too late?

  5. The reform of personal bankruptcy law including the development of IVAs should be a key priority of the Government’s legislative program.

    1. Individuals should be able to enter into a bankruptcy and address the entirety of their debt, incl. mortgages, cost effectively and in a timely and efficient manner. Current bankruptcy law is so cumbersome that according to Accountancy Ireland magazine “In 2005, the United Kingdom had 47,291 bankruptcies. The Republic of Ireland had 9. While there are a number of factors for the disparity between the two countries in the number of bankruptcies, the dominant factor is cost. It is relatively cheap to go into bankruptcy in the UK, while it is very expensive (both from the debtor perspective and from the creditor perspective) to organise bankruptcy in Ireland. ”
    2. I believe innovation and enterprise is stifled by the lack of reform. Those people, who take risks, and undertake enterprise are also those who are also likely to fail. The common perception is that ‘it takes three failed businesses before you strike gold.’ In Ireland, where (due to lack of debt financing for early stage businesses) many entrepreneurs will use credit cards, personal ‘car/holiday’ loans, to start a business. I think that entrepreneurs are our nation’s future, current bankruptcy laws stigmatises them and can keep them trapped in bankrupcty processes that can last for years and years – under the watchful eye of the ‘official assignee’ whose role is one of a grave warden instead of a ‘turn around’ specialist.
    3. I personally believe that the existence of IVAs will also send a signal to banks with regards to prudent lending – and the good lending practice it entails. The Irish Times today has an article today which says ” NIB told the Commercial Court yesterday that Mr McFadden informed it on September 28th that he was now located in London. The bank expressed concern he might seek to frustrate its attempts to obtain judgment against him for the €6.3 million by seeking to realise “what is perceived to be a more debtor-friendly bankruptcy procedure in England”.” It is clear to me that the bank’s lending practices were part of the reason for the debt levels and that they are able to ‘trap’ this gentlemen within the jurisdiction through the court action even though, in my view, there is some contributory negligence on their part in the situation having arrived at this situation.
    4. I believe that IVAs are necessary to forestall much personal anguish on the part of those who will suffer over the course of the coming months/years. I do not believe that the current situation addresses the social requirements of minimising mental suffering to those who have, often with the help of banks, and because of mistakes they have made, arrived at a situation of irreparable debt. The clear requirement is that society should, where a bankrupt, after the fact and where there was no fraud, acts honestly and transparently, facilitate a quick – open – resolution.

  6. Ongoing concern… Didn’t David Duffy say it wasn’t an issue in the majority of cases!

    Case closed, go back to bed America.

  7. This is potentially throwing a range of different problems into the one pot. Trying to find a single policy to address all of them (even failing to identify each of the issues separately) would be a disaster.

    For example, are we taling about:
    – People who can not realise losses through disposal of assets due to negative equity
    – People who have a temproaral wealth problem, presently unemployed, but likely to have mcuh income over the future
    – The draconian debtor’s jail laws that apply in Ireland and the
    – Or people who have simply borrowed too much irresponsibly?

    Debt forgiveness as a way to solving these as a basket of problems would fail all sorts of tests for efficiency and equity.

  8. In some sense, you have to talk about these together if there is going to a policy move toward some sort of debt reduction at the houshold/individual level.

    We are talking mostly here I would have thought about individual/household insolvency whereby people cannot make their debt repayments due to a change in their employment/income circumstances. Your first and second points are essentially two reasons why people may be insolvent though the case where people are never likely to be earning enough income to meet their debt is another case and probably more relevant to what is being proposed.

    The issue of moral hazard would clearly need to be talked about here (your fourth point) as no system can afford to encourage people to act irresponsibly and then have the slate wiped clean by the state ..ahem

    The third point I don’t think will confuse this issue too much but you are right, it should be discussed at some stage.

  9. This is to be welcomed. Let’s see how long it takes the DoF to come up with the legislation.

    We also need to see the introduction orderly wind up and special resolution legislation for banks too.

  10. IVA’s don’t extend to mortgages, so I think it is important to draw the line of distinction there. One glaring issue is that of how it is rolled out and by whom, the skillset is one of financial planning, mediation, and law all in one, the likelihood is that certain professions such as solicitors, accountants and brokers, will all get auto-entry, but that would be a big mistake, sadly we need to make sure that the time is spent getting relevant cross-qualifications, the trainers exist in the UK, thankfully, at the speed of legislation in Ireland we do have the time to do it in, but the problem is marching ahead irrespective of that.

  11. @K Deeter,

    That’s my understanding too. IVA’s relate more to unsecured debt. If a mortgage lender gets involved with an IVA process, it would be to seek any shortfall remaining after disposing of the property.

    Though, given some government ministers think that NAMA is copying Sweden’s model, God knows what Irish IVAs would involve.

    So if (deluxe) Irish IVAs are introduced, how much additional capital will banks have to hold against mortgage risk? Or is it like everything else – “we haven’t costed it yet” 🙁

  12. @ Liam,

    See my blog for a more precisely target policy suggestion.

    On this more generic “debt forgiveness” issue I still can’t see the policy imperative. I think we need to separate out general issues of personal insolvency from the speciic “negative equity” problem.

    The former is dealt with the world over in a quite satisfactory way with some modern bankruptcy laws that avoid moral hazard by enforcing induviduals into a type of adminstration where their future income is sequestered for a set period of time (7 years say).

    The latter needs some thinking about due to the more widespread ramifications, as I said, I write abou it on my blog.

  13. Ok, I can see better what you mean by separating out the two issues and take your point.

    One of the key points still is that the bankruptcy laws you talk about below do not apply in Ireland and thus the policy imperative is created by this. This interacts with negative equity to the extent that having a large mortgage on a house that can’t be sold for anything near what it was bought for is going to be one of the main triggers of people becoming insolvent more generally, particular following an income shock.

    “The former is dealt with the world over in a quite satisfactory way with some modern bankruptcy laws that avoid moral hazard by enforcing induviduals into a type of adminstration where their future income is sequestered for a set period of time (7 years say).”

    Having said that, the broader ramifications of negative equity in terms of geographical mobility, housing market frictions and so on do indeed need to be thought of as specific issues for the Irish economy. I have posted specificially on negative equity a number of times and will publish something soon so let me say that I take your basic point but I still think some posts about what should be done about household insolvency issues (including mortgage repayments) would be useful.

  14. About a year ago I wrote about the problem of the debt burden on individuals and the likely economic and social implications of recourse debt (aka domestic mortgages). Strange silence up to now. So who has suddenly got religious on this very vexing topic?

    We seem to have Two Schools of ‘economics’ here. Grow, grow grow and be saved, and cut, cut and be … saved? One of ye is not for real – or is it both of ye?

    So you want ‘growth’ Good. The you MUST cram down the excess debt – you MUST! So devise a simple process for Sean and Maire Citizen to do this. Else you will have a population of Debt Slaves – and NO growth!

    You prefer cutting. Fine. You get the Debt Slaves also and NO growth!

    Cram down the debt and clear the registers. Very unpleasant for equity and bond holders. However, you will get growth, albeit slow and drawn out and from a significantly lower base.

    No easy choices here.

    B Peter

  15. Liam

    See my blog for my suggestion. I am potentially in favour of policies that might allow households to liquidate their long property positions and de-leverage in ways that avoid promoting moral hazard or arbitrary redistribution of wealth.

    I would need a lot of convincing on policies that subsidise ongoing debt servicing

  16. Something has to be done that’s for sure Brian. There’s a time bomb ticking out there. And I’m not just talking about a financial one.

    Debt that is difficult to clear (debt slavery) combined with what looks like long term negative equity and still rising unemployment (and increasing long term unemployment?) has to blow something somewhere. I would guess the worst thing that could happen now (and probably will) is that the banks, having got what they can from government/NAMA will just put up interest rates, not linked to ECB rate changes. That would start causing a lot of pain.

    I once saw a bank burned to the ground during some strife abroad. Didn’t think there would be much of a chance of seeing that again in my lifetime!

  17. Cognitive dissonance: banks are good but debt is slavery?

    Until you voters decide to ensure responsible regulation, everything is going to be crony based and that will victimize many people.

    And a commision against corruption is necessary too, as 1,000,000,000 in costs is expensive social welfare dor the bar library, so Tribunals are out!

  18. @Rory above. Point 2 is of utmost importance to the development of our economy. It alone should be sufficient to drive reform in this area if not for the cabal of vested interests that constitute our establishment.

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