Today, the 22nd of May 2017, marks a landmark case for Anthony Joyce and Co. Solicitors. The High Court’s ruling will affect how mortgage borrowings are to be treated in formal debt deals such as a Personal Insolvency Arrangement (PIA).
This ruling could mean that financial institutions may no longer legally be able to ‘warehouse’ part of a mortgage when a formal debt deal is put in place for a homeowner.
In an appeal case, Ms Justice Marie Baker ruled that including a split mortgage as part of a Personal Insolvency Arrangement was not financially sustainable. The ruling will come as a blow to banks in Ireland.
Personal Insolvency Arrangement
A Personal Insolvency Arrangement provides for the agreed settlement of secured debt up to a limit of €3 million (although this cap may be increased with the consent of all secured creditors) and an unlimited amount of unsecured debt.
A PIA will run over a period of 6 years, with a possible agreed extension to 7 years.
The PIA works like a Debt Settlement Arrangement in the following ways:
- You must apply through a Personal Insolvency Practitioner (PIP)
- You must be able to make some repayments to your creditors in return for a discount of your debts
- It is a voluntary arrangement and must get the support of creditors – both secured and unsecured – representing at least 65% of your total debt
In addition, over 50% of your secured creditors and 50% of unsecured creditors must vote in favour.
However, the Personal Insolvency Act 2015 provides for court review where a mortgage lender rejects the borrower’s personal insolvency proposal.
When the agreed period ends, and if your PIA has operated successfully, you will be discharged from the unsecured debts that it covered. Secured debt, however, will only be discharged to the extent specified in the PIA.
What Does Today’s Ruling Mean?
Often, a spilt mortgage (or ‘warehousing’) can be agreed as part of a Personal Insolvency Agreement. A split mortgage can involve warehousing a portion of the mortgage amount, usually for a period longer than six years. During this time, no repayments are made on the warehoused portion of the debt and some banks may not charge interest on the ‘parked’ portion.
But as part of today’s ruling, barrister Keith Farry, instructed by Anthony Joyce & Co. Solicitors, argued that under the Personal Insolvency Act a split mortgage should not be used in conjunction with a Personal Insolvency Arrangement. This is because a PIA has a finite lifetime of 6 years, but a split mortgage could be in place for years before it is resolved. Judge Baker agreed with an earlier circuit case finding that a split mortgage used as part of a PIA would be unsustainable.
The case in question related to a married couple with three children who had a PIA rejected by KBC. Debt of €250,000 was to be written off, but there would be a mortgage balance of €120,000. KBC had proposed a different PIA arrangement.
Judge Baker said this was “benevolent” but it was “capable of creating circumstances amounting to insolvency at the end of the mortgage term in approximately 23 years’ time”. According to the judge, warehousing some of the debt, as KBC proposed, presented a hazard and was unfair to the debtor.
Are you seeking to make a personal insolvency arrangement? Then get in contact with Anthony Joyce & Co. solicitors. With years of experience negotiating personal insolvency arrangements, our team can advise you on the best course of action for your unique circumstances.