Jill Kerby

INSOLVENCY PROCESS FLAWS NEED CORRECTING IMMEDIATELY

The website is in place. The helpline is manned. You can now read for yourself the guidelines that are in place that will be used to determine the living standard you will need to adopt if you wish to become insolvent in the eyes of the law.

And that’s about it.

The Insolvency Service of Ireland last week announced that their service would be operational from next June.  The headlines are full of the tiny amounts that families will have to live on for the 3-6 years of the insolvency work-outs, but just how eager anyone will be in taking up one of these three options could end up depending on whether the most serious flaws in the process can be amended or corrected in the next two months.  These include:

-       the insufficient number of licensed PIPs (Personal  Insolvency Practitioners);

-       clarification of how PIPs will be paid;

-       extending the free MABS service outside the Debt Relief Notice option;

-       the maintenance of post-discharge registers in the case of people who complete the Debt Settlement and Personal Insolvency Arrangement process;

-       the lack of a definition for what is a “sustainable” mortgage.

Let’s start with the Personal Insolvency Practitioners. The Department of Justice has guesstimated that in year one of the new service there will be 3,000-4,000 applicants for Debt Relief Notices for up to €20,000 of unsecured debt and between 15,000-20,000 applicants in total for either a Debt Settlement Arrangement for unsecured debt of any value or a Personal Insolvency Arrangements for unsecured and secured debt worth up to €3 million.

It is now expected that “several hundred” PIPs will be needed to deal with the DSAs and PIAs (The Money and Advice service will handle the DRNs for free.) Not a single one has been recruited, vetted or licensed yet.

Both Alan Shatter, the Minister for Justice and the head of the Insolvency Service Lorcan O’Connor reiterated that the fees to pay the PIPs will come out of the agreed credit repayment to all creditors. However, the Insolvency Service as part of a DSA scenario issued to journalists, noted that in this case,“the PIPs fees are made up of an initial fee of €1,500 to reflect the up-front work undertaken by the PIP and is followed by yearly amounts staggered over the remaining 5 years.”

The insolvency regulation does not specify how the PIPs – solicitors, barristers, accountants and qualified financial advisors- are paid. They will be able to charge a non-refundable upfront fee to potential clients as well as be remunerated from the amount set aside to repay creditors (including themselves.) But because there is no compensation should the insolvency application they design be rejected, the concern is that PIPs will not only demand upfront fees, but opt for high value insolvency cases where not only will their overall fee be higher by the end of the five or six year discharge period, but where an upfront fee is also paid.

Next, the free MABS service is to arrange and administer the Debt Relief Notices for people who are insolvent but with no more than €20,000 worth of unsecured debt, like credit card bills, personal loans or unpaid utility bills. 

The expected initial shortage of PIPs – and the problems of finding one that will take on low value insolvency cases – suggests that the free MABS service should be extended and qualified officials from MABS should be licensed as PIPs. MABS itself would then be paid the same fee that would otherwise be paid to the private PIP.

REGISTERS

Under the current, flawed legislation, only people who are successfully discharged after three years from their Debt Relief Notice will have their name removed from the public Insolvency Register. Anyone who successfully discharges their Debt Settlement Arrangement after five years or the six year period of a Personal Insolvency Arrangement, will permanently remain on this register. 

Being officially stigmatised – for life – could not just impact on future attempts to secure new credit, but perhaps even certain employment. This anomaly could discourage someone from seeking a DSA or PIA and needs to be corrected immediately.

Finally, the key component of the PIA process will be mortgage debt write down, yet there is still no accepted or statutory definition yet of what is a “sustainable” mortgage relative to income/debt. Debtors, their PIPs and the lender/creditors need to have such a guideline before any Personal Insolvency Arrangement that includes mortgage debt will have any decent chance of being approved and the untenable part of the mortgage written off.

Anyone considering seeking protection via the Insolvency Service from the end of July needs to consider all the above. Inform yourself: check out the new website – www.isi.gov.ie. You can also contact the ISI at 0761 064200 or at info@isi.giv.ie

MABS DEBT SURVEY: OLDER MORTGAGE DEBTORS NEED IMPARTIAL ADVICE

There goes another myth.

A mortgage arrears survey of 6,000 clients by MABS, the free money advice and budgeting service has found that contrary to the common view that the majority of the 95,000 mortgage arrears cases involve younger, first time buyers, instead, 70% of these indebted borrowers appear to be people aged between 41 and 65.

The MABS report paints a complex picture of people who have not only found themselves in mortgage arrears but are also struggling with a pool of unsecured debts like credit cards and personal loans. This older age group, states MABS, have found themselves in this position because their higher incomes, and greater asset wealth (especially in the higher value of their homes) during the boom years at the time allowed them to borrow to extend their homes, trade up or buy holiday homes and investment properties.

In too many cases, their motivation was to provide for an enhanced pension at retirement.

The report (http://www.mabs.ie/fileadmin/user_upload/documents/Reports___Submissions/Mortgage_Report.pdf) contradicts census data about mortgaged head of households that suggested that they include 8.7% of people who are unemployed, 12.5% who are outside the labour force such as students or carers and 78.8% who are employed. Instead, MABS found that 37% of their clients with mortgages are unemployed, 17.8% are outside the labour force, and only 45% are working.

It also found that 83% of distressed mortgage holders in their survey had loans with the retail banks, only 13% had a subprime loan, 3% local authority loans and 1% credit union or foreign loans and that 86% of the 6,000 had other debts: 50% between two and four other debts, and 5% with 10 or more.

This data is very welcome and puts a different slant on the problems facing the banks. 

Just last month the Central Bank instructed AIB, Bank of Ireland, PTSB and Ulster Bank (Danske Bank is outside the CB remit and has the lowest percentage of mortgages in arrears) to start clearing the 95,000 loans in more than three months arrears by offering “long term and sustainable” refinancing arrangements to at least 50% of these distressed debtors by the end of 2013. It is understood that a favoured solution for the banks will be a split mortgage that parks the part of the loan that is unaffordable for a number of years, with new terms negotiated for the part that can be repaid.

A loan like this might be a suitable solution for a younger borrower who has 30 or 40 years of employment and the prospect of higher earnings ahead of them. Inflation will also help devalue the true cost of repaying their new split mortgage, eating away at the capital value that needs to be repaid. It might even make it easier for the bank to write off any remaining arrears at the end of the term.

But this solution, says MABS won’t work for older borrowers. How can a split mortgage be a long-term solution for someone in their 50s or 60s (already hit by falling incomes) in a market where prices are still contracting and which will increase any negative equity on their second or buy-to-let properties?

By retirement, such a person who does not enjoy the magic effect of time on their debt, could end up with a large mortgage shortfall in retirement and little or no employment opportunity. If they have no occupational pension, they may have to depend entirely on state pension income.

MABS believes that these older borrowers need debt write-off because forbearance measures like extended repayment terms and split mortgages will not work. Along with FLAC, (the free legal advice centre) and other consumer groups, MABS are calling for the provision of independent, impartial advice to be made available to debtors negotiating new deals to be included in the revised mortgage Code of Conduct that are now being considered by the Central Bank.  More suitable solutions can then be considered at are sustainable.

There is no guarantee that this advice will be made available, but financial advisors and business leaders have for some time noted that money locked in conventional private pension funds could be an ingredient in saving a business starved of bank capital.  Could they also be part of a solution to a serious arrears and debt problem for older borrowers if the banks are also willing to write off and not just park some of this debt?

Time really is of the essence as the banks work under the new clearance deadlines.  Difficult as it may be to find the money to pay a good advisor, anyone who recognizes their own situation in this MABS report should act as soon as they can to secure that impartial advice.

FORGET ALL THE HYPE – INSOLVENCY GUIDELINES WILL HAVE TO BE FLEXIBLE OR THEY WILL NOT WORK

Were you frightened, or frightened for someone you know who is in serious financial difficulty by the unseemly and at times, hysterical debate in all the media recently over what will constitute ‘reasonable living expenses’ when the new insolvency process begins?

The leaking of the proposed living expense guidelines has been counter-productive because it is simply wrong for anyone to assume that all creditors will have an on-going, micro-managing role in how much is spent on food, health and child-care, insurance, entertainment for the five or six year duration of insolvency arrangement.

However, the process is quite wrongly being politicised and PIPs, personal insolvency practitioners, will be starting out with the Taoiseach’s unhelpful comments - that the vast majority of insolent homeowners “will not lose their homes” ringing in their ears. (He also said, after the Cyprus deposit debacle, that Irish depositors have nothing to fear.)

The only people who will ultimately make that decision are the debtor’s own creditors, most likely a number of banks, or in the case of the Irish state, the Troika.

The most reassuring commentary I have heard about how our brand new debt insolvency process might work, given have a chance, has been from insolvency practitioners who have been arranging informal and formal legal arrangements including bankruptcies for decades in the UK.

The biggest UK insolvency practitioners, the consultants Grant Thornton, have described how it has only been since 2008 when formal expenditure guidelines (very similar to the ones being considered here) were finally adopted by insolvency advisors and the banks/creditors, their Individual Voluntary Arrangements have worked with a greater degree of success than at any time since their launch in 1986.

The UK guidelines – and more importantly, how they are used by the supervising insolvency practitioner assigned to the creditor for the period of the IVA – allow for considerable flexibility within the repayment parameters of the arrangement, says head of insolvency, Gareth Neill. 

He expects the same will apply here, assuming that the banks agree that the guidelines are just that – guidelines - and are not written in stone. (With a 65% creditor agreement necessary, that may not be the case.)

Without flexible and “realistic” expenditure guidelines says Neill, the new insolvency arrangements “will not work and debtors may be forced to opt for bankruptcy.”

Neill told MoneyTimes that bankruptcy is not the ideal arrangement for any party: the borrower loses everything and the creditor gets far less of their money back than under an insolvency arrangement. But it does provide finality after the 3 year discharge period and the bankrupt is entirely debt free.

The launch of the Insolvency Service of Ireland(ISI) is behind schedule, but an information campaign is expected to begin soon and will lay out the starting parameters:

If you are insolvent – that is, if your income from all sources is insufficient to meet your debt repayments as they fall due, you should be eligible to apply for a (5 year duration) Debt Settlement Arrangement for your unlimited, unsecured debts like credit card bills, personal loans, HP loans, utilities, or for a (6 year duration) Personal Insolvency Arrangement that includes both your unsecured and secured debts, like mortgages worth up to €3 million. (A registered and approved personal insolvency practitioner from the likes of Grant Thornton or other accountancy practices will then take over your case. They are paid from the share of money that will also repay creditors.)

If you have no income and no assets (like a property/car) and unsecured debt worth up to €20,000, you can apply for a (3 year supervision) Debt Relief Notice under the administration of MABS, the Money Advice Budgeting Service.

The final option, (3 year duration) bankruptcy, is court-based and for debtors with insufficient income and assets to ever repay their debts in full. A court ‘assignee’ is appointed to administer/supervise the sale and distribution of the bulk of your assets to creditors and sets you reasonable living expenses.

If you think you fall into any of these categories, you might want to think about your next response:  should you contact MABS, now if you haven’t already done so? Should you contact an accountant or tax advisor you know to find out if they will be acting as PIPs. Can they put you on a preliminary list of potential clients?

A 70 day moratorium against any legal action will apply once you start the insolvency process but the formal route only gives you one lifetime bite at the DSA or PIA; the next one will result in a legal bankruptcy.

An informal arrangement might still be possible for some people.

I will be returning to this topic as more genuine information emerges.

HOW REAL IS BITCOIN, THE FIRST GLOBAL VIRTUAL CURRENCY?

Around 1996-97, a friend of mine who was involved in the satellite imagery business – his companies produced high grade satellite maps and undertook satellite mapping projects for mining companies and government agencies like the EU’s agriculture commission - told me about these amazing new things called DVDs, first invented in 1995.

I hadn’t a clue what he was talking about.  But I do remember thinking that I really had to learn more. It took a few years to abandon video cassettes, but today, DVDs are being overtaken by direct streaming, traditional internet search engines by Twitter and Facebook.

And now there is Bitcoin. (see https://www.weusecoins.com/; www.coinbase.com)

It was inevitable that in a world where physical money is being used less and less – overtaken by credit and debit cards, e-banking and computerised money transfers – that someone (in 2009) would come up with the idea of cyber-based or ‘virtual’ money.

Bitcoin (as in, computer ‘bits’ of information) has now gone mainstream and has been given a global boost by the events in Cyprus, where the sanctity of Eurozone cash deposits has been blown apart and capital controls have created a two-tier euro - the Cyprus euro that can mainly only be used there and the one the rest of use (for now).

The price of bitcoin in just the past fortnight has nearly doubled to $78 a “coin” (as I write). It was worth about 0.25 US cent when first launched and all the Bitcoins in cyber-circulation are reckoned to be worth about nearly $1 billion now, though no one knows for sure.

So what is Bitcoin?

Invented – it is reported – by a Japanese computer hacker, it is a decentralised digital currency that only trades via the internet. There is no central bank that issues, regulates or sets the price of bitcoin. Instead it operates through a peer-to-peer network of users, that is willing buyers and sellers with real goods and services.

Demand for the growing, but ultimately limited number of bitcoin – no more than 21 million bitcoin will ever be issued by the year 2140 – dictates the price at any given time. Bitcoin are issued within its agreed total limit of coins by the user networks, who are known as ‘bitcoin miners’. The miners, says its Wikipedia entry, verify every bitcoin transaction “and add them to a decentralized and archived transaction log every 10 minutes.”

Leaving aside the hugely technical explanation of how bitcoin operates in the virtual world (a great deal of ‘faith’ is required, just like with every other currency) your first purchase of bitcoin is going to be via a conventional currency like euro, pounds, dollars, etc.

Each bitcoin you buy from a supplier for the global price at that moment is then put into the Bitcoin wallet that you set up which in encrypted and encoded with ‘bits’ that represent the number and value of the coins you now own.  You don’t want to lose these codes…your digital signature …or you lose your bitcoins.

Once you have a wallet of bitcoins, you can start using them.  As I write thousands of ordinary retailers and service providers all over the world are being added to the growing network of real people who will sell their goods for a bitcoin.

You can now buy everything from a pizza to a house with bitcoin, somewhere in the world. Governments and central banks, which have no control whatsoever over this entirely private, virtual, encrypted currency say they are hugely worried that bitcoin is being used to buy and sell dangerous contraband like drugs and arms. They also say it is an easy way to undertake money laundering. This is also true – the Iranians buy bitcoin and then convert them into US dollars to get around trade sanctions.

Mostly, governments and central banks are concerned how easily bitcoin circumvents the use of their monopoly to create money out of thin air and then tax it, directly or debasing and devaluing it as the need (like now) arises.

These are all the main reasons why the sale and price of has soared since 2001. It is the only ‘real’ money that can’t be debased by central bankers.

That said, I haven’t bought any bitcoin - yet. I still don’t fully understand it and the risks. How ‘safe’ is it from computer hackers? The price is very unstable, even more than gold, which also rises and falls with demand. What are the tax implications? Can VAT and CGT liabilities be payable to the state in bitcoin?

And I’m old-fashioned: bitcoin is not tangible like gold (which can never disappear) and wouldn’t exist at all without a reliable broadband connection.

Then again, I had my doubts about DVDs and Twitter and…