Debtors keep homes as court accepts insolvency deals outside guidelines
Landmark court ruling rebuffs AIB and Bank of Ireland’s efforts to block Personal Insolvency Arrangements. A High Court judge, in a significant decision concerning the effect of “reasonable” living expenses guidelines in Personal Insolvency Arrangements, has approved separate insolvency deals aimed at ensuring a couple and their four children, and a separated mother of three, remain in their homes.
Had the PIAs not been approved, there was a concern about possible bankruptcy or homelessness. The effect of the couple’s PIA will mean some €331,000 will be written off their debt to Bank of Ireland while some €74,000 will be written off the woman’s €171,000 debt to Allied Irish Bank.
Mr. Justice Denis McDonald rejected arguments by both banks that it is not lawful, under a PIA, to require debtors and their dependents to live for a certain period at a level below the reasonable living expenses set out in guidelines published by the Insolvency Service of Ireland. (ISI).
Lawyers for the couple and the woman argued the guidelines were aspirational and maintained they could live adequately for a period below the guidelines. In his judgment, Mr. Justice McDonald said, while the guidelines are an “essential yardstick” that should not be readily departed from, they are “guidelines”.
He was satisfied Personal Insolvency Acts stop short of requiring that the guidelines must be strictly adhered to in every case. An individual assessment must be made in every case, he said. He was also satisfied the PIAs proposed were sustainable and the couple and the woman have shown they can maintain a reasonable standard of living under the arrangements.
The couple had shown they can live modestly and the woman has the prospect of more financial supports from adult children lodging with her, he noted. He also found neither bank would be prejudiced by approving the PIAs and would do better than in the event of bankruptcy.
The couple and the woman had separately appealed decisions by the Circuit Court upholding objections by the banks, their main creditors, against the proposed PIAs. Both banks argued it is not lawful for a PIA to require debtors and their dependents to live for a time below the ISI reasonable living expenses guidelines and, even if that was lawful, neither of the proposed PIAs were sustainable.
The couple owe BOI €377,484 under a mortgage loan secured on their home plus an unsecured €195,551 debt. The man is a technician and his wife works in the home. Their eldest child is in third-level education and the three other children are aged under 15. They owe BNP Paribas €321,078 for a holiday property in France and also own an unencumbered property in Bulgaria worth €20,000. The family home and French property are now valued at €220,000 and €237,000 respectively, meaning both are in negative equity.
Their proposed PIA provided the mortgage debt would be written down to €242,000 on payment of a €5,033 dividend to BOI, the mortgage loan would be restructured as a 29-year loan and the unsecured €195,551 debt would be written off on payment of a €7,264 dividend to BOI. The French property would be surrendered to BNP. Dividends to unsecured creditors would be paid from the sale proceeds of the Bulgarian property.
The judge noted the net household income was €3,246 monthly and their monthly expenses are due to rise to €2,660 in 2020 when they will have two children in secondary school. When the eldest child turns 19 in 2023, he will no longer be accounted for in the ISI guidelines, the judge noted.
When the €829 monthly mortgage is added to the monthly expenses, the expenses will be €3,489, greater than the €3,246 monthly income. That meant the only way the family could meet their mortgage payments for 2020 to 2023 was to live at a level, €245.56, below the ISI guidelines. He was satisfied they had shown they could do so and also noted the man had sworn the alternative for them was homelessness.
In the woman’s case, she is also in her forties and now a factory worker, her business had closed down some years ago. She owes AIB €170,268, mostly under a mortgage loan secured on her home. Her PIA proposed, inter alia, the mortgage debt be reduced to €95,000, the current value of her home. She has a net monthly income of €2,149 from which €443 monthly would be paid towards the mortgage and €200 monthly over five years for a dividend to unsecured
Her monthly expenses, including running a car, would be €1,050, below the relevant ISI guidelines, but she has additional payments of €227 monthly until 2020 under a hire purchase agreement for her car. The judge was satisfied the car is essential for the woman as a worker and mother and the payments under the PIA would not reduce the standard of living of herself and her dependent child to an unreasonably low level.