If I made the debt forgiveness rules… If I could make the rules surrounding debt forgiveness they would be something like this:
1. you can only seek application for debt forgiveness via the bank and not on your own. This may sound odd but doing this helps pre-qualify the case and remove moral hazard. If you go in on your own in early days then no meaningful engagement will have occurred and your credit history isn’t shot [which is a fair outcome to getting debt relief].
Banks (via the Mortgage Arrears Resolution Process) are also in an idea position to know when a loan is unsustainable. This is further described in S.39 of The 2011 Code of Conduct on Mortgage Arrears
Where ‘unsustainable’ is defined as per the Expert Group Definition. Which is where you go 18 months into arrears or after a 5yr Deferred interest scheme doesn’t work . It is important to remember that banks are legally obliged to be in contact with borrowers and attempting to find work out plans along the way.
Effectively, we shouldn’t fund a department to do the job that banks are already doing, instead there should be a single state underwriter who ensures that debt forgiveness cases are not being advanced on the basis that it is easier to deal with the case in hand via a repossession & short sale than it is to work through it with set criteria.
2. There would be a ‘loss sharing’ mechanism whereby the bank and borrower sit down and decide how much each party will lose. If the bank made a risky loan at the outset they would have to take the entire loss (determined by looking at the legacy loan documentation), if it was a good loan and the borrower simply went under then I think it would be fair to make the borrower take more of that loss – full relief is for the hopeless cases. This part of the process could have an underwriting process the same way that advancing a loan does.
It would also be sensible to have a rule that puts more loss on the borrower if they volunteer this process rather than the lender (ie: if they want to initiate it), having said that you’d also need to ensure that there is some kind of research so that the banks don’t force people to initiate so that they get a better deal.
One addendum though would be this: If the bank want to claim that a person with limited income can afford a certain loan repayment in their opinion then this case can only be qualified if they turn around and give a person on the same circumstances a loan, simply put: call them on their bullshit.
3. Rather than having a claim over the borrower for a decade it would be limited to 5 years during which they are free to go back to work minus their PAYE allowance of €1,650 per year, so they do end up paying a bit more in tax (covering the cost of the underwriter) but it doesn’t create an unemployment trap. During that time you review their situation every year to determine (if the ruling resulted in them owing something during the process) a payment schedule for the next 12 months – which, if it is adhered to will mean that after 5yrs their credit record is good, if not then it is shot for another 5yrs.
During the entire workout period there should be no access to further credit unless creditors are repaid.
4. Schemes such as taking a share in the persons home would not be allowed for reasons that I set out here.
5. A certain time-frame for a decision would prevail if a person seeks a short-sale after which no interest can be applied. At present you can be waiting for 6 weeks to hear back from collections teams, if they are not in touch within a week I would have a rule that no interest can be applied until such time as they respond with a proper response (so not a ‘we got your letter thanks’ response).
6. Banks would publish their cost of funds taking losses into account, at present we don’t know what money is costing banks, all we know is that we have ploughed in €63bn+ into saving them. If branches are unprofitable they should be closed, and loans should not be advanced at a loss (new lending), if banks don’t like this brand of transparency it then they should get a different owner who isn’t the taxpayer.
7. There would be a non-judicial process in which the case would be determined (ie: this part would not be decided by the bank), perhaps MABS could do this, or the Central Bank could regulate debt advisors and allow them to do this, it would result in a small fee to both sides (for the borrower it would be paid for via the PAYE allowance eradication. For the bank it would be up front).
8. If the bank disagree there would be an appellate procedure but if they opt for this they cannot apply any interest or penalties from the time the first decision was made, and instead there is a reversal of this at whatever rate the bank would normally charge a borrower, so that instead it eats into their potential upside instead.
some of these things have already been taken care of by the Miscellaneous provisions bill 2011 (such as s7 which reduces the time/duration of a bankrupt), and much of it will be captured in the 2012 Personal Insolvency Bill due because of the IMF bailout.
I might put more into this as I dwell on the topic, if you have any thoughts or spot holes in it then please let me know! Perhaps it is something I can send on if it grows and gets better.