Irish Insolvency Chief to Chase Borrowers Who Refuse to PayJoe Brennan
Ireland’s new insolvency service will pursue and prosecute borrowers fraudulently seeking debt forgiveness, said Lorcan O’Connor, head of the new agency
Borrowers who lie about their finances face fines of as much as 100,000 euros ($130,000) or as long as five years in prison, according to laws which created the Insolvency Service of Ireland, known as the ISI, last month.
“There is anecdotal evidence that in some cases people have been either preferring certain creditors over others or adopting a strategic default,” O’Connor, 37, said in an interview at the ISI’s Dublin office on May 7. “It’s incumbent on the service to ensure we are strict and protect the integrity of the 99 percent of cases that are genuine.”
Analysts are split over how many Irish borrowers are so-called strategic defaulters: borrowers who can afford to pay but don’t do so in the hope of winning future debt forgiveness. Gregory Connor, a finance professor at NUI Maynooth, estimated in March that strategic defaulters may make up more than 35 percent of arrears cases. Finance Minister Michael Noonan responded that these figures are “wholly anecdotal and not based on any robust, structured or in-depth analysis of the situation.”
“We don’t know how many strategic defaulters there are out there, but certainly somebody seeking to play the banks would have to be a lot more cautious,” said Eamonn Hughes, an analyst at Dublin-based Goodbody Stockbrokers. “A lot of the pieces of the puzzle are falling into place on who may qualify for a deal.”
Prime Minister Enda Kenny’s government set up the insolvency service and appointed O’Connor as part of its plan to deal with the legacy of the real estate bubble which imploded in 2008. Kenny’s predecessor Brian Cowen agreed to new insolvency laws as part of the agreement to win an international bailout in 2010.
Home prices have fallen 51 percent since peaking in 2007, and unemployment stands about 14 percent, leaving borrowers struggling to repay loans.
Some 16 percent of owner-occupier mortgages and 27 percent of buy-to-let loans were at least 90 days in behind in repayments by value at the end of last year, central bank figures show.
While there’s no definitive figure on how many are strategically defaulting in the hope of winning debt forgiveness, Bank of Ireland Plc said in March that it has appointed 1,100 rent receivers, who directly collect rent from tenants, to stop borrowers diverting the cash away from loan repayment.
The ISI, which is ready to take first applications at the end of June, will sign off on accords negotiated between borrowers and banks with the aid of mediators.
“The reasonable living-expenses guide we have set out will also address the issue” of strategic defaulters, said O’Connor, formerly a director in Deloitte LLP’s restructuring services in Ireland. “If you are looking for debt relief in some shape or form, you need to adjust your lifestyle in some cases.”
Borrowers seeking debt relief may be banned from taking vacations, sending children to private school and paying for private health insurance, according to guidelines published last month. Monthly individual living expenses may be capped at 35.73 euros for clothing, 247.04 euros for food and 33.40 euros for personal-hygiene items.
Borrowers will arrive at O’Connor’s door having exhausted other avenues to reach a deal with their lender. In some cases, they will be encouraged to trade down to smaller homes, while the central bank is pushing the idea of split mortgages, where portions of loans will be put on hold until the person’s circumstances improve.
In other cases, banks may agree to debt forgiveness in an accord directly negotiated with the borrower, without the involvement of any outside agency.
O’Connor said he agreed with Irish Justice Minister Alan Shatter’s estimates of demand for the services of the ISI, which employs about 50 people. As many as 4,000 borrowers may seek relief on unsecured loans of as much as 20,000 euros in the ISI’s first full year, Shatter told lawmakers in March.
Some 20,000 borrowers may look for relief on secured debt up to 3 million euros or unlimited unsecured loans, he said. Most of these arrangements will leave people in their homes.
The average costs of larger insolvency arrangements “could be between 5,000 euros and 10,000 euros,” O’Connor said. While this is payable by the borrower, it ultimately eats into what the lender can recover, he said.
Ireland will “in all likelihood” follow a U.K. pattern where most accord changes reflect worsening fortunes rather than an improvement, he said.
Failure to come to a deal leaves the bankruptcy option, which involves borrowers losing their homes. Shatter said he expects about 3,000 applications for bankruptcy. Under new laws, borrowers are discharged from bankruptcy after three years, compared with 12 years under the previous insolvency regimes.
So far, the ISI has drawn 1,000 calls and e-mails, O’Connor said, with over 20,000 visits to the agency’s website.
Accords reached under the ISI’s aegis “are better for all sides than bankruptcy but not as good as doing a deal short of this,” said O’Connor. “I would be supportive where debtors and creditors can come to an arrangement” privately.