Case study Insolvency Service's PIA Case Study Anthony

Brendan Burgess

Brendan Burgess

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This sample scenario is designed to illustrate the basic features of a PIA and includes principal reduction in secured debt.

Full story: [broken link removed]


1 . A N T H O N Y ’ S ST O RY

Anthony is single, with one child (age 4) in Primary School and does not require a motor vehicle. He worked full-time as a Sales Assistant until he had a car accident 18 months ago. Because of his accident, he can only work part-time and his net income has decreased to
€2,000 per month.

Doctors have informed Anthony he will not be able to work full-time again. They have also informed him he will have to get regular physiotherapy sessions. There is no prospect of Anthony’s income generating capacity improving. Anthony’s Principal Private Residence (PPR) is currently valued at €60,000, but the outstanding mortgage is €120,000. His monthly mortgage repayment on his PPR is €636. He also has a credit union loan of €18,000, which requires monthly repayments of €400.

Anthony’s current expenditures including his mortgage and credit union loan repayments are €2,632 (€2,232 + €400) monthly. He has co-operated with his bank under the Central Bank Code of Conduct on Mortgage Arrears in relation to his PPR for the past eight months, but has been unable to agree a sustainable repayment solution. Anthony is unable to pay his debts in full as they fall due and acknowledges he is insolvent.

Anthony meets with a Personal Insolvency Practitioner (PIP), and provides full details of his financial circumstances so the PIP can understand his financial position.

Net income| €2,000
Childcare|€380
Set costs |€1,116
Physiotherapy|€100
Available for debt servicing|€404
Mortgage repayments| €636
Credit Union|€400
(Deficit)| (€632)

Potential PIA solution for Anthony proposed by the PIP

Anthony’s current mortgage repayments are €636 per month, which is not sustainable. The PIP assesses whether extending the mortgage term or reducing the interest rate would make the mortgage sustainable. Due to Anthony’s age, it is only possible to extend the mortgage by five years, which would reduce mortgage payments from €636 to €538. However, this repayment is still unsustainable.

The mortgage interest rate already runs on a very low “tracker” rate and leaves no room for downward adjustment.

In order for the mortgage to be sustainable, the PIP concludes that it will be necessary to extend the mortgage by 5 years and reduce the principal by €50,000. This would reduce Anthony’s monthly mortgage payments to €314 per month, and leave a small amount available for Anthony’s unsecured creditors.

The shortfall of €50,000 is treated similarly to the unsecured debt in accordance with section 102 (11)1 of the Personal Insolvency Act.

Anthony’s monthly income and expenses after PIA restructuring


Monthly Income| € 2,000

Total Set Costs| € 1,116



Childcare| € 380

Special Circumstance (Physiotherapy)| € 100



Mortgage | € 314
Available to unsecured creditors| € 90
This amount is now available to make payments to his now unsecured creditors. This equates to €6,480 over the 6 years of the PIA.

As part of developing the PIA proposal, the PIP will seek to agree fees with the creditors. Fees will vary in accordance with the complexity of a case and what is acceptable to the creditors. In proposing the fee amount, the PIP may suggest a staggered draw down of the fee to reflect the upfront work associated with making an application and a proposal, as well as his/her other statutory duties during the lifetime of the PIA.

For the purposes of this scenario, it is estimated that the PIP fees are €5,000. The PIP fees of €5,000 include a €1,000 upfront payment in year one followed by an annual payment of
€800 in years two to year six.


Anthony's position after meeting his obligations under the PIA


a) Principal Private Residence Mortgage is now sustainable because:

• Unsecured debts are discharged;
• A portion of the PPR mortgage principal (€50,000) was reduced during the PIA.

b) The extension of mortgage term from 20 to 25 years.
c) Anthony will have repaid €1,480 of his unsecured debts at the end of the term of the PIA and the remaining €66,520 is discharged. This represents a 2% return for the unsecured creditors based on amounts outstanding at the date of the Protective Certificate.
d) Claw-back provisions may apply to the extent of the principal reduction of €50,000,
should Anthony sell his PPR within the next 20 years. e) Anthony is solvent.
 
€120,000 @ 2.5 % for 20years = €636

€70,000 @ 2.5% for 25 years = €314

Would the bank go for this?

Say that they repossess the property and lend on the €60,000 proceeds at 4.5% SVR. This would give them €341 per month instead of €314

If they go for the PIA, they might get a claw back if the guy sells it within 20 years.

Alternatively, the bank might just offer him a split mortgage or an interest only mortgage for 5 years with a review after that.

€120,000 @ 2.5% = €3000a year or €250 a month.

The bank will benefit from any increase in value of the property, whether he sells it within 20 years or after 20 years.
If he falls into arrears, the bank can repossess the property and sell it on. But I suppose that under a PIA, they could repossess it anyway.
 
What is best for Anthony?

The interest on his mortgage which is his real cost of housing is reduce from €3,000 a year to €1,750 a year or €150 a month.

Presumably he could not get accommodation for this price anywhere else, so he should go for this.

It's mad for the Insolvency Service to propose that the accommodation costs be reduced from €250 a month to €150 a month and expect the bank to approve it.
 
Brendan Burgess said:
Mortgage | € 314
Available to unsecured creditors| € 90[/table]This amount is now available to make payments to his now unsecured creditors. This equates to €6,480 over the 6 years of the PIA.

. The PIP fees of €5,000 include a €1,000 upfront payment in year one followed by an annual payment of €800 in years two to year six.


c) Anthony will have repaid €1,480 of his unsecured debts at the end of the term of the PIA and the remaining €66,520 is discharged. This represents a 2% return for the unsecured creditors based on amounts outstanding at the date of the Protective Certificate.
.
Click to expand...

Who is going to pay the 1000 to the PIP upfront, and where is the 800 Euro's going to come from?

I'm confused about the figures for the unsecured. He has 90 a month to pay them back over 6 years so 6480. His unsecured debt is 18K, but you mention 2% of this, 2% is 360 Euro.

If I were a bank I wouldn't agree to him paying back the credit union anything, also wouldn't waste time and money on going through the PIP process. Better to agree that Anthony gets 50K written down on condition he only pays the bank.

There is an extra cost to the bank on the PIP process, it takes bank staff time, ie money, to engage with this long drawn out process.

Getting his mortgage of 120K written down by 50K is excellent and agree that his household cost is now below the cheapest one bed in nearly any city at 314 Euro a month. And he's buying an asset that may go up in value.
 
Brendan Burgess said:
The interest on his mortgage which is his real cost of housing is reduce from €3,000 a year to €1,750 a year or €150 a month.
Click to expand...

Those figures appear to be incorrect. His current mortgage payment is 636 and the proposed amount is 314. 72 Euro's weekly.
 
Bronte said:
Those figures appear to be incorrect. His current mortgage payment is 636 and the proposed amount is 314. 72 Euro's weekly.
Click to expand...


Hi Bronte

The current payment is €636 of which €250 is interest. He is effectively saving €386 per month.

The cost of his accommodation is the interest.
 
Bronte said:
If I were a bank I wouldn't agree to him paying back the credit union anything, also wouldn't waste time and money on going through the PIP process. Better to agree that Anthony gets 50K written down on condition he only pays the bank.

.
Click to expand...

That is a much better solution all round.

Unfortunately, the PIP is unlikely to recommend this and the CU is unlikely to agree to it.

If he goes for a PIA and the bank agrees to treat €50k as an unsecured creditor, the CU will have only 26% of the unsecured votes ( 18/68) and will be unable to veto the deal.
 
Let's look 25 years into the future.

The cost of his accommodation has been reduced to €150 per month.

He has been "saving" €160 a month for 25 years which now amounts to €70,000.

Anthony has paid off his mortgage

He has a house which is now worth probably €120,000 which he owns outright.

This has been done at the expense of the mortgage lender (probably the other taxpayers) and the Credit Union.
 
Hi Bronte

The bank has a choice of what to do with the negative equity.

It can treat it as part of the mortgage, in which case it does not have a vote on the unsecured creditors.

If it agrees to it going into the unsecured pot, it is just the same as any other unsecured creditor.

Therefore they can force any reasonable agreement through which treats all the unsecured creditors equally.
 
Brendan Burgess said:
Therefore they can force any reasonable agreement through which treats all the unsecured creditors equally.
Click to expand...

On most of the examples you've posted I can only see the CU's getting shafed by the banks.

I wonder then if I were advising them, would I say to CU's put a judgement mortgage on the house. Doesn't that change the loan from unsecured to secured?
 
Bronte said:
On most of the examples you've posted I can only see the CU's getting shafed by the banks.

I wonder then if I were advising them, would I say to CU's put a judgement mortgage on the house. Doesn't that change the loan from unsecured to secured?
Click to expand...

My understanding is that a judgement mortgage only renders the debt secured to the extent of the available equity in the property.
 
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