"AIB may offer debt relief to some mortgage holders"

[Brendan Burgess]

From today's[broken link removed]

ALLIED IRISH Banks has hinted that it may be willing to offer some degree of debt forgiveness to struggling mortgage customers, while the Central Bank said the banks had been given “more scope” to restructure unmanageable mortgages on a case-by-case basis.

...
He stopped short of saying that debt forgiveness was among the proposals included in its submission, but it is likely to form at least part of the solution it proposes.
“I would prefer to call it debt restructuring,” he said,



... He said that if a borrower had their debt restructured they would be “unlikely” to retain full ownership of their home.

 

[orka]

The Irish Times also had a small piece yesterday which said that in the US, debt forgiveness may be looked on as income and taxed accordingly. I suppose it makes sense from a purely clinical viewpoint (the bank is 'gifting' you 50K or whatever) but it seems harsh given the circumstances when it might happen.

 

[Bronte]

Orka, would you be able to copy and post that? If true I guess one will need clearance from the revenue that it will not be treated as a gift.

 

[orka]

http://www.irishtimes.com/newspaper/pricewatch/2011/0725/1224301313306.html

Taxman may take cut of debt write-off Duncan McNiff got in touch about our mortgage article last week, in which we said that shortselling of property in the US allows people to sell for less than they owe and the bank writes off the difference.
“This is not quite true,” he writes, “because what you forgot to mention is that in a short sale the Federal government may take the view that the written-off debt is income . The $70,000 of forgiven debt is viewed as income and the borrowers could well be liable for to pay 40 per cent, or $28,000, in taxes.”

However, looking at the IRS (US Revenue) website, it looks like they brought in a law to exempt primary residences from having to treat debt forgiveness as taxable income.

http://www.irs.gov/individuals/article/0,,id=179414,00.html

What is Cancellation of Debt?
If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is normally reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.

Here’s a very simplified example. You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you.

Is Cancellation of Debt income always taxable?

Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:

• Qualified principal residence indebtedness: This is the exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners.
• Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
• Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets.
• Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income.
• Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences.

 

[JoeB]

That's a great point, .. any debt forgiveness should be taxed. If not, it's just another way of moving money from the taxpayer, into the hands of mortgage holders.

I think strongly that individual state owned banks, SHOULD NOT be in a position to give other peoples money away.. they can give their own money away, but not other peoples. Given that these banks are funded by the taxpayer then any losses they make, or deliberately choose to make, are funded by the taxpapyer, this should be disallowed.

Any debt help should be given through social welfare... or given by private banks, that will fail if they overdo it. Otherwise I can see this happening..

AIB write off a billion. In a few months they're undercapitalised, and they come to the taxpayer for a billion. This money should not be paid by the taxpayer.. but it seems that we are paying for all bank losses... and it's likely that we will have to pay for bank losses that haven't even been made yet.


Why should a state owned bank be allowed to make this type of commercially disastorous decision? What's in it for the bank?

And if there's nothing in it for the bank, then why do it? They should not have a social conscience... we have a social welfare system for a reason,.. in order that private companies need not engage in socail welfare.


So how is the bank selling this to shareholders? Where is the clear benefit to the bank?

 

[Brendan Burgess]

Hi Joe

I don't think that a state owned bank should behave any differently from a public company. If it's the right thing for Ulster Bank to do, then it's the right thing for AIB to do.

It is very likely that any form of debt forgiveness, will be the writing off of money which is uncollectable. This loss has already been made so there will be no additional loss to the taxpayer.

In practice, where a person surrenders their home or it is repossessed, the banks often write off the balance as uncollectable. They certainly do it on their own books. But they should also do it formally with the debtor to give them a fresh start.

I don't agree with AIB unilaterally writing down the existing mortgage on a home while leaving ownership with the mortgage holder.

I argued this issue in more detail in[broken link removed]in the Sunday Business Post recently.

Brendan

 

[JoeB]

...
It is very likely that any form of debt forgiveness, will be the writing off of money which is uncollectable. This loss has already been made so there will be no additional loss to the taxpayer.
...

It's how to determine what's un-collectable that's the problem in my view. We can't simply rely on people signing a form that says that the information above is true and accurate.. .. people would have to open their entire financial situation to view.

If this isn't done in a courtroom then I won't have confidence in the system... instead I'd believe that people are having debts wiped that don't deserve it, or can afford to pay, but are choosing not to.


Should debt forgiveness be extended to those who smoke?, or to those who have foreign holidays, or drive a newer car than 2006, or who send children to fee paying schools?

 

[JoeB]

...
I argued this issue in more detail in[broken link removed]in the Sunday Business Post recently.

Brendan

Nice article.

Some questions though..
quote: The government should encourage the lenders, especially those it controls, to implement a formal debt management system now.

Has the government made a choice not to intervene in the running of the banks it owns? Does the Gov have voting rights?
I think the government should either be saying nothing, or insisting, never 'encouraging'... not if we own the banks we're 'encouraging'. It should either be stay completely away, or insist upon what we want.




quote: Although it may well suit both the borrower and the bank to sell the house, in some cases it will be cheaper for the state to keep the person in their home and to pay some or all of the mortgage interest on their behalf rather than to provide them with a local authority house.

The problem here is the Local Authority waiting list. It's several years long,.. and anyone availing of your scheme would skip it entirely.
There's also the problem with the assumption that people need houses. What about trailer parks?, surely we can house people in trailer parks for <20K every five years? Why buy houses, we'll never keep up with demand.
I can't see the point in working if we give houses away for free to those who don't have jobs.

We're setting our base standards far too high in my opinion. We need to acknowledge the fact that we're broker than a third world country.

 

[Bronte]

I'm all for this debt forgiveness from AIB. If that's what it takes to get people back on the right track then why not.