Case study Approaching retirement - major secured and unsecured debts

J

jimmyjimbob

Guest
Summary prepared by Brendan

| loan|value|deficit|
Home|€200k|€150k|€50k|4.5%
Investment|€200k|€100k|€100k|3.5%
Credit Card|€20k|0|€20k
Credit Union|€14k|€7k|€7k
Overdraft|€5k|0|€5k|
Total|||€182k

Gross income: €55k

Single - aged 55
 
Hi,

Perhaps you could give me an opinion on the following scenario for a family member. I think they only have the UK bankruptcy as an option but that would be the absolute last resort for the person in question. They would prefer to continue working and try to keep all payments going. I personlly worry though that they will be paying back the money and not really making a dent in the overall debt at great potential cost to their health.

Personal and income details
Income self: €55,000 - Self Employed
Income history: Self employed for last 10 years
Income partner/spouse: Single
Income history:
Amount of Mortgage Interest Supplement received: €0

Home Loan
Lender: Bank of Scotland (Ireland)
Amount outstanding: €200,000
Value of home: €150,000
Interest rate: Variable - 4.5%
Monthly repayment: €1,200
Amount in arrears: €5,000

About to enter into MARP to look for interest only for a period of time.

Investment property
Lender: Permanent TSB
Amount outstanding: €200,000
Value of home: €100,000
Interest rate: 3.5%
Monthly repayment: €935
Amount in arrears: €0
Monthly rent received: €700

Other loans and creditors
Overdraft : €5,000
Credit Card: €20,000
Credit Union: Loan of €14,000 against shares of €7,000

Any other relevant information
Currently have a shortfall of about €1,500 per month between income and expenses (expenses include payments on the loans and mortgages above).

Credit Card and Credit Union repayments are about €1,500 per month. Home mortgage payment is €1,200 per month and investment property mortgage is €900 per month. Shuffling money between credit cards and overdraft to keep the show on the road.

An important point is that there is only about 10 years until retirement to repay all of these debts. There is no pension fund at all so state pension will be the only income in retirement.

What is your preferred realistic outcome?
Wondering whether this is sustainable - realise it is probably not and am wondering what the options are.

Current research tells me it might be possible to give back the keys to the investment property, let the bank sell it, take the shortfall as an unsecured debt.

However it seems impossible to see how how the debts would all be repaid by retirement age anyway so perhaps bankruptcy in the UK is the only realistic option. The issue there is the worry about being able to find work and get income upon return.
 
I can see that the problem is the unsecured debt, and not the mortgage. There is no need to go interest only on the mortgage, when there is a rental income on the second property, and negative equity isn't always enough of a reason to look towards bankruptcy. It would be much easier to restructure the unsecured debt over a longer period - your relative's mortgage lenders have security on the properties, the credit card company does not. Given the salary and the fact that your relative is single, some belt-tightening might be appropriate - the mortgage balances in total, after rental income is €1435 a month. It's a case of offering less to the credit union, offsetting the shares, and giving the credit card company less as well, all very workable through a debt management plan, and depending on expenditure of your relative, this could be doen and dusted come retirement age, at least to the point that the mortgages would be paid down significantly and there would be equity in the property. The unsecured debts would also be paid in full (in 6-8 years depending on how they deal with interest). And this is without the requirement to enter MARP, to wait for anything in the Persoanl Insolvency Bill or to move to the UK to go bankrupt.

www.frost.ie
 
Hi Frostie,

Thanks for taking the time to reply - looking at it again it does seem alright that the unsecured debt is causing the biggest issue but I still have a big concern over the investment property.

The investment property looks to me to be costing the person €8,400 per year.

They are earning €8,400 on rental income
Getting about €3,100 in interest relief annually
Pay management fees of about €1,300 annually
The person's effective tax rate is roughly 30%

Am I right in saying that the person is making an income then of €2,800 from the property ((€8,400 - €1300 - €3100) * 70%) but they are paying a mortgage of €11,200 so really the investment property is costing them €8,400 per year?

If that really is the case what options does the person have here - I have read here about needing to get agreement from the bank for a sale and then the negative equity gets put on the person as unsecured debt that they need to work out a payment plan for over time. Then I am back to the original issue - the person has about 10 years until retirement so not a hope of getting all of that debt paid back.

Thanks for helping.
 
Let's look at the investment property first

Rent|€8,400| 12 x €700
Interest paid|€7,000|€200k @3.5%
Other costs| €2,000| just a guess
Income Tax| €500|
loss|€1,000

The best you could expect would be for ptsb to switch it to interst only for the long term. Even at that, it will cost €1,000 a year. It would have to double in value to recover the negative equity.

This is a big loser and needs to be got rid of.

Even if all the lenders, other than the home loan, agreed to write off their debts...

He would end up with a home worth €150k and a mortgage of €200k.

He has the income to pay the interest on €200k which would be €9,000 a year. But he won't have the income to repay the capital, ever.

I think that UK bankruptcy is the best option ...

Given his age, I would wait until the new legislation comes into force.

I would put a PIA to the creditors as favourable as possible, but I doubt if they would accept it.

If they don't, then give back the keys and go to the UK.

In the meantime...
Enter into discussions with ptsb about an orderly sale of the property. If they agree, then ptsb will have €100k of unsecured creditors and the rest will add up to €32k. If ptsb agree to a deal, he will be able to impose it on the others.

Bank of Scotland want to leave Ireland. They might well do a deal on selling the property and writing off the shortfall.

If he can convert his secured loans to unsecured loans, he might get a favourable Debt Settlement Arrangement.

He could be back to Square 1 - no liabilities and no assets this time next year.
 
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