Irish banks haven’t had a boom and bust like this before and don’t have systems in place to deal with systemic negative equity and debts.
In the US and the UK, there are systems in place for debt forgiveness.
Bankruptcy is a real option in the UK for example – you can be back on your feet within one year in the UK but it takes 12 years in Ireland before a person who had been legally declared bankrupt can run a business again.
In the US debt forgiveness is so common that it was treated as income by the taxman who considered it a reduction in one’s liability and therefore one’s net worth.
In 2007, however, as the recession started to bite in the US a new law, the Mortgage Forgiveness Debt Relief Act provided that debt forgiven on a primary residence is not treated as income, for debts forgiven in the 3-year period 2007–2009.
The power of this Act has since been extended to 2012.
In Ireland there are no laws designed to help homeowners out of negative equity. But pressure is growing on the Government, which now owns several of our main banks, to come up with a plan for negative equity.
We’ve heard a lot about the moral hazard of rewarding those that don’t pay their bills. Essentially debt forgiveness is a model in dealing with near no-hope situations.
Some believe it might be used to help those in severe negative equity to move home.
Say a couple bought an apartment in 2007 at the peak of the market for €350,000 and this has now dropped in value to €300,000. The couple got a 100 per cent mortgage and owe, say, €345,000. They want to sell and buy a place but will never be able to pay the lender the difference between the sale price and the balance of the mortgage.
The bank may feel that writing off the debt is cheaper than repossessing the property.
A pilot debt-forgiveness scheme was tried out some years ago in a joint initiative between the Irish Banking Federation and the government-backed Money Advice and Budgeting Service.
Under the scheme banks agreed to wipe out a debt if the debtor did a number of things including disclosed all their assets and secondly paid an agreed amount (it could have been as low as €10 a week) over a set number of years. If the debtor remained faithful to the plan, the final debt was written off.
“The big thing that’s going to force a change in dealing with debt is the fact that debt is now a middle-class problem. Years ago people went to the Vincent de Paul, now they go to their TDs,” said a spokesman for MABS.
In November 2010, the Government's Expert Group on Mortgage Arrears and Personal Debt recommended that there be no mortgage forgiveness for householders in distress. They did suggest that mortgage-holders should be allowed to defer some interest payments for up to five years, which they think will give borrowers time to "get back on their feet".
It did, however, call for changes in bankruptcy laws. Current legislation makes it very difficult to declare bankruptcy - unless you pay all your debts you remain bankrupt for 12 years, compared to the UK, where legislation allows for bankrupt individuals to be discharged from their obligations within 12 months.
Useful links
RTÉ Money: Mortgages and arrears
Expert Group on Debt and Mortgage Arrears: Download full report
RTE News: November 17, 2010 Expert group recommends no forgiveness for debts
