Personal Insolvency Arrangements
Personal Insolvency Arrangements Explained
Personal Insolvency Arrangements (PIAs) are formal, legal solutions that were introduced by the Personal Insolvency Act 2012. They were developed to help home owners, struggling with debt to stay in their homes and also to protect other assets which have debts secured over them. They are unique in that they allow unsecured debts, like credit cards and personal loans to be dealt with as part of the Arrangement.
PIA's can help people stay in their homes but only if that home is of a reasonable not excessive size.
How do PIAs Work?
PIAs are court approved arrangements that are proposed on behalf of home owners by Personal Insolvency Practitioners (PIPs).
They aim to restructure people’s mortgages so payments can become affordable again, any arrears can be addressed and repossession can be avoided.
How they do this depends of the facts of each case, but can include reducing interest rates, extending the term of the mortgage, postponing payments by warehousing some of the mortgage debt or by the lender agreeing to write off some of the mortgage.
They also address unsecured debts, as mortgage providers can use their position as a creditor to vote through Arrangements, meaning unsecured debt be written off after a short period of time, or only a percentage of what is owed is paid back.
The first step in the process of applying for a Personal Insolvency Arrangement is the home owners must speak with a Personal Insolvency Practitioner. The PIP then must check whether the debtor is eligible to apply for a Personal Insolvency Arrangement.
If the debtor is eligible the Personal Insolvency Practitioner, then drafts a Prescribed Financial statement that outlines the household income and expenditure and how much disposable income is available to pay towards debts. This is sometimes known as the viability test.
Time frame for repayments
If you have disposable income after paying the restructured mortgage you will be expected to pay a contribution for 5 or 6 years.
Protective Certificates – Creating a Safe Place
If the debtor is eligible and it’s the opinion of the PIP that a PIA is a viable option, the Personal Insolvency Practitioner then applies to the Court for a Protective Certificate.
A Protective Certificate creates a safe place for 70 days, where creditors are not allowed to take any action and the debtor is legally protected, to allow the Personal Insolvency Practitioner to begin negotiating with the creditors.
The mortgage provider is then provided with a copy of the home owners Prescribed Financial Statement and invited to submit their proposals as to how they believe the mortgage should be restructured to make it affordable.
The Personal Insolvency Practitioner then consults with the home owners in relation to drafting their formal proposal to the creditors.
This normally involves looking at what the debtor can afford to repay each month towards their mortgage. It will also involve looking at what will be required to make the mortgage affordable.
This may involve requesting the mortgage provider reduces the applicable interest rate on the mortgage, in order that monthly payments can be reduced or possibly whether the term the mortgage has been taken over can be extended, to allow more time to pay.
It may also look at whether the amount owed under the mortgage agreement should be reduced, particularly where there is negative equity, that is where the amount owed is greater than the current market value of the property.
Another option, often preferred by mortgage providers, is that some of the debt should be warehoused, that is payment of it should be deferred to a later point.
Often a combination of these approaches will be used, with there being an active part of the mortgage, with a reduced interest rate and also a part of the mortgage being written off or payment of it being deferred (warehoused) to a later date.
In relation to the unsecured debt, how these are dealt with will often depend on the position the mortgage providers take.
Rather than having a home owner making payments each month to credit cards and personal loans, when they could be paying more to their mortgage, they may agree to have some of the mortgage treated as an unsecured debt in an Arrangement. Where this amount is more than the other unsecured debts, they can vote out the other lenders and agreed that this debt is written off, sometimes within a short period of time, such as three months.
Alternatively, where they do not agree to this, the Personal Insolvency Practitioner may suggest a reduced payment be offered to these creditors over a period up to six years, with the unsecured lenders only receiving a percentage of their debt back. The rest of the unsecured debt would then be written off at the end of the Arrangement.
The Creditors’ Meeting
Once the Proposal is drafted it is then circulated to all the creditors and the Personal Insolvency Practitioner then calls a meeting of creditors.
At this meeting a vote is taken on the proposal. There are three parts to this vote and all parts must vote in favour of the Arrangement.
The first part is a vote of all creditors, secured and unsecured.
Creditors with sixty-five percent of all the debt in value must vote in favour of the proposal. So, for example, if the total debt is €100,000 and all creditors vote at the meeting, creditors with €65,000 of the debt or more must vote in favour of it.
The next part is a vote for just the secured creditors, such as mortgage providers. Creditors with more than 50% of this total debt must vote in favour of it.
The final part is for the unsecured creditors, like credit card and personal loan lenders. Again those with more than 50% of the total debt must support the proposal. However, where the mortgage provider agrees to have some of the debt treated like an unsecured debt, they can vote at this stage also, meaning where the debt they agree to be treated as unsecured is more than the other unsecured creditors, they can carry the vote.
This means in reality, they can vote through proposals that mean the unsecured debts be written off legally after a short period of time, such as three months, in order that the mortgage can be prioritised.
If at the Creditors’ Meeting the proposal is accepted, the Personal Insolvency Practitioner then lodges it with the Court to have it approved. If the Court accepts the corrected procedures have been followed and creditors’ voted in favour of it, the Arrangement is approved.
Insolvency Service of Ireland
The Arrangement then takes effect when the Insolvency Service of Ireland register the agreed Proposal in the Register of Personal Insolvency Arrangements.