High profile or not, personal insolvency works for debtors
Case of Pia Bang and Jeffrey Stokes shows the success of new regime, writes Mitchell O’Brien
WHEN the High Court approved a €12m write-off of debt owed by Pia Bang Stokes and her husband, Jeffrey Stokes — formerly of Unicorn Restaurant fame — it sparked fears that our new personal insolvency regime was failing ordinary debtors while working for high-profile ones.
The couple walked away from their debts after their creditors agreed to a lump sum payment of €145,000. Mr and Mrs Stokes also retained their €800,000 home in Kilternan, South County Dublin, although the home carries mortgage debt of about €680,000 on which they pay monthly repayments of some €700.
The Personal Insolvency Act, and the Personal Insolvency Arrangement (PIA) mechanism, works. PIAs return people to solvency while keeping the family home.
A PIA or insolvency is not bankruptcy, it comes before bankruptcy and it is a better solution than bankruptcy for both the borrower and the banks in most cases. The courts have approved thousands of insolvency arrangements since the legislation became effective in September 2013.
Rather than being perceived as a failure, the high-profile case involving the Stokes is a testament to the successes the system is delivering. Indeed, high-profile cases don’t tell the full story.
PIAs work exactly the same and on the exact same basis for the ordinary family home borrower with €250,000 worth of debt as they do for a debtor with €14m of debt. The common thread between the Pia Bang Stokes case and the thousands of more modest PIAs being approved is the maths.
If you are unable to meet your financial commitments (including the mortgage on your family home) as and when they fall due, you are insolvent and eligible to make an application for a PIA.
The sooner you contact a Personal Insolvency Practitioner (PIP) the better. The PIP will advise you of your options and assist you in completing your prescribed financial statement and PIA application form. From here the PIP will arrange for your application to go before a Personal Insolvency Court.
The Court will issue a protective certificate (PC) giving you 70 days protection from your creditors. It is during this period the PIP will engage with the mortgage lender and other creditors and construct a PIA proposal that will be voted on at a creditors’ meeting.
If a 65pc majority of the debt owed is voted in favour of the proposal, then the PIA will be put back before the same Court to be approved giving it the force of law, binding all creditors (including the mortgage lender) and the debtor to the terms of the arrangement.
If creditors vote against the proposal, there is now an appeal mechanism whereby the Court may approve the PIA, and override the so-called “bank veto”.
It is now the case that even where your bank rejects the PIA, the Court can approve your PIA proposal that was made to the bank. Both the High Court and Circuit Court have approved PIAs, including PIAs with substantial debt write-down, where creditors have initially vetoed the PIA proposal. In that, the much criticised “bank veto” is gone.
A PIA is all about a debtor’s income and reasonable living expenses (RLEs). The concept of RLEs was introduced as an amount of income a debtor will not be forced to live below while servicing debt.
In a standard PIA there are primarily two different types of debt, the family home mortgage, and debt not associated with the family home. The home mortgage is serviced from within a debtor’s RLEs on the basis that if a debtor is not paying a mortgage they will be paying rent.
If a debtor has a capacity to make a contribution to non-mortgage debt without reducing the full family home mortgage payment due, then the mortgage payment is left alone.
However, if a debtor does not have enough income to cover the full mortgage payment on his family home on top of his other reasonable living expenses, then the PIA will restructure the mortgage payment as well.
If you are having difficulty paying your family home mortgage or other debts, regardless of the level of debt or how hopeless your situation may feel, consulting a PIP is the responsible course of action.