When faced with difficulties servicing personal debts, legislation in Ireland leaves few options other than budgeting, prioritising and preparing for the long slog.
‘‘The laws in the Republic are quite frankly draconian,” said Karen Stewart, manager of National Debt Relief Ireland.
‘‘It costs as little as £485 in Britain to declare yourself bankrupt, whereas in the Republic of Ireland it can cost tens of thousands because you have to go to court,” said Stewart.
Legislation in Ireland has a very punitive approach to bankruptcy, relying on the 1988 Bankruptcy Act. Under this act, anyone filing for bankruptcy has a 12-year discharge period, loses control of their property and, when discharged, is still filed on a discharged bankrupts record, according to Paul Joyce from the Free Legal Advice Centre.
Similarly, a formal scheme of arrangement that would allow reduced repayment proposals to pass through court, which are legally binding to all creditors if 60 per cent of them approve it, is also difficult to implement and has rarely been issued.
A number of organisations are lobbying the government to bring laws in line with Britain and other European countries. Last September, the Law Reform Commission published a report calling for an overhaul of the current legislations on indebtedness.
Last year, more than 19,000 new clients approached the Money Advice and Budgeting Service (Mabs), an increase of almost 2,500 people on the previous year. Since then, there has been a 25 per cent surge in individuals contacting the service’s helpline during the first quarter of this year and a general increase has occurred in contacts from all groups of people, according to Mabs spokesperson, Michael Culloty.
Families with mortgages are the fastest-growing group seeking help. Mortgage holders account for 6,827 new clients last year. More than half of all new clients fell into the 26-to40 age bracket and more couples with children approached the service than lone parents. Clients in receipt of social welfare and in rented accommodation, both local authority and private homes, still remain the single largest group.
Most advice is sought in relation to installment loans, utility arrears and credit card debts. However, mortgages are also beginning to account for a more significant number of complaints, according to Culloty.
Typically, people battling with personal loans and credit cards are also having trouble repaying their mortgage. More women than men approached Mabs for financial advice in the last year, but Culloty said that the gender gap was evening out compared to previous years.
Traditionally, Mabs dealt with debts relating to the household – such as rent and utility arrears or credit union loans – over which women presided and were therefore the first to notice problems. With the emergence of newer financial products such as lifestyle and car loans, men are also seeking advice for repayments.
Following job losses, government levies, tax hikes and pay cuts, many people who could previously afford their loans are struggling to make ends meet.
‘‘A lot of people coming to us now have never missed payments before and have never had problems making repayments,” said Stewart.
Sean Tyrer, managing director of Debt Advice, said that there had been a significant uptake of the company’s services by new clients over the last two years. Mostly, clients are self employed and attached to the housing market , although sole traders are also featuring frequently in the company’s client base. Due to the nature of their work, clients often present business as well as personal debts.
Managing debt
When faced with difficulties in servicing debts, the first piece of advice by most debt management services is to approach creditors and inform them of the situation. This allows room for the renegotiation of interest rates and reduced payments before financial difficulties spin out of control.
A budget should be drawn up, giving a breakdown of all income, including benefit payments, and all outgoing expenses, such as living expenses, mortgage payments, utilities, credit card payments, etc. Based on this, a person should then make an affordable offer to their creditors that they can maintain.
Payments should be prioritised to ensure mortgage, rent and utility arrears are addressed first and foremost, followed by other secured debts, such as car loans. Failure to make timely payments on these each month can have severe consequences. Only once the secured debt is covered should a person assess what they can afford to pay towards their unsecured debt, such as credit cards or personal loans.
‘‘The biggest interest people will have to pay is on credit cards, and credit card companies really go after them,” said Stewart. ‘‘They’ll phone them at work, at night time and so on. They’re very aggressive, so in order to stop these calls people sometimes pay credit cards first and maybe not make mortgage payments.
Mortgage lenders will often be open to negotiating the terms of their contracts with clients, as they want to ensure repayment of their loans, said Stewart. ‘‘They will usually not go for repossession until 12 payments have been missed.”
Where there is a multitude of debts, any money left over after payments for secured debts can be used to offer pro-rata payments to unsecured creditors. In some cases, there may be no money left over to service some of the debts. In extreme cases, token payments of a small amount might be made to the creditor.
These payments are sometimes accepted by financial institutions, as they show a commitment to deal with the problem, according to Tyrer, although they are not a way out of debt. The problem is that, when payments are not made, the interest bill rises even higher.
For people who have purchased payment protection insurance with their loans, this will kick in when there is a redundancy, but usually the insurance only pays out for one to two years.
It covers some illnesses and redundancies, but typically does not pay out for the first three to six months after job loss. Also, part-time or self-employed workers cannot usually claim, nor can people working in a family business.
The HSE offers a mortgage interest supplement as a short-term support, with interest payments for people facing serious problems in meeting their mortgage payments.
The means-tested supplement only contributes to interest payments and not the actual loan, and is only available to people working less than 30 hours a week with a weekly income that does not exceed €317.43. Individuals in full-time education are not eligible, nor are married couples where one partner is in fulltime employment.
If the capital value of the property exceeds €40,000, payments of up to €4 for every €1,000 of capital are made. All the banks now have procedures in place to assist customers with mortgage arrears, involving an extension of the loan, changing payment types to interest-only payments, payment breaks or offering a fixed payment, depending on the individual circumstances.
Some people consider consolidating their loans into one new loan, but this needs to be approached with caution – and such loans can in any case be difficult to obtain.
Consolidating is only an option if individuals are proven to meet their debt payments – and even then many banks will not give such loans to relatively low-risk customers, according to Stewart.
Emmet Pullen, a partner in Debt Plan Ireland said: ‘‘We would advise caution to anyone considering this option. Many people that we encounter have significantly more serious situations to deal with as a direct result of consolidation and reborrowing.”
Typically when considering consolidating their debts, borrowers seek to have other debts rolled into their mortgages. This can lead to lower initial payments – because mortgage interest rates tend to be lower. However, the problem is that spreading debts out over a mortgage term of 20 years or more can lead to much higher repayments being made over the term of the loan. Proper advice is thus essential for any borrowers considering this consolidation option.
The Financial Regulator’s website – itsyourmoney.ie – has an example of a borrower who has an existing 20-year mortgage for €100,000 and consolidates other debts totalling €58,000 – for car loans, home improvements and a personal loan, into this.
While the total monthly repayments facing the borrower fall from €1,647 to €959, the total cost of paying off all the debt over 20 years is €11,000 higher. This is because shorter term loans for items like cars and personal spending – normally repaid over three to five years – are being repaid over 20 years.
Commercial debt management firms
A growing number of commercial debt management firms are appearing on the market, offering services from drawing up budgets to negotiating interest rates with financial institutions and distributing payments on behalf of the client, promising to reduce and manage monthly debt repayments.
The market for these services is currently unregulated and a number of organisations have called for the licensing of debt management firms.
‘‘Any unregulated financial activity runs the risk of exploitation of vulnerable clients,” said Pullen.
‘‘There are currently companies from outside of Ireland using the non-regulated status to falsely advertise unrealistic solutions to unsuspecting consumers.”
To date, Mabs is the only free debt advice and management service in Ireland, with more than 60 offices nationwide, offering confidential and independent support since 1993.
According to Culloty, people should do their research before engaging a debt management firm.
‘‘Why would you pay for a service when one is available that is free and confidential and that has a strong relationship with all major creditors and utility suppliers?”
‘‘We hope people can deal with creditors themselves with the help of our website and helpline. For others finding that quite difficult, we will intervene and negotiate on their behalf, having made out their budget and ensure that they get all their entitlements, “ said Culloty.
The organisation also has a payment system in place, running through accounts with a number of credit unions. A single monthly payment is made by clients into the account and is then redistributed to creditors.
The length of the waiting list for appointments at the offices vary and are longest in the commuter belts of major cities.
However, if there is an emergency, such as an imminent repossession, a client will be seen quickly, according to Culloty. People should be very suspicious of commercial debt management firms advertising write-offs of up to 75 per cent of debt. It is very rare that this can be achieved in Ireland, according to Culloty, and usually refers to cases in Britain.
Before engaging a commercial service, people should ask what the exact fees are and what they include; if they will have to pay, even if the desired solution is not achieved; whether the service is connected to any organisation selling financial products; and what level of training the staff have.
Debt management firms usually receive one monthly payment from clients that covers all the repayments made for all the debts, which they then redistribute. On top of this, they take monthly fees and a one-off set-up charge.
National Debt Relief Ireland also offers free advice. If a client chooses to engage the company in managing their debts, there is a one-off set-up charge equal to a monthly payment followed by a monthly charge of 15 per cent.
Debt Advice is another firm giving free advice. A debt repayment plan through the firm costs €49 a month, with an initial set-up fee equalling one monthly debt repayment. If a token payment plan is negotiated, clients pay €39 a month.
Debt Plan Ireland charges between €500 and €800 for a set-up fee for clients who engage it to negotiate and manage their plan. A further monthly charge of 10 per cent of the monthly payment plan is then charged, capped at €70.
Car loan problems
When purchasing a car with a hire purchase agreement, a person does not own the car until all the repayments have been made. Therefore, when the monthly repayments cannot be met, selling the car is not an option.
However, a ‘half rule’ is built into the agreement, whereby the car can be returned to the lender if half of all repayments have been made. In this case, no further payments will need to be made although the debtor is responsible for the cost of any necessary repairs. The half rule still applies if there are arrears, although any outstanding payments will need to be settled and can be subject to penalty fees and an interest surcharge.
If possible, the half rule is often preferable to repossession or voluntary surrender, where the full debt remains and has to be repaid. In the case of a voluntary surrender, the finance company sells the car and the money raised goes towards repaying the debt, however any outstanding debt will have to be paid in full. If there is a repossession, a charge of about €300 can be incurred, often making it more costly than a voluntary surrender. A person’s credit history will be affected in both cases.
A hire purchase agreement is one of the least flexible forms of finance with a fixed term and fixed repayments. Speaking to the lender immediately when financial difficulties become evident may allow for a renegotiation of the contract terms, such as an extension. This would reduce monthly payments, but there may be a rescheduling charge of approximately €60 as well as penalty fees for any payments already missed.
If the car was purchased with a personal loan, the debtor can try to renegotiate interest rates or the loan term with their creditor. Failing that, they can sell the car to cover the outstanding debt.