I wrote about the Personal Insolvency Bill in the Sunday Independent last weekend. This legislation has the potential to ease mortgage misery, loosen the noose of debt and release back into the economy money that’s servicing massive debts. It could be a game changer, but only if the banks play ball. You can read the original here. Or the full text is below.

This week, the most important piece of legislation to come from this Government reaches report stage in Dail Eireann. It will then do one more lap of the Oireachtas before being passed into law next month. Minister Shatter’s intention for the Personal Insolvency Bill is admirable, but its success requires a fundamental shift from the banks in how they deal with borrowers. The Bill provides three legal mechanisms.

The first is a Debt Relief Notice, allowing for the write-off of unsecured debts up to €20,000 after a three-year period. The borrower must have no assets, no disposable income and no realistic chance of paying off their debts. The second is a Debt Settlement Arrangement (DSA) for unsecured debts over €20,000. Here, the borrower pays the lender what they can after providing for what the Bill calls “a reasonable standard of living”. After a period of no more than five years, the outstanding debt is written off. The DSA requires agreement between borrowers and lenders, and will be facilitated by a new type of financial advisor called a Personal Insolvency Professional, or PIP.

The third mechanism is a Personal Insolvency Arrangement (PIA) for secured debts up to €3m (mainly mortgages). The PIA also requires agreement between borrowers and lenders, with the borrower paying what they can for no more than six years. The focus of the PIA is to leave the borrower with their house and an affordable mortgage where possible.

Here’s how this might work. A couple borrowed €400,000 in 2004 and bought a house that’s now worth €150,000. One of them lost their job, so they are no longer able to meet their mortgage payments. After trying unsuccessfully to work things out with their bank, the couple go to a PIP. The PIP determines that, after providing for a reasonable standard of living, the couple could pay the bank €1,100 a month. This would service capital and interest on a mortgage of €220,000. The PIP proposes to the bank that €180,000 of the €400,000 is written off and that the couple begin to service a new mortgage of €220,000. This is still significantly over the market value of the house, but is affordable and lets the couple remain in their home. Criteria would be included to address issues like how much of any additional income should go to the bank if the financial circumstances of the couple improve during the settlement period. Should the bank refuse any deal, the couple have the option of bankruptcy. The bill is lowering the bankruptcy period in Ireland from 12 to three years. Still painful, but now a viable option. Or they could move to the UK, where the period is one year. In the case of bankruptcy, instead of the bank getting €220,000 plus interest, it would get just €150,000 for the sale of the house. The banks and organisations supporting borrowers point out that a number of distressed mortgages are caused by non-mortgage debt and could be resolved by doing a deal not on the mortgage, but on the credit card and personal loan. As such, all three of the mechanisms in the bill are relevant to resolving the mortgage crisis.

And it is a crisis in need of urgent fixing. Central Bank data from June suggests about 90,000 mortgages are in arrears of 90 days or more in Ireland right now. That’s more than one in nine. There are also 40,000 or so mortgages which have been restructured by the banks. Typically, this means borrowers have been put on a short interest-only period. Organisations supporting these borrowers, such as FLAC and New Beginning, say a large number of these restructured mortgages are not sustainable. The interest may be getting paid, but the borrowers are sacrificing too much, and the problem is not going away. If you add the restructured mortgages to those in arrears, we are nearly at one in five of all mortgages in Ireland, covering about 350,000 people. Having this many people use every euro they earn trying to service unsustainable mortgages is bad, not just for them but for everyone else as well. It means that huge sums of money are being diverted away from the local economy, often out of the country. This closes local businesses, driving up unemployment. It means that a highly productive portion of our workforce is not incentivised to get a job, upskill or work harder for a pay rise.

It also means that many entrepreneurs cannot do their thing and create jobs. The average age of founders of successful hi-tech companies in the US is 39. That’s right in the middle of the generation worst-hit by the mortgage crisis. We need our entrepreneurs setting up new companies and creating employment — hard to do if you have no money and crippling debts.

Conclusively resolving the mortgage crisis as quickly as possible is one of the necessary steps to economic recovery. So if everyone benefits from the success of the Personal Insolvency Bill, what’s the risk? The banks, naturally. They maximise profits, at least in the short term, by putting people on interest only, or lengthening repayment periods, extracting whatever they can from borrowers, for ever. And that is exactly what they have done to date.

Last September, the chief executive of Bank of Ireland, Richie Boucher, appeared before the Finance Committee. He revealed that, in spite of the nearly €5bn support provided by the people of Ireland to his bank, not a single cent had been surrendered by the bank to any borrower. Last Thursday he was back, so I took the opportunity of asking him if anything had been surrendered since then. He refused to say. So I asked him if it was possible that Bank of Ireland would even consider debt surrender under the Personal Insolvency Bill. He replied that the bank’s responsibility was to maximise the recovery of the loans that it provides.

Mr Boucher’s performance at the Finance Committee was such that it led to accusations of him lacking a moral compass, showing contempt and being minimalist in his answers. The likelihood of his co-operation with the new bill seemed rather slim to me at least. Bank of Ireland’s approach to debt surrender mirrors that of many of the banks. There is a real danger that they will continue on their current course, refusing to engage with borrowers and PIPs; that they will do everything in their power to stifle debt relief. In doing this they would keep a generation locked in a twilight zone of debt and an entire economy depressed. Of course, the power is, ultimately, with the people. Should the banks refuse to engage, borrowers should avail of the bankruptcy option. A mass voluntary surrender of property followed by bankruptcy would leave the banks high and dry. As per the example cited, it would leave the banks with far less than if they co-operated, but would free hundreds of thousands of citizens of debt traps and allow them to get on with their lives.

There are aspects of the Personal Insolvency Bill I would change, but it is a powerful piece of law-making with huge potential. Early next year we will begin to see how much of that potential is likely to be realised.