RTE television recently featured a number of Irish couples who were drowning in debt largely as a result of having taken out large mortgages at the height of the property bubble in 2006 to 2007. There are over 45,000 mortgages now in arrears of three months or more in Ireland. It is estimated that a further 35,000 homeowners have renegotiated the repayment terms of their mortgages by rescheduling mortgage payments, switching to interest only mortgages, extending the term of their mortgage or agreeing a payment holiday with their mortgage providers.
It is clear then this is a significant problem caused or compounded when one or both partners have lost their employment and are existing on social welfare benefits only. The huge and continuing drop in property prices means that a large percentage of the 80,000 plus cases mentioned above relate to properties in significant negative equity. Falling property prices combined with reduced mortgage payments mean that in many cases the quantum of negative equity continues to grow.
Many couples are living in limbo, dreading the day when they have (to endure) their day in court and face the likely repossession of their homes. For some, depending on who their mortgage provider is, they may be able to avail of the government one year moratorium on legal action for repossession. The government is now also proposing to introduce a ‘deferred interest scheme’ (DIS) whereby borrowers can defer repaying about one third of the interest content of their repayments for up to five years. Not all lenders however have signed up to this. Significantly Ulster Bank and KBC Bank who are outside of the Irish Government’s guarantee scheme have stated that they will not sign up to the DIS scheme. Other lenders, particularly some of the so-called ‘sub-prime’ lenders have not clarified their position as yet.
In the event of repossession, under Irish law, any shortfall remains a debt to be paid by the unfortunate couple, whether they went through formal repossession procedures in court or simply handed back the keys and walked away. The amount of the shortfall may not even be known for some considerable time until the bank or building society sells the property and of course the selling costs also become part of the debt.
So what is a couple to do short of winning the lottery, receiving a large inheritance or securing extremely well paid jobs? One possible solution which has not been aired very extensively in the Irish media is to emigrate and use the laws of another member country of the European Union to write off the shortfall debt as well as any other unsecured debt that such a couple may have. OK, who wants to emigrate but perhaps an unemployed couple, particularly if they have no children or other family ties or responsibilities, can at least consider the pros and cons of this admittedly drastic solution. It may even be that in due course they have to emigrate anyway. So, how does it work and what do you have to do?
The free movement of labour in the EU has some unexpected benefits for citizens of member states, particularly if they are overburdened by debt and threatened with aggressive insolvency proceedings. In the UK the legislative framework for dealing with debt is particularly attractive compared to that in other member states. The UK offers debtors a second chance and an opportunity to rehabilitate themselves, whereas in some EU member states the prevailing legislative and social culture may seek to punish the insolvent debtor.
European regulations permit the insolvency legislation of one member state to apply in another subject to certain provisos. One of the features of cross-border insolvency is that debtors may seek to open proceedings in another state of the EU which has insolvency legislation more favourable to their particular circumstances than they could hope to attain in their own ‘home’ jurisdiction. This phenomenon is sometimes referred to as “forum shopping”. The result is that a debtor who lives in any member state may be able to put forward an Individual Voluntary Arrangement (IVA) or petition for bankruptcy or indeed pursue some other legal solution to their debt problems in the UK – provided that the UK is their “centre of main interests”. The definition of the term “centre of main interests” or COMI is of course key to the matter. There is no definition of COMI except that the relevant EU Regulation states that “the centre of main interests should correspond to the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties”.
The usual interpretation of this is that the COMI will be the country where the debtor mainly carries out their trade, profession or self-employment. Where the debtor does not trade or carry on a profession, the COMI is usually considered to be the country where he or she resides. If the debtor resides in one country and trades in another, the COMI is the country where the debtor trades. Where the person’s only connection with a country is that they work there on a non self-employed basis (perhaps, commuting from a neighbouring country), then the COMI will generally be in the country in which they live and consequently pay bills, operate a bank account, purchase goods and so on. How long would one need to live (and ideally work) in the UK to establish one’s COMI there? It is generally considered that six months or more is sufficient but there is no definitive answer to this.
In the event of bankruptcy proceedings, the COMI is determined at the date the bankruptcy petition is presented and not where, historically, the relevant (e.g. borrowing) activity was carried out. In the UK a debtor may petition for his or her own bankruptcy, although in many cases it is a creditor who does it. The total cost is about £600 and discharge normally takes place in one year. The location of creditors and the country in which debts were incurred are not material issues in determining a COMI. Interestingly, although not relevant to personal insolvency is that in the case of a company, the COMI is the registered office, in the absence of proof to the contrary.
What about an IVA? This solution also is available to the hypothetical couple from Ireland but in this case 75% of the (assumed to be all Irish) creditors have to approve the IVA proposal. They will often do so provided they are satisfied with the debtor’s capacity to comply with the terms. Remember too that an IVA in the UK is limited to England, Wales and Northern Ireland. For Scotland the broadly equivalent insolvency solution is a Trust Deed. Remember, even if creditors reject the IVA proposal, the bankruptcy solution still remains and in the UK this is now a very benign solution, although the effects on a person’s credit rating can be severe and will last up to six years, even though the bankruptcy itself only lasts for one year. Any Irish persons considering either bankruptcy in the UK or indeed an IVA or any other financial solution to their indebtedness should obtain advice from an insolvency expert and they would also be well advised to obtain independent legal advice before pursuing such solutions.
