A recent High Court personal insolvency judgment has poked a hole in the logjam blocking the resolution of bad mortgage cases when it comes to one tricky category of broke debtor: separated couples, and more specifically, the case of the deserted spouse.
Ms Justice Marie Baker's ruling in Re: JD (a debtor) will help guide how banks and other lenders consider personal insolvency arrangements – debt write-off plans for individuals needing a financial leg-up – when a spouse is no longer around or helping to repay the couple's joint debts.
In this case, the court did not reveal the identity of the parties. The wife came to the High Court to appeal a Circuit Court ruling in November that sided with her bank, EBS. It had objected to a rescue plan drafted by personal insolvency practitioner Darragh Duffy of McCambridge Duffy, the Co Donegal firm that is behind many debt fixes for people.
She has two young children and together with her husband owed EBS €300,000 on a mortgage their home in Co Wexford. The loan fell into arrears in 2013 after the wife suffered a serious illness and their marriage broke down. The husband has not made any contribution towards the mortgage payments since the couple informally separated in January 2012. The couple have other unsecured loans.
The husband agreed to make maintenance payments to his separated wife but reduced the voluntary payments on two occasions, in November 2013 and March 2014. After he stopped making maintenance payments of €120 a fortnight, as directed by the District Court in May 2014, she obtained an attachment of earnings order in December 2014.
Creditors’ meeting
In October 2015, the wife turned to Mr Duffy for help with her debts and he proposed a personal insolvency arrangement at a meeting of her creditors in January 2016. It was rejected by EBS. From there she went to the Circuit Court, starting proceedings on which the judge ruled last month.
The mechanism through which a debtor can go to court and challenge a bank’s veto against a personal rescue plan – section 115A of the Personal Insolvency (Amendment) Act 2015 – is relatively new.
While debtors have challenged bank vetoes in the Circuit Court, just five section 115A cases have gone to the High Court so far. Three revolved around technicalities concerning the Act. In a fourth case, a debtor had his challenge against a bank veto rejected because of his conduct: he failed to keep his mortgage payments prior to contesting the veto.
The fifth case involves the debts of the separated woman. Her proposed deal to write them down was pretty straightforward. She owed €322,227 on her mortgage on a house valued at €190,000. Mr Duffy proposed writing off the arrears on the mortgage and an additional €80,000. This left a mortgage of €220,000 which he suggested should be split into two parts: a live mortgage balance of €140,000 and a warehoused loan of €80,000.
The separated women would pay €684 a month on the live part of the mortgage for the six-year duration of the personal insolvency arrangement. Thereafter, the warehoused amount would be added, bringing her monthly repayments to €1,104.
In addition, during the six years she would pay €338 a month to cover Mr Duffy’s fees and a dividend to her unsecured creditors: she owed €32,000 to a number of financial institutions and had a hire purchase loan of €17,000 for her car.
For the most part, the bank objected to the plan because it felt the arrangement would have prejudiced it because the estranged husband did not agree to the proposed changes and the deal might have prevented it from pursuing any claims against him as a co-debtor on the mortgage.
Applying the intent of the law – that creditors would fare better with a debt writedown deal in a personal insolvency arrangement rather than bankruptcy for the separated mum – and with the aim of keeping her in her home, Ms Justice Baker allowed the appeal, blocking the bank’s veto.
‘Huge decision’
The judge found the deal was not unfairly prejudicial to EBS. She considered the woman to be “reasonably likely” to be able to make the new repayments in light of a court order and an attachment of earnings concerning the payment of child maintenance.
As for the issue of the separated couple, the judge said the arrangement did not deprive the bank, as a secured creditor, of any right to pursue the husband as a co-debtor or co-mortgagor. In other words, nothing the judge agreed to with the wife could be taken as letting the husband off the hook on his debt obligations.
The judgment is seen as very significant, given the number of personal insolvency cases involving separated couples. Previously, banks were unable to complete deals with one debtor without their other half signing up too. In many cases, it was the final complication that toppled a proposed personal insolvency arrangement that otherwise had a good chance of being agreed.
"It is massively significant," said barrister Keith Farry, who presents personal insolvency cases in court. "It is a huge decision. I won't say that it is obvious but the Act clearly spelled out that it is personal insolvency, it is individual insolvency and just because one person didn't agree to an arrangement, it couldn't be binding or have an effect on others."
The Insolvency Service of Ireland released statistics last month showing that divorced or separated individuals accounted for almost 15 per cent of applicants seeking some kind of debt relief agreement, either in cases involving unsecured debt or secured debt in personal insolvency arrangements so the judgment may help others in similar situations to resolve a complex problem.
“Time will tell but we would be aware of a disproportionate category of cases of separated couples, relative to the population,” said Lorcan O’Connor, the director of the insolvency service. “This does now look as if it is something that will assist the banks doing deals where they wanted to but couldn’t; and it will help debtors themselves.”
