Tuesday, 20th February 2018

Making The Most Of A Voluntary Surrender

No matter what your current financial position is you should not surrender your property to the bank without first discussing your situation with one of the ten or so active PIPs in Ireland.

If you simply surrender a property you are throwing away a valuable trump card in relation to debt settlement – perhaps the only trump card you currently have. It is a substantial negotiating tool that can potentially be used to clear down all or most of your debts.

Voluntary Surrender Has A Tangible Value

You may believe your situation is so hopeless that it makes no difference.

Perhaps the property is a buy-to-let with substantial negative equity and potential rental income that won’t even cover the interest on your mortgage.

Many people in this type of situation just want to get the bank off their back and to get rid of the property.

There are many different seemingly hopeless scenarios like this but no matter what your situation you should understand that from a banks point of view there is a tangible value to a voluntary surrender.

This is because the alternative for the bank is potentially having to go through the legal process of repossession which is expensive and time consuming, often taking two years or more.

Calculating The Value Of A Voluntary Surrender

Exactly how much is the value of a voluntary surrender and how is this value calculated?

From our experience in insolvency negotiations with banks to date the average value to the mortgage lender of a voluntary property surrender can be up to €30,000.

This is calculated very roughly by multiplying potential lost rental income by twenty four months and adding the cost of legal fees. So for example:

24 months x €1,000 rent is €24,000 + legal fees of €6,000 = €30,000

This “value” can be used like cash along with a contribution of whatever you can afford to pay to settle all or part of whatever debts you owe. And we are not just talking about your debts with the lender but all other debts such as credit cards or personal loans as part of an overall solution to your debt problems.

How Do You Realise The Value?

This does not mean that you can ring the bank up and say “I know if I surrender my property this is worth €30,000 to you.”

In order to realise this value you need to enter a Personal Insolvency Arrangement (PIA) but this can be done at no cost to you.

You will need to approach one of the ten or so active Personal Insolvency Practitioners in Ireland (PIPs) such as GT Debt Solutions and we will get the process going. (Unlike most PIPs we do not charge upfront fees so you have nothing to lose in consulting with us.)

As with all PIA’s there is a straightforward process and you can learn more about this in our recent post about accelerated PIAs.

How Does an Accelerated PIA Work?

We will come up with a proposal to settle all your debts. The key to it being that the mortgage lender holds the majority vote of over 65% of the creditors voting rights and therefore under the legislation it is only they who have to approve of the arrangement and all the other creditors will be brought along. A majority of 50% secured and over 50% unsecured creditors will also be required and quite often this will be the same secured provider particularly if there is significant negative equity.

So for example, let’s say the value of the property is €200,000 with negative equity on the property of €150,000 and the total of the other unsecured debts, such as credit card and credit union loads, are €50,000. In this case we only need to negotiate and agree with your biggest creditor, the mortgage holder who in this case holds 75% of the debt. Once they support the proposal it is approved.

The whole process should take from 3 to 6 months in order to be court approved.

Call and arrange to speak with one of our client managers for a more detailed understanding of how this process can work in your particular situation.

Why Would A Bank Agree To This?

When people have been dealing directly with their mortgage lender for quite some time but feel they have been making no progress they find it hard to understand how we can do so much better.

The key is that we do a robust review that includes sworn affidavits. The banks trust our intensive due diligence which ensures the debtor is fully transparent to the bank. This in turn allows them to make a decision based on the facts. In the absence of a trusted third party in the middle there often seems no way to easily resolve the impasse and eventually the bank will see no alternative but to go down the legal route.

In this type of situation the bank often see that a voluntary surrender is better than a legal repossession where returns would be less favourable for the creditor.

Offering a PIA as a resolution is seen as a kind of accelerated bankruptcy but is generally far cheaper and faster for the bank than firstly having to issue legal proceedings to repossess the property and then having to force the debtor into bankruptcy to attempt to realise further funds against the remaining amount of the mortgage which then becomes unsecured debt.

Summary

We can help even if you are at the point of surrendering your property or having a property repossessed. You may be surprised at how much bargaining power you have at that point and just how much debt can be written down.

If you are going to lose your property it makes sense to try to ensure that all your other debt is written off at the same time so that you can have a fresh start in life.

Call us now and see how we can help.

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What Is An Accelerated PIA?

A Personal Insolvency Arrangement (PIA) can last anywhere from 1 day to 72 months. (84 months in certain circumstances.)

Any PIA that is closed out ahead of the 84 month period is called an Accelerated Personal Insolvency Arrangement.

Personal Insolvency Practitioners (PIPs) who have been working with the personal insolvency regime have realised that there is no restriction on a PIA having to last 72 months. Once you can get the majority of creditors to agree to a proposal you can close out that arrangement. For many this is an effective option that means an accelerated PIA can be the fastest route back to solvency. Better and faster than even the quickest UK Bankruptcy.

Average Completion Time 3 to 6 Months

AT GT Debt Solutions our average Accelerated Personal Insolvency Arrangement lasts 6 months although many complete within 3 months.

In these cases there is a requirement for the debtor to pay a lump sum. Some debtors will have that lump sum to hand, whereas others might need six months or more to get that lump sum from family and friends.

Some banks want you to surrender the property and others are happy for you to sell it and this can also effect completion times.

With a sale involved the generally closing out time is within 6 months and then it takes another 3 months to finalise the paperwork and close out the arrangement by issuing a you with a completion statement.

Accellerated PIAs & Lump Sum Arrangements

Over 30% of the solutions GT Debt Solutions have facilitated to date have included a one-off payment from a relative or friend.

This type of solution can clear all your debts immediately and leave you with a completely fresh start within one year or less.

Lump sum arrangements are probably the most effective ways to clear all debt in the shortest time and have the least amount of “side effects”.

In particular they are very efficient for the large volume of debtors who fall under the official Reasonable Living Expenses (RLE’s). Read more about this here.

You might be surprised at how small a lump sum is needed for this type of settlement. Everything is relative to your personal situation.

Believe it or not the Irish lending institutions have moved on from a few years ago and now they want a speedy resolution just like you do. However, what is required is a credible, trusted third party to negotiate a final arrangement.

Accelerated PIA versus Banktuptcy

A large proportion of people in the bankruptcy queue would do substantially better from an Accelerated Personal Insolvency Arrangement.

It seems that very few people are aware of this and are being badly advised. Here is why:

3 to 5 Years Vesus Immediate Completion

In an Irish bankruptcy you will be in it for 3 years plus potentially have a bankruptcy payment order for 5 years. If your circumstances change positively within that period you will have to contribute more based on your improved financial situation. In an accelerated PIA you are completely finished once it is approved and the completion statement issued. If you win the lotto the next day you get to keep it all!

Sometimes a creditor will try to keep a PIA open because perhaps they see the debtor has been a good earner in the past and hope they can get more of a contribution down the line. However, if they do then they have to pay the PIP annual fees and for example our minimum annual fees are €600 plus VAT (paid by the creditors not you) and this is a real cost to the lender so generally we find this is an incentive for them to agree to close it out sooner if appropriate. It is all often down to good negotiating which is why using the services of an active PIP like GT Debt Solutions makes sense.

Credit Rating

With any bankruptcy your credit rating will be permanently affected since you will always be asked on loan applications if you have ever been a bankrupt.

With an accelerated PIA your name will be taken off the insolvency register inside six months.

Even though you may still be asked about your PIA in the future, lenders consider it far better that you entered into a consensual arrangement and completed that arrangement rather than just walking away through a bankruptcy. It actually demonstrates financial responsibility. Yes like many, you got into trouble but you dealt with it through negotiation and completed the arrangement to the satisfaction of all parties.

Remember the day you enter into a PIA you are rebuilding your credit rating.

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What is an Appropriate Family Home?

Staying In Your Family Home

The appropriate family home was brought in as part of the personal insolvency act 2012 and essentially said that an overriding cornerstone of the legislation was that a debtor should be allowed stay in their home but that it had to be an appropriate sized dwelling.

What is an Appropriate Family Home?

This is as you would expect it to be, so that a single person living in a four bedroom house would be seen as disproportionately large.

An appropriate family home for two adults and two kids might be a two or three bedroom semi detached house not a mansion.

Perhaps surprisingly the valuation of the home doesn’t really come into it so whether you live in Foxrock or Clondalkin it is the appropriate size that counts.

It is a grey area, however. Creditors can vary in their approach to this although we have rarely had any significant pushback.

It is normally a case of being able to make a compelling argument. So for example if you live in an inherited family home that has been in the family for several generation then even if it is deemed to be too large you can still make a case to stay there and the creditors will listen.

How Is This Used For Your RLE?

If we are trying to establish your Reasonable Living Expenses (RLE’s) we will generally look at what the rent in the area is and this is then used to establish what is reasonable for the mortgage costs.

So if you are living in a house where the monthly mortgage payment is €3,000 a month, but you can rent a similar house for €1,800 a month then it is the rental figure that is used in your RLE figures.

 

Appropriate Family Home, RLE & Your Debt Repayments

In our example where the mortgage is €3,000 a month. Let us say you are just about managing to pay this but cannot then afford to pay anything more to any of your other unsecured creditors. Many people are in this situation where they continue to pay their full mortgage because they are afraid they could be put out of their home.

The rental figure of €1,800 for the area is used to determine what your RLE’s should be. Depending on where you live (what part of the country or what suburb of the city) your RLE’s will vary quite considerably.

The rule is that we must go with what is reasonable in order to be fair to all the creditors. Therefore, once this rental figure has been established we will look at whether the mortgage can be sustained on €1,800 a month.

If so, this then leaves an additional figure of €1,200 a month for distribution to your other creditors.

This is the parity that is required.

How Does A Reduced Mortgage Payment Work?

In the above case our proposal to the creditors will ask the mortgage lender to agree to park 40% of the mortgage for you while 60% is serviced for the duration of the Personal Insolvency Arrangement (PIA). Hence a reduced payment from €3,000 to €1,800.

At the end of the PIA you will again have the additional €1,200 available to start servicing the mortgage again, but all the other unsecured debts will be written off.

The advantage here is that you get to stay in your home while the unsecured debts are written off. These could include the negative equity on a buy-to-let that you surrendered plus credit card and credit union debt.

But by this time circumstances may have also improved and you can look again at the situation and whether you want to stay in the home. For example perhaps your children will have left home by this time so you don’t need such a large house.

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Low Income Solutions

If you are unemployed or have a very low income most Personal Insolvency Practitioners (PIP’s)  or Debt Solution companies will tell you they can’t help you because you are below the Reasonable Living Standards (RLE) as set by the Insolvency Service of Ireland.

Hundreds of people in this situation are left in a zombie like limbo where they still have a large amount of debt hanging over them with no way to change anything.

Low Income Solutions Exist

However, there is a way out of this situation. We have potential insolvency solutions for you even if your income is below the official “reasonable living expenses” level.

This is a bad situation for you but it is also a bad situation for your creditors too and they want to conclude matters just as you do.

We make that possible as a trusted third party who can negotiate for both sides in a way that is just not possible for an individual to do on their own.

Modest Lump Sum

The best way is if you can somehow get a lump sum gift from an agreeable relative or friend.

With a relatively low amount you can potentially clear all your debts and begin again with a completely fresh start.

Sometimes this can be done via an Accelerated Personal Insolvency Arrangement. You can read more about this here.

With your debts off your back you will be feeling psychologically and emotionally far better and in a position to take control of your future.

Why Would Your Creditors Agree To This?

When people have been dealing directly with their creditors for quite some time but feel they have been making no progress they find it hard to understand how we can do so much better.

The key is that we do a robust review that includes sworn affidavits. The creditors and in particular lending institutions trust our intensive due diligence which ensures the debtor is fully transparent to them. This in turn allows them to make a decision based on the facts. Without us as a trusted third party in the middle there often seems no way to easily resolve the impasse and eventually your creditors will see no alternative but to go down the legal route.

Offering a lump sum PIA as a resolution is generally far cheaper and faster for the creditors than having to issue legal proceedings.

The sad irony is that if you are truly desolate with no income and no assets then we can often find it easier to negotiate with the creditors as there are less variables at play.

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Negotiating With Banks

When you have been negotiating with banks directly for quite some time and seem to have made little progress it easy to believe there is no solution available to you.

However, that is often not the case. In some situations you just need the right firm representing you who understand the best strategy to get you a fresh start.

In this article we explain why how a firm like GT Debt Solutions can do better negotiating with banks on your behalf.

Why You Should Never Negotiate Directly

Personal Insolvency Practitioners (PIPs) are there for a reason.

1. An active PIP will be able to advise you of all your options based on the facts provided.  A PIP’s job is to serve your best interests, whereas like any commercial enterprise a bank must serve it’s shareholders. Obviously a bank will only suggest the options that suit the agenda of the bank. That is why the banks prefer it when you deal directly or with one of their appointed representatives rather than an independent PIP. When you talk to a client manager at GT Debt Solutions all your options will be explained to you.

2. When we put a proposal to your lenders it is always based upon a robust investigation which ensures the debtor is fully transparent to the creditors. The bank knows they can trust our intensive due diligence, which often includes sworn affidavits. The structure provided by the personal insolvency process allows the banks credit committees to make decisions based on the facts.

3. Without a firm such as ourselves as a trusted third party there often seems no way to easily resolve any impasse, and eventually the bank will see no alternative but to go down the legal route.

Remember that your creditors  pay our fees from the available funds so the work we do on your behalf costs you nothing extra.

Banks Do Make Compassionate Decisions

Contrary to public opinion banks will make humane, compassionate decisions that are not simply based on profitability. We see this time and again. However, as stated above they cannot make decisions without facts and sworn declarations from debtors.

A typical example of this is where a bank has agreed to an Accelerated Personal Insolvency Arrangement (PIA) where they would have received more money in a forced sale scenario.

We had a recent example in Munster where an elderly couple had €300,000 of equity in their home but had commercial debts even greater than this amount. One of the couple had a long term illness and they really needed to stay in their home. The couple’s two sons were able to raise €120,000 between them and the bank accepted this amount in an Accelerated PIA as full and final settlement in order to facilitate the couple to continue to live in their home.

The bank could have gone down a bankruptcy route and received a far higher amount but they made a sensible humane decision. Obviously they also avoided a situation that could have been quite dirty and potentially generated negative publicity.

This is typical of situations where there is a cashflow issue but also equity in the family home. Generally the banks have been quite good in that regard. Once the bank have a trusted third party to negotiate with them they are able to make these type of compassionate decisions.

Pre-Engagement Decisions

Having had visability of over 3,000 cases since the introduction of the personal insolvency legislation our experience is very strong .

We can generally tell how any particular lender will feel about a proposal we make on your behalf. If we feel that a case is not clear cut we look for a pre-engagement decision from your key creditor. We put an informal proposal to the bank to find out whether it is likely to be acceptable. This saves a lot of time and effort being wasted down the line.

Again there is no upfront fees for this as it is all part of the service we offer.

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