A recent judgment finds a Personal Insolvency Arrangement (the PIA) is not permissible where the term of the restructured loan is likely to exceed the lifespan of the debtor.
The key facts
The PIA in question involved a mortgage term extension of 372 months (ie 31 years) which would have required the Debtor to continue making repayments until she was 98 years of age which is well beyond the Central Bank's recommended age of 70 years of age.
The property in question was in positive equity and there was no possibility of a write-down of the debt owed. The term extension was thus used to reduce the monthly repayments to €241.19 per month, which the Personal Insolvency Practitioner (the PIP) considered to be affordable with the assistance of the Debtor’s children. The PIA also proposed that should the Debtor not survive until the end of the restructured mortgage term, her estate would repay the remaining balance owing on the secured debts to Ulster Bank from the sale of the property.
In his judgment, Mr Justice Sanfey makes clear that such an arrangement is not permissible in circumstances where the Court cannot be satisfied that a debtor is “reasonably likely to be able to comply with the terms of the proposed arrangement” by virtue of the fact that the term of the restructured loan is likely to exceed the lifespan of the debtor.
In rejecting the application under section 115A, the Court was not satisfied that the Debtor has demonstrated that the repayments under the PIA are in any event affordable or sustainable. Some of the key holdings of the Court were as follows:
- A PIA may not seek to extend the term of a mortgage beyond the average life expectancy of a debtor;
- Any term extension beyond age 70 will be carefully scrutinised and interrogated by the Court;
- The sustainability of a PIA must be assessed on its own merits and the Court will not readily accept aspirational commitments from third parties, particularly where there is no evidence as to the assets and liabilities of those third parties.
A key issue that impacted the decision of the Court was the fact that the Bank who was the only creditor, strenuously opposed the PIA proposed by the PIP.
By comparison, in a subsequent judgment given by Mr Justice Sanfey with similar facts, the Court approved a PIA which proposed a mortgage term extension of 420 months (ie 35 years) and required the Debtor to continue making repayments until she was 90 years of age. Central to this decision was the fact that no creditor opposed the arrangement.
Lessons to be learned from the case?
The primary goal of restructuring a mortgage term beyond the Debtor’s lifetime is to "ensure affordability of the repayments and to secure the continued residence of the Debtor in their family home".
While the judgment is most relevant in respect of PIAs which seek to extend the mortgage term until the Debtors are in their 80’s, it is also relevant to any term extension beyond 70, particularly those which are dependent on the support of third parties (eg children, siblings etc). The Court will closely scrutinise such arrangements and look for cogent evidence that the repayments are sustainable.