Legislation must be overhauled to protect people from vulture funds
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One of Ireland’s leading personal insolvency experts has called on the next government to overhaul near decade-old legislation to protect people with crippling mortgage interest rates from vulture funds.
Solicitor and Personal Insolvency Practitioner (PIP) Alan McGee made his comments after negotiating a near €59m debt write-off for Cork publican John Gaffney, which was approved by the High Court last week.
It is one of the largest debt write-offs to be granted by the courts under personal insolvency legislation enacted in 2012 to deal with the fall-out from the Celtic Tiger era financial crash but still falls well short of the record €133m write-off secured by former Ireland rugby international and manager Pat Whelan in 2018.
Mr McGee said while the Gaffney case, which attracted significant media attention and generated substantial social media commentary, it is one of the last linked to the financial crash to wash through the system.
Another solvency problem looms large today and it’s linked to the cost-of-living crisis and soaring interest rates, Mr McGee said.
And the vulture funds, which own most of the distressed mortgages, appear unwilling to accept personal insolvency arrangements which have been part of the state’s debt solution machinery since 2012, he said.
- A Debt Relief Notice for people who have a low income, few assets, and debts of less than €35,000, such as personal loans, credit card loans, store cards, credit union loans, and overdrafts. It is not a suitable solution for people with a mortgage;
- A Debt Settlement Arrangement for people who have unsecured debts like credit cards, loans, overdrafts, and that allows for some debt write-off;
- And a Personal Insolvency Arrangement (PIA) for people with unsecured and secured debts. It is a formal agreement with creditors that will write-off some unsecured debt and restructure any remaining secured debt, while keeping the person in their home where possible.
The Act was largely ineffective for the first few years because the banks rejected most proposals but it was amended in 2015 to provide for a court review and appeal process which changed the landscape for personal insolvency.
Recent figures from the Insolvency Service of Ireland (ISI) show there were 5,342 approved arrangements from 2014 to 2019, but that figure increased to 6,522 in the period from 2019 to June 2024.
Publican John Gaffney, aged 59, of Mountain Lodge, Ballyleigh, Waterfall, engaged in the PIA process, and hit the headlines last week when his arrangement was approved by the High Court.
The court was told that he was a major property investor in the Celtic Tiger boom years before the global financial crash began in 2008.
He is a shareholder and an employee in several companies which run pubs, including Washington Inn Limited, RPJ Stables Bar Limited, JJ Cow Tavern Limited, and Flannery’s Bar Glasheen Limited.
Court documents showed that he had total debts of €59,439,493, far greater than the value of his assets.
His creditors include Nama, Bank of Ireland, Pepper, Mars Capital Finance Ireland DAC, and Everyday Finance DAC.
Barring one investment property in Monard, Co Tipperary, all of his investments had been sold already, the court was told.
Under the terms of the court-approved PIA, Mr Gaffney will have almost all of the debt written off but he and his family can continue living in the family home subject to the payment of the restructured mortgage which requires a monthly payment of €4,500.
Meanwhile, some €6,000 will be given to unsecured creditors as part of the arrangement in settlement of the near €59m in unsecured debt.
The High Court was also told that after AIB sought repossession of the family home a few years ago, Mr Gaffney’s wife Assumpta secured a PIA in 2021 writing off approximately €4.2m in debt.
Mr McGee said some media reporting did not reflect all of the details involved in what was a complex case, and that this “legacy case from the crash” is amongst the last of that kind to filter through the system.
“There is no difference in my opinion to a €59m debt write-down, a €5.9m write-down, a €590,000 write-down or a €59,000 write-down — if the person can’t afford to pay it, they can’t afford to pay it,” he said.
“If it’s unsustainable debt, it’s unsustainable debt.
“The range of the debtors out there is not at the top end of €59m. They are at the lower end.”
He said today, PIPs are dealing more and more with vulture funds on cases linked to the cost-of-living crisis and soaring interest rates.
“While the Irish pillar banks have not passed on all the ECB interest rate rises in recent years to their variable rate mortgage customers, the same can’t be said for the funds,” he said.
He has one case of a married couple, with two teenage children, living in a three bed semi-detached home in Cork, whose PTSB loan was sold to Pepper Finance Corporation in 2019, when the interest rate was 4.7%. Today, their rate is a staggering 8.5%.
“That loan is now in arrears, the couple can’t sustain it, and Pepper want them to sell their home,” he said.
“Pepper refused the proposed PIA and want the debtors to sell their home and enter the rental market.
“They say that the debtors’ home which has equity of circa €40,000 exceeds the reasonable needs of the debtor's family.”
And Pepper is due to increase its variable rate for one unnamed fund by 0.95 of a percentage point from December.
Mr McGee said based on his experience, Pepper’s preferred option in all cases is for the full debt to be serviced with no offer of a reduced interest rate, and their default option is to seek a sale of the property for immediate financial return.
Mars Capital has shown some flexibility in accepting reduced interest rates, but Mr McGee said given the large number of distressed mortgages that are currently with vulture funds, it is inevitable that the vast majority of rejected PIAs that are under appeal are against funds holding the secured debts.
And once a fund contests a PIA, there is little or no consistency in how they approach the legal process in court.
He has examples of Pepper opposing one PIA because it contained a variable interest rate proposal, yet objecting in another case because a debtor did not accept counter-offer terms that included a variable rate.
Everyday Finance objected to a 3% variable rate yet made a counter-offer that included a 3% standard variable rate which was accepted by the debtor but then reneged upon by the creditor.
The system must and can be improved through legislative change — a raft of which were suggested arising out of an operational review of the Personal Insolvency Act which began in 2017.
The ISI made formal submissions in 2017 and 2019 but nothing substantive has been done, apart from some minor amendments in 2020 mainly in response to the covid pandemic.
“Maybe it’s because politicians don’t see any votes in it,” Mr McGee.
“And maybe it’s because those affected are slow to make an issue of it because they are embarrassed by the fact that they might be insolvent. They don’t want publicity.”
Reverting to Mr Gaffney’s case, Mr McGee said the publican is working to the pin of his collar to generate the money required to meet his new financial obligations and that when his new debt repayments and vouched expenses are accounted for, he will have just €19 in disposable income a month.
“While it is accepted that personal insolvency is an open court process and matters can be reported on there is a regrettable tendency towards the sensationalist reporting in particular on high level debt write downs or celebrity cases.”
On the same day this case was heard, Pepper contested on 15 separate grounds another personal insolvency arrangement that proposed to restructure a mortgage.
“The PIA was approved but was not reported upon,” Mr McGee said.
“Reporting can scare people away from insolvency and with long-term mortgage arrears over 90 days at 28,197 at the end-June 2024 as per Central Bank of Ireland statistics, these people need to be encouraged into the system and not scared off by publicity that is likely to demonise the debtor.”
But he urged people in such situations to engage in the process.
“If somebody is in their home and they can’t pay their mortgage and the sheriff is coming, there is generally a way of getting it resolved,” he said.
“It’s a tough regime, but it’s not as tough as bankruptcy.
“The legislation is not to achieve write-downs. The legislation is there to achieve solvency.
“It’s designed so that you can get in and get out and get on with your life.
“But it needs a more level playing field for everybody and more certainty in terms of our engagement with creditors, especially the funds."