Can The Personal Insolvency Act 2012 Be Used To Clear Mortgage Debt?

Author:Mr Stephen O'Sullivan
Profession:Stephen O'Sullivan, Barrister

The Personal Insolvency Act 2012 (hereinafter the 2012 Act) has not been fully implemented yet. All sections referred to in this piece refer to sections of the 2012 Act unless otherwise stated. Many of the rules in the Bancruptcy Act 1988 (hereinafter the BA) continue in force. There are good summaries of the 2012 Act found on the net including here.

The 2012 Act is in reducing the bankruptcy period from 12 years to 3 years (the official assignee often agrees an income payment agreement which can last up to 5 years therefore in many cases the bankrputcy may in effect be 5 years). In addition the 2012 Act provides 3 statutory mechanisms whereby a debtor can eliminate or reduce his debts. These include a debt relief notice, a debt settlement arrangement or a personal insolvency arrangement (hereinafter PIA). The only mechanism under the 2012 Act that can be used for secured debt, such as a mortgage, is a PIA or bankruptcy.

Using PIA to deal with mortgage debt

Before the PIA route is considered the debtor must go through any mortgage arrears resolution process available (MARP) in respect of any principal private residence (PPR) for 6 months and the show the process has not been successful (s.91.1.g). Details of the requirement of such a process are set out here.

At that point the debtor can go to a registered personal insolvency practitioner (hereinafter PIP) who draws up a proposal for a PIA. The proposal will be based on an analysis of assets and liabilities and will usually provide for a 6-year plan at the end of which all of the debt will be cleared with the exception of the PPR if desired, albeit with unsecured creditors getting a dividend of less than 100% of the debt owed. 65% in value of the creditors must agree. In addition 50% of the secured creditors and 50% of the unsecured creditors must agree.

As part of the plan proposed by the PIP, the bank must tell the PIP what it's preferred method of dealing with the asset is and this must be taken into account by the PIP in drawing up the proposal (S. 102). A non-exhaustive list of options as to the PIP's proposal in relation to secured assets includes (s.102.6):-

  1. A period of interest only payments; an extension of the mortgage term; the release of equity by the debtor in return for a reduction in the debt.

  2. A reduction in the principal sum due. The debt cannot be reduced below the value of the secured asset unless the bank agrees. Where the bank agrees to this, the amount of that...

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