Procrastination – always a tempting option, rarely the right choice.
The warehousing of debt is a popular option put out there by Creditors for those desperate to emerge from unsustainable debt. Delaying payment of a large percentage of a mortgage, car loan or credit card debt may seem appealing in the present but leaves the hanging cloud of debt over people.
Debating warehousing of debt
The topic of warehousing of debt has been at the centre of an internal debate amongst Personal Insolvency Practitioners (PIPs) following a submission by a “stakeholder” to the Insolvency Service of Ireland that its “split mortgage scenario” (which it provides online as a one of several sample arrangements for PIPs to follow), may be incompatible with the Personal Insolvency legislation.
At its heart, the insolvency legislation provides processes by which a debtor with unsustainable debt can become solvent in five to seven years.
Being solvent means being able to pay your debts as they fall due without falling below a reasonable living standard and while warehousing a portion of debt for a later time may temporarily return a debtor to solvency, barring a significant change in circumstances, they are likely to remain destined for insolvency in the future.
A debt free future
The Insolvency Act 2012 aims to resolve unsustainable debt within the arrangements the Act provides for. While s.102(6) specifies that a term of a Personal Insolvency Arrangement may allow for a deferral of secured debt payments (warehousing of debt), this clause is quickly qualified by stating that this time-limit should not exceed the duration of the arrangement which is usually six years.
A plain reading of this section of the Act therefore clearly indicates that deferral of payments on debts should not extend past the arrangement. However, the ISI scenario and common practice allow warehoused debt to be deferred until a much later time than the conclusion of the arrangement.
Supporters of the ‘Split-Mortgage’ option can point to s.100 of the Act which gives wide flexibility to a PIP to propose any payment arrangements with creditors, subject to the rules of the Act itself.
Freedom and Flexibility
The ISI have argued that this section reflects the intention of the legislature to allow PIPs the flexibility to devise a range of different solutions depending on the circumstances of the situation. Indeed, s.102 (which places the time-limits on the deferral of payments) is stated as being subject to s.100’s more general language.
While a technical argument could be made that the warehousing of debt is not a payment arrangement as allowed for in s.100, such debate could be cut short on a simple reading of the legislation which shows an intention to restrict deferrals of payment to within the arrangement timeframe.
What really matters?
In my view , the key question is whether or not warehousing of debt is the right approach to solving debt issues.
The power of the arrangements as provided for under the insolvency legislation is their ability to give debtors a fresh start free from unsustainable debt. Warehousing of debt begs the question of ‘what is the point’ if after five to seven years of paying all disposable income to creditors, the debtor is still left with a future debt which they have not to this point been able to manage.
Arrangements can and do leave debt remaining after their conclusion, such as remaining mortgages on family homes. However, the payments for these lasting debts should begin within an arrangement framework and therefore truly place the debtor firmly on a solvent path that does not have an impending roadblock of a future crystallising debt.
Procrastination is a like a credit card: it’s a lot of fun until you get the bill – Christopher Parker