With the new insolvency and bankruptcy regimes coming into play (eventually) bankers will finally and late as usual for them, realised that their ability to bully customers and hide massive looses is about to be taken away from them. The borrower is now the person with the control. Because the borrower now has the option to either agree a deal or not. If the deal being offered is not good for them or acceptable they can say no and the bank is the one who is going to be the biggest loser. This is going to happen because borrowers are now so distressed that the bankruptcy option will in most cases be the best financial option.
In a recent case which we are handling a single woman Mary, who built up a buy to let portfolio of 5 properties over a 10 year period is now in €1m negative equity and no sign in the foreseeable future of being able to recover this negative position. (The question of how a single woman earning no more than €50k a year was given over €2.4m is for another day!)
The interest only loan period had come to an end again and the bank wanted to increase loan repayments 150% which was totally sustainable. Mary has decided she is no longer going to have no life and work for the bank for the next 10 years then for the bank to force a sale leaving her with nothing. So Mary decided she wanted to sell her properties and look to doing a deal with the bank on the negative equity. She then gave her tenants notice and put the properties up for sale.
She engaged us to send a proposal to the bank which included the sale of the buy to let’s, analysis of her disposable income and an offer of a monthly payment for a 3 year period towards the negative equity. After the three years the balance of the debt was to be written off. Because she was able to keep paying her family home mortgage and there was very little equity in it it was not affected by the proposal. In effect the proposal was giving the bank a payment of over 60% of the debt outstanding while Mary will lost 100% of her investment in the portfolio.
However, the bank was shocked (even horrified) to see that our client would give notice to her tenants and put the properties up for sale. The bank did not under any circumstances want to crystallise the potential loss and thought they could bully Mary into just keep working for ever to pay this debt off.
Even when the bank came back with a count offer it involved another 5 year interest only loan with a 1% increase on exciting rate and a cross charge on the family home! In other words ‘you are going to work for us forever and when we feel like it we will sell your properties AND take your family home’!
But that is not what is going to happen, our client Mary, has now decided that if the bank does not agree to her proposal she is not going to work for them endlessly but she is going to declare bankruptcy.
Bankruptcy will have little effect on her income as she does not earn enough to have to pay anything to her creditors in bankruptcy. It will have no effect on her employment as she is not a company director or manager nor will it affect her family home since she will be able to keep paying the mortgage and there is little or no equity in it so of no interest to the assignee in bankruptcy.
So when Mary declares bankruptcy she will be immediately free of the debt, the stress attached to the debt which is considerable, will be able to get on with her life and in 3 years will automatically is discharged from bankruptcy
I suspect when the bank is informed of the bankruptcy option as being real they will change their tune and take the offer that was originally on the table if it is still on offer at all!
As the saying goes ‘what goes around comes around’ bankers welcome back to the real world!