Court rejects bank’s plan to defer part of couple’s mortgage

The High Court has rejected a bank's proposal to "warehouse" almost half of an insolvent couple's mortgage for repayment at a later date because a formal deal to resolve all their debts was a "once in a lifetime solution".

In a judgment that has major implications for how banks deal with insolvent debtors, Ms Justice Marie Baker ruled against KBC Bank Ireland's proposal to "freeze" €135,000 of a couple's €285,000 mortgage to be repaid at some future date, even though the lender was permitting them to stay in the home for the remainder of their lives.

The personal insolvency arrangement agreed by the court means Colm and Paula Callaghan of Drogheda, Co Louth, can write off about €242,000 worth of debt, including €165,000 due to KBC. The bank had appealed an earlier ruling by the Circuit Court granting the couple this deal.

Ms Justice Baker said the bank’s proposal was unreasonable and unfair as the repayment of the inactive part of the mortgage did not rest on “any anticipated ability to pay in the future and is entirely on the hazard”.

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‘Speculative’

While not ruling out warehousing arrangements in other formal debt deals, the judge said KBC’s proposal in this case was speculative in nature and based on assumptions and conjecture regarding the living conditions of the couple “far into the unknown future” when they will be in their 60s.

“While the counterproposal made by KBC may seem attractive and to some extent benevolent, it is capable of creating circumstances amounting to insolvency at the end of the mortgage term in approximately 23 years’ time,” she wrote in her judgment.

Splitting bad mortgages and “warehousing” part of the debt for repayment at a later date is a popular form of restructuring for banks as it maintains the prospect of being repaid most or all of their debts.

The court ruling means it could prove more difficult for banks to exclude some mortgage debt from write-offs within the normal five-year term of a personal insolvency arrangement.

"It is the first case that has really started to deal with the warehousing issue," said Anthony Joyce, the couple's solicitor. "From our point of view, it is opening that door which will be more favourable to the debtor."

Ruling welcomed

Personal insolvency practitioners (PIPS), who advise insolvent borrowers, welcomed the ruling for bringing clarity to whether banks can include split mortgages and warehousing deals in personal insolvency arrangements.

"PIPs don't like warehousing because it doesn't provide certainty. It leaves a chunk of debt hanging over someone like a sword of Damocles to be dealt with at a later date," said Ronan Duffy, a personal insolvency practitioner with Donegal firm McCambridge Duffy which devised the couple's insolvency plan.

KBC Bank Ireland said it did not comment on individual cases.