See Troika puzzled as public left footing speculators' bill - The Irish Times - Sat, Oct 27, 2012
The government wants to allow debt writeoffs of up to €3 million under the pending Personal Insolvency Bill despite the fact that the average mortgage is only about €350,000.Apparently,the bill also protects the family home.
As I understand the Irish Times article,the bill will allow the debtor declaring bankruptcy to renege on the mortgage,yet keep the family home. Banks will be prevented from repossessing the home but surely this would be a violation of constitutional property rights that would have to be tested in the courts. Any legislation that makes it easy to renege on home mortgages will weaken the banks' negotiating position on defaults.It could cost the banks several billions,requiring a taxpayer bailout.
The foregoing will impair credit availability in the future,with mortgage lending confined to only the most creditworthy. Since the latter would be politically unacceptable,the government may be tempted to keep the mortgage lending operations of banks permanently nationalised so they can be ordered to meet quotas on mortgage lending.
Lack of mortgage credit would hamper new business startups and small business expansion as mortgage funding is their main source of loans and venture capital.
The €3 million limit on debt may be designed to help the property speculator lobby,according to the article. As I understand it,a debtor declaring bankruptcy could not be pursued by the creditors for debts up to €3 million,whereas under existing law personal debts of any amount can be pursued for life. The latter makes it very difficult for bankrupts to start over,unlike in the US where bankruptcy is often optimistically viewed as trial run for entrepreneurs.
Does pursuing debtors for life make much difference to debt losses? I suppose in future it would discourage the kind of double or quits gambling on property characteristic of the Celtic Tiger which laid low many a formerly wealthy speculator. As for collecting on debts in default,creditors could theoretically go after business people in default who start over and succeed. But how could they succeed with the debt albatross pursuing them for life? Many a potentially successful business could be prevented from starting in the first place.