Irish Mortgage Corporation

Debt forgiveness for consumers has a role to play in national recovery.

Debt seems to have replaced property prices as a topic of conversation for many. How to handle debt has immediate and significant consequences as more and more people continue to be made redundant or companies reduce incomes (as overtime, bonus, commission or even basic wage reductions). All this coupled with increasing Government levies on incomes and pension contributions; household budgets are being squeezed to levels never seen before.

There is little doubt that many individuals will need to be more proactive on how they view money and how they manage it. In a recent Irish Mortgage Corporation survey, 56% of respondents revealed that they have no household budgeting structure and 17% admitted to having some difficulty paying their bills.

Based on those findings, consumer behaviour has to change, but so have the lending institutions that extended many forms of credit, including mortgages, car finance loans, credit cards and personal loans.

What is needed now is a complete re-think and re-evaluation of our attitude to money. Unlike the driving and computer industries where ‘learner’ courses help with understanding and management of best practice, in the area of financial education, there continues to be deficit for formal education. Imagine what our roads would be like if we had no driving standards or tests. Imagine leaving the public to trudge their way through the computer-training manual as a way of learning – very few people did or would.

Money and attitudes to money would benefit from a ‘driving licence’ approach. The issue of money, and more importantly, debt is too important and when things go wrong, too destructive not to have one. With a drivers license for money, consumers would be thought some basic principles on household budgeting, understanding the long-term cost of credit and borrowing and understanding basic, everyday financial information, including bank statements, charges and costs.

Financial education should be thought from secondary school level, this is where many begin to gain some basic elements of financial independence and are more likely to understand sound principles from personal experience. Of course, education should not stop there. Community based programmes could also be offered to those no longer attending formal education and the focus should be to prevent problems from developing as well as problem resolution.

Get over the fear of beginning

Through simple but concise financial education, consumers should be in a much better position to break the important barrier of knowing where to begin managing their household finances through a budgeting structure. The first step is the most important and having the tools will make taking that first step easier.

Debt forgiveness

What is needed in Ireland today is a New Deal (much as Roosevelts New Deal between Government and society in depression era United States). In this new deal, for consumers who enter a financial education course, then if circumstances warrant, they would be offered some amount of debt forgiveness. A very simple and practical starting point could be on the issue of negative equity. Take a homeowner who needs to sell a property (because they want to trade down or relocate completely) but does not have the means to cover the difference between the sale price of the property and the outstanding balance on the mortgage. Lets say the property has fallen in value from €250,000 to €200,000 but the outstanding balance on the mortgage is €240,000, in this case, there is negative equity of €40,000.

Provided that the mortgage holder can prove that the property sales price is a ‘fair’ price in the current market and is in good standing with their lender, does not have the means to pay the value of the negative equity, then debt forgiveness may be the most cost effective route for the bank (not to mention the mortgage holder).

The value to the bank in this instance is it would avoid a painful and costly foreclosure process that would be time consuming and expensive. Consumers are unlikely to wait forever to sell a property that is priced well in excess of the going market average in the hope of paying the full value of the mortgage.

Revenue would probably deem the amount of debt forgiveness as a form of income and impose some form of taxation.

Debt forgiveness should not stop at mortgages but should extend to all other areas of credit, provided the borrower has completed a financial education course.

While the issue of a bad bank continues to be worked out, the restoration of banking continues to be of primary importance. However, so too does that other pillar of our economy; the consumer. The current situation of many being trapped in properties that cost more than they should now afford with additional debt levels that increase relative to their falling incomes will only act as a drag on the economy for years to come. A return to sustainable economic growth (not boom and bust cycles) could be facilitated through education and forgiveness or in other words, acts of good faith on the part of the debtor and creditor.

Frank Conway is a director with Irish Mortgage Corporation. He can be contacted on This e-mail address is being protected from spambots. You need JavaScript enabled to view it

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