ALLOWING householders temporarily stop paying part of their mortgages in order to pay down their other personal debts is one of a number of proposals on personal indebtedness being considered as part of reform of Irish bankruptcy law.

The troika of the European Commission, European Central Bank and International Monetary Fund has asked banks to assess the impact of such reforms, which would allow struggling borrowers reduce debts and stay in their homes.

One proposal involves the banks agreeing to reduce mortgage repayments or forgive some mortgage debt to allow distressed customers to reach a deal on unsecured debt such as personal loans, credit card debt and overdrafts.

The troika  asked the banks this week about the effect of including debt such as mortgages in voluntary personal settlements reached outside the bankruptcy court.

The aim of the proposals is to give heavily indebted borrowers time to reduce their debts by putting a brake on mortgage repayments so they can reach a settlement on their unsecured debts.

This kind of solution – currently not available outside the draconian Irish bankruptcy process – would last up to five years and is intended to help borrowers to return to repaying mortgages at a later date.

Bank of Ireland, Allied Irish Banks and Irish Life and Permanent met the EU, ECB and IMF on Monday ahead of publication tomorrow of the troika’s fourth report card on whether Ireland is meeting the EU-IMF agreement.

Voluntary debt settlements will be contained in the Government’s personal insolvency legislation which must be introduced during the first three months of 2012 under the terms of the bailout agreement.

The decision to include mortgage debt in voluntary personal debt settlements – known as individual voluntary arrangements (IVAs) in the UK – is being debated among the troika, the banks, and Government and Central Bank officials.

Proposals for a “non-judicial settlement” are being led by Department of Justice officials who have also met the troika this week.

The banks had no comment to make on discussions with the troika, while the European Commission and the Department of Justice also declined to comment. Minister for Finance Michael Noonan said early reform of personal insolvency law was “a central element” in most of the solutions in the recent report on tackling mortgage arrears. There was “no magic solution” to the problem of rising arrears, he said.

Troika officials have queried the effect of debt settlements for individuals on the capital of the banks, which have already received €62 billion from the Government.

Several bankers have raised concerns about the effect of writing down mortgages in discussions.

Solutions offered by the Government group on mortgage arrears, led by accountant Declan Keane, included split and trade-down mortgages to reduce repayments and mortgage-to-rent plans.

The troika has questioned how the banks are going to deal with increasing arrears and whether they intend to raise interest rates further.

They have also queried the banks about the Central Bank’s threat to cap variable interest rate hikes if their actions exacerbate the problem of mounting arrears.

The troika asked about progress on disposing of €73 billion in excess assets to reduce banks’ reliance on the ECB. Discussions focused on whether the banks would “deleverage” themselves of these assets in the time and at the discounts agreed under the EU-IMF programme.

The Government has pledged to inject €64 billion into the banks to cover higher levels of bad mortgages and losses on the sale of excess assets. The Minister for Finance may try to transfer part of the bank costs to the EU bailout fund if euro zone governments allow the fund to be used to recapitalise banks. The Government could seek to move part of the €20.7 billion cost of AIB and some of the €29 billion pledged to Anglo Irish Bank to the European Financial Stability Fund to reduce the State’s borrowing costs.

*This article was amended on October 19th, 2011