BANKS will take back homes and tie struggling homeowners to years of repayments in return for writing off their mortgage debt.

But the new debt-settlement scheme will not be a debt "free-for-all" as those who tap into it will lose their homes and still have to make repayments based on what they can now afford for between five and seven years before they have their debts cleared by the bank.

The bank will have the power to decide if and when to sell the house -- possibly forcing the former owners into private rented accommodation or council housing.

The plans involve a new debt- settlement process, which will allow people with massive mortgage arrears, as well as other personal debts, to avoid going to court and declaring themselves bankrupt.

Anyone seeking to benefit from the new arrangements would have to be assessed by an insolvency expert and would also need the agreement of their bank before they got a debt deal.

If the plan does become law then all of the banks would have to sign up to it.

The Department of Finance, the Central Bank and the banks have been lobbying Justice Minister Alan Shatter for months to exclude mortgage debt from non-court settlement arrangements.

The new insolvency plans were on the agenda for yesterday's cabinet meeting, with the details about to be handed to the Oireachtas Justice Committee for its comments.

The Government, under pressure from the IMF and European Commission, has promised to publish details of new personal insolvency laws by the end of March.

However, Finance Minister Michael Noonan is understood to be so happy with the plans to include mortgage debt in the new non-court arrangements that he and Mr Shatter agreed to hold a one-to-one meeting to sort their differences.

It is estimated that around 25,000 households have mortgages and other debts that they have no hope of ever being able to pay back.

The Government is keen to ensure the new debt-settlement deals are not manipulated by people who deliberately stop making repayments, even when they can afford to make some payments.

It is estimated that there are between 6,000 and 12,000 mortgage holders who can pay, but won't. These people are known as strategic defaulters.

Banks are understood to be resisting attempts to include secured debts in settlement agreements, arguing that this is how it works abroad.

But Mr Shatter is concerned that excluding secured debt would make non-court settlements unattractive and people would opt for bankruptcy instead.

Mr Shatter favours setting up an Irish Insolvency Service to oversee non-judicial debt settlements.

Personal insolvency trustees would assess the income and outgoings of those seeking a debt deal and then get all the banks and other lenders owed money by the householder around a table and try to do a deal.

Some payments would have to be made over a number of years before the debt would be written off. Whether this period ends up being five years or seven years has yet to be decided by Government.

The debt deal would be approved and overseen by a state-run personal debt office.

One person familiar with the planned new scheme said: "There is concern that the general public does not end up feeling that the new arrangements are too lenient. But it will not be a debt free-for-all."

Irish Independent