What is payment in kind ?
Payment in kind, daci en pago, can be used in Spain as an alternative to canceling the mortgage when handing over the property to the bank. Sometimes paying back the banks in Spain can be very difficult, especially if you have lost your job or your income has been reduced.
The option of canceling the debt by selling the property can be frustrating if the market property value is much lower than the mortgage value. A few years ago, a mortgage foreclosure would result in an auction where the asset was sold for an amount similar to or higher than the unpaid debt. Now, it is the other way around and the debt may not be fully cancelled just by auctioning the property. The debtor may still retain some personal liability even after the auction.
Therefore, the transferal of the property to the bank, possible under some circumstances, to cancel the debt may make sense. This may be called payment in kind or œdacin en pago.
But is it that simple?
Debts should only be repaid using mortgaged assets, thus limiting the debtors liability to only include mortgaged assets. However, the mortgage usually includes unlimited personal liability and therefore, upon enforcement of the mortgage, the debtor is still liable for the remaining amount.
The law allows banks to reclaim the asset for 60% of the assessed value, but the debtor is still liable for the remaining unpaid debt. However, banks may be forced to accept a property as payment in kind of the debt when they face foreign debtors who return to their country of origin and they have no other assets in Spain other than the property.
In this critical scenario, banks may negotiate on the debt and try to get an agreement with the debtor, while the property has a much lower value than the debt and they know they could not clear the whole amount of the debt by auctioning the property.
There are different options in situations where the debtor is unable to make mortgage payments, on one hand The Royal Decree 6/2012 incorporates a Code of Good Practice. However, the Royal Decree is very restrictive and it is applied to debtors at risk of social exclusion. But it has very limited practical application due to specific requirements of the debtor. Under those circumstances a four-year grace period for repaying capital is established and mortgage term can be extended up to 40 years, repaying interest at the 0.25 Euribor benchmark plus 0.25 , during the grace period. Finally, if the debtor is unable to afford the payments the bank can accept the payment in kind. Therefore, transferring the property will involve canceling the whole debt as well as all personal liabilities.
However, a number of options exist for other debtors where pushing the banks and negotiating the mortgage may end up leading us to a payment in kind. The bank will have no other option than to accept our property to satisfy the mortgage as a way of canceling the whole debt without further personal liability of debtor.
There are also intermediate alternative solutions to a payment in kind that may be be considered, like re-negotiation of the mortgage whole amount or conditions with extensions to deadlines or granting grace periods where only the interest is repaid.
Always take professional advice from a qualified lawyer before it is too late. Prevention is always better than cure.
Barrister & Partner at Corral Alcaraz Law Firm
LAWYERS, BARRISTERS & ACCOUNTANTS