As a direct result of the economic downturn in 2008 many UK nationals who purchased property in Spain were unable to keep up the mortgage repayments. In many cases there is no hope that the property owners will ever be able to repay the mortgage debt that they owe. In these cases, voluntary repossession, or handing the property back to the bank in settlement of the debt owed, also known as 'dacion en pago' may be an avenue to consider.
What happens if I default on a Spanish mortgage?
In the event of a default on a Spanish mortgage, the bank may foreclose on the mortgage, which is a procedure not dissimilar to that used by UK banks, other than that the final stage of the procedure is a court regulated auction at which the bank becomes the legal owner of the property, unless a third party purchaser buys the property, which is unlikely due to the way that the auctions are set up and promoted.
When the bank becomes the owner of the property a shortfall may be created, that is the difference between the value of the property as at the auction date, and the level of debt as at that date. As the debt relates to a mortgage and given the considerable fall in the value of most Spanish property, the level of debt can be relatively high.
The bank may either pursue the debtor for the debt itself, or sell the debt to a third party, who in turn may either collect the date himself, or instruct debt collection agents to do the job. The debt collection agents may be based in the UK, sometimes even in the same region as the debtor.
Is there anything else the Spanish bank can do?
Given that the cost of foreclosing on a mortgage is an expensive and lengthy process, a bank may ask the debtor for a power of attorney, whereby the bank can act on behalf of the debtor to sell the property to one of the bank's clients. The selling price may be above or below the current level of debt, and arrangements may be agreed with the bank to ensure that no shortfall remains. However, it is very unlikely that there will be any surplus to distribute to the debtor at the end of the process. Moreover, there is no certainty as to how long it will take to sell the property.
What is a 'Voluntary Repossession', or 'Dación en Pago'?
From the perspective of the debtor the best solution is to agree with the bank what is commonly referred to as a voluntary repossession (in Spanish a "Dación en Pago"). Sometimes the process is referred to as simply 'handing back the property to the bank'. This is a process whereby the debtor agrees to transfer his/her interest in the property to the bank in exchange for the bank cancelling all of the debt secured against the property. The process must be completed using the correct procedure. It is not sufficient simply to hand the keys to the bank as the debtor will still be the registered owner of the property and debt will continue to accrue.
What is the procedure to complete a voluntary repossession in Spain?
In order to agree to a voluntary repossession the bank will need to know that someone acting on behalf of the debtor and located in Spain is in a position to sign the necessary documentation before a Spanish Notary. The bank will then value the property and consider whether according to its current policy it is prepared to write off any shortfall. Once the bank is happy to proceed it will arrange for documentation to be signed completing the transaction.
Clearly there is an obligation on the debtor to repay the debt, whereas the banks are under no obligation to accept a voluntary repossession. It is for that reason that the approach to the banks is best handled by professionals with experience of dealing at branch level and at head office level with the debt recovery departments of Spanish banks.
If you have a property in Spain that you can no longer afford and you would like to discuss your options please contact us. You can contact us by email at email@example.com, by telephone on 020 3478 1420 or by submitting your query using our contact form.