The Poor Man’s Solution
Handing in the keys by hard pressed homeowners unable to meet their mortgage payments can lead to collateral damage that worsens the problem. The banks, the biggest unwilling estate agents in the UK and Spain are not happy. Repossession proceedings are time consuming and expensive. The procedure can take up to three years and there is the additional haemorrhage of lost interest and legal fees.
The legal procedure known as a Dación en Pago may be a better option for the defaulter who may otherwise face years of legal wrangling and even bankruptcy: The outstanding mortgage is still an obligation as are the additional costs in the event of default.
Put simply it means surrendering the keys to the bank by formal declaration before a notary. In return the bank agrees to cancel the balance owing and release the mortgage holder from further liability.
A CLEAN SHEET
The credit consequences of the cancelled debt do not transfer. If the defaulter returns to their own country they can start off with a clean sheet.
The Dación en Pago is established by Article 1.175 of the Spanish Civil Code (SCC) and the transfer, unless otherwise agreed, is limited to the value of the mortgage which corresponds to the value of the property. In other words if the outstanding mortgage is 100,000€ but its value is only 80,000€ there will be a shortfall of 20,000€.
GET OUT OF PRISON?
There are three important requirements for the Dación en Pago to be acceptable: The borrower should not have already defaulted. The lender should not have already commenced repossession proceedings. Thirdly, the property should not be in negative equity exceeding (as a rule of the thumb) 20 per cent if it is to be considered.
There is no obligation on the bank to accept the Dación en Pago solution but there is equally good reason for their doing so. As commonsense suggests these procedures must be conducted by legally qualified professionals.