Traditionally only companies were given the opportunity to declare bankruptcy in an effort to avoid going to the wall. In 2004 however, a new law was introduced that permitted individuals to declare personal insolvency for the first time. So if you find yourself unable to meet your financial obligations, what benefits, if any, would there be in declaring yourself personally insolvent in Spain?
The benefits of making a declaration of insolvency include:
- Freeze any processes currently underway including those relating to repossession proceedings (including repossession proceedings for up to a year)
- Stop the accumulation of interest on any unpaid debts
- Permits the resumption of any credit agreement that had been temporarily suspended for failure to make loan repayments
- The debtor may attempt to arrange improved terms or even to negotiate the reduction of the debt
The main deficiency of the process – from the point of view of the debtor – is that the debt does not get extinguished. (This unfortunately remains the purview of wealthy bankers in our society.)
Neither will the process ultimately prevent repossession proceedings from a bank if your home is mortgaged and you are unable to meet the mortgage repayments – though it can suspend the proceedings for up to a year. Given the expense attached to personal insolvency proceedings, if you are having difficulties with mortgage repayments you would be better to enter into a formal discussion with the bank on rescheduling payments, extending the repayment period etc.
In Spain, debts are essentially forever – including mortgage debts. A bank that takes repossession of your property may add any costs incurred in realising the sale such as legal or auctioneer costs to the debt. And, should the proceeds of the sale of the property not cover that debt, then the bank may at any time in the future seek to embargo any other assets or income that you have in order to recover the balance. It is definitely worth doing everything possible to avoid going down the route of default and repossession as it works out much more expensive in the long run.
When to declare insolvency
The process is beneficial therefore in that it makes it possible to get some ‘breathing-space’ in order to renegotiate debts and thereby avoid a catastrophic outcome. Any debt-recovery processes are temporarily suspended to give you some time to manage the situation and talk to the creditors, perhaps enabling you to continue making essential payments such as the mortgage repayment while restructuring other debts, thereby avoiding a default on the mortgage, for example.
So an application for insolvency should be considered as an appropriate measure to manage your financial situation in the long term, and avoid losing your home or business in the short term.
The process of personal insolvency in Spain contemplates, upon agreement with the creditors, that the debt is discharged upon payment by the debtor of possibly as little as half of the outstanding debt over a period of five years (not including mortgages).
There are two main methods in which the insolvency process can be initiated – either as a voluntary or necessary insolvency. The former is when the individual starts the process unilaterally while the latter occurs when the creditors make the application. The applications are made to the Mercantile court – the assistance of a lawyer and the procurador is obligatory, and in the case of a voluntary insolvency, the application must be made within a period of two months from the time that applicant was or should have been aware of their personal insolvency i.e. inability to repay debts.
A special power of attorney is required and the applicant must include a list of all debts and their financial situation including information relating to their financial activities over the previous three years, their marital status etc as well as in inventory of all of their assets.
The court will decide within a period of twenty days whether they will accept the application and if and when approved, and the declaration of personal insolvency is made at a court hearing. At the hearing the court will name a court ‘administrator’, usually a lawyer or an accountant from whom the applicant will require approval to dispense funds and make payment.
While beneficial for those who need some temporary breathing space and help with certain types of debt, the process of declaration of personal insolvency will prove an expensive waste of money for others – particularly so if your sole debt is a mortgage when you would be better to negotiate directly with the bank if possible. Normally a lawyer will do this on your behalf for a much lower fee than personal bankruptcy proceedings.