Second Chance and Habitual Residence

The so-called right to the exoneration of unsatisfied liabilities was introduced in Spain in 2015. Since then, it has made it possible for individuals -under certain conditions- to extinguish their debts (without paying them) and thus be able to opt for a second chance.

The liquidation of the debtor’s assets

The cases of people who have access to a second chance are very diverse: the partner of a company that guaranteed debts of his company that have not been paid. This consumer was postponing a personal debt based on small loans with high-interest rates, the self-employed who has been left in debt after closing a frustrating project.

In all these cases, to access the second chance, it is required -as a budget- that the person who chooses this mechanism previously liquidates all her assets.

The principle of universal patrimonial responsibility and the second chance

It is evident that, if a person has assets, their assets are responsible for their debts. And therefore, it would not seem right that a person could be released from his debts and, at the same time, be allowed to keep his assets.

For this reason, before any Judge can decide whether to recognise a person’s right to a second chance, all of that person’s assets must be disposed of, to convert it into liquid and deliver it – to the extent possible – to his creditors.

But… Does the person who wants to opt for the second chance also have to lose his habitual residence in all cases?

Let us think, for example, of a person who is in a situation of insolvency, because he started a business that has not turned out well and has lost everything, except half of his house, which is mortgaged, which he shares with his couple (and co-owner), and in which their minor children also live.

It seems clear that, in certain cases, the sale of the habitual residence is not only not useful, but can even be detrimental to the interested party and also to his creditors, because it can increase the crisis in which that person finds himself, which will have a negative impact on the prospects for loan repayment.

Legal regime (pending)

To date, the second chance regulations have not dealt with regulating the relationship between the second chance and the habitual residence. On the contrary, the judges (significantly the specialised commercial magistrates) have been applying an interpretation sensitive to social reality, which allows people who request a second chance, in certain circumstances, to keep their habitual residence.

This legal vacuum is in the process of being solved with the approval of the Bill to reform the revised text of the Bankruptcy Law, approved by Royal Legislative Decree 1/2020, of May 5, for the transposition of Directive (EU) 2019 /1023 of the European Parliament and of the Council, of June 20, 2019 (…).

The projected reform will significantly impact all bankruptcy law and, among other things, regulates the possibility that the debtor has of keeping his habitual residence in the framework of a second chance process.

However, some parliamentary procedures are still pending the project’s approval. That, at least, will delay its entry into force for several months, so that at the time of writing this note, there is still no regulation in detail on this matter.

Current statu quo

Given the current loophole, the treatment that is becoming generalised by numerous courts and tribunals on this issue is that which is prescribed in the action criteria approved by the 2016 Seminar of the Commercial Judges of Barcelona and the Court of First Instance number 50 of Barcelona, which indicate:

“12. It may be assessed that it is not necessary, to agree on the exoneration, that the goods and rights subject to the payment of credits with special privilege are subject to realization as long as it is stated that their payment is being taken care of, charged to the mass, which can be paid all credits against the estate and that the value of the guarantee is greater than the fair value of the asset on which the guarantee is constituted”.

Conditions for housing conservation

In other words, a natural person who has access to a second chance can keep their habitual residence if the following three conditions are met:

1. The house is mortgaged (and up to date with payments).
2. The debtor (or a third party) can continue to pay the mortgage payment.
3. The outstanding mortgage amount is greater than the home’s market value.

Market Value Vs. outstanding mortgage amount

The third requirement indicated, in practice, occurs in many more cases than one might think since the real estate crisis that broke out in 2008 caused a significant drop in the value of many homes. Therefore, if at the time before the crisis, a buyer had financed 100% of the purchase price of a home, it is not difficult today to find cases in which the current value of the outstanding mortgage is higher than the current market value of the mortgage—the House.

As we leave 2008 behind, this third requirement will be more difficult to meet (due to the increase in housing prices together with the amortisation of mortgage debt), which we hope will be resolved with the pending reform, and that in its planned wording, it will give the courts a broader margin of the decision to allow debtors to keep their habitual residence by being exonerated of their debts, at the cost, yes, of demanding a more significant effort on their part, adjusted to their possibilities and adequate to the sacrifice of its creditors.