Debt relief to keep the peace

All the alerts have gone off over the situation of many Spanish households after years of economic crisis. The family - that enviable safety net that people could fall back on for emotional and economic support - is stretched to the limit. And that poses a threat to the relative social calm that still prevails in Spain, experts warn. Urgent measures are needed to shore up families and prevent thousands of people from swelling the ranks of the dispossessed.

Household over-indebtedness is perhaps the most alarming part of the equation, and its clearest expression is the growing number of home foreclosures and evictions. Some 150,000 families have found themselves at this juncture over the last four years. When the last reform of the Insolvency Law was published in the official gazette last October, toward the end of the Socialists' time in office, an additional clause was added tasking the government with "the possible adoption of measures to complete the economic and social protection of consumers and families."

For now, though, whatever small steps have been taken in that direction - such as last month's announcement by the Economy Ministry with regard to mortgage cancellation and eviction postponement - do nothing to truly increase consumer protection and represent little more than a gesture of goodwill. Essentially, Minister Luis de Guindos asked the banking sector to accept the keys to a home in exchange for forgiving any remaining debt on it - what is known in the United States as deed in lieu of foreclosure - and to give mortgage holders in default a two-year moratorium before they are served with an eviction notice.

Such measures would provide debt relief to thousands of families, but adopting them depends on the banks, and that's a whole other story.

The Insolvency Law of 2003, whose latest reforms went into effect in January, does not set out specific measures to help individuals who declare themselves insolvent, which means they have to take the same steps a business would. If a debtor proposes a settlement with his creditors, but the bank does not show up for the talks, this is viewed as a negative vote, meaning there is nothing to negotiate: the debtor remains liable for the outstanding debt.

"This is what happens - lenders don't even show up at the creditor meetings, because that's a voluntary step; they [the debtors] don't get that second opportunity they have in other countries. They [the creditors] have internal orders not to go to those meetings," says José María Fernández Seijo, the magistrate at Barcelona's Mercantile Court No.3 and an expert on the issue. Despite the hurdles, Fernández Seijo has managed to get some debt pardoned in the courts on rare occasions.

Banks were half responsible for the crisis; now they have half of the solution"

The Spanish Banking Association (AEB) does not know how each particular bank acts with regard to "the few debt settlements with individual debtors," in the words of a spokesman. Regarding the absence of the banks at these meetings, he said that "the main loan a family has from the bank is the mortgage, and mortgages have preference, meaning that these lien holders are better placed than other creditors when it comes to getting repaid, and maybe that's the reason why they don't have to officially set themselves up as creditors."

"Creditors get the privilege of not showing up, and if they don't, it doesn't affect them in the least," insists Jesús Quijano, who teaches mercantile law at Valladolid University. As a matter of fact, only two percent of insolvent individuals take their case to the point of court intervention.

"Assets are liquidated for as much as they'll bring in. The outstanding debt remains," notes Quijano, who was a Socialist deputy in the previous term and a speaker during the debate on insolvency law reform.

Other European countries do provide specific protection for families that can no longer meet their financial obligations. Either all or part of the balance of the loan may be canceled, as long as the debtors are acting in good faith and depending on the magnitude of the debt and the reasons why it was entered into in the first place.

"In Spain, for now, things are not that way - debtors in arrears are still liable with all their present and future assets, so says the Civil Code," says Quijano.

Things are usually different for companies. A business that declares itself unable to repay what it owes may simply disappear without trace. Any remaining debt is covered as much as possible, but that is it.

What isn't spent today on relief will be spent tomorrow on security"

But families cannot disappear. Debt may even be transferred from the original debtor to his or her heirs. It is true that there is a minimum amount that may not be touched by creditors to ensure a family's survival, and this amount is greater for larger families. The previous government of José Luis Rodríguez Zapatero raised that minimum from 700 to 961 euros per month.

Besides that safety clause, the bank that takes back the property must auction it off for at least 60 percent of its appraisal value to help the debtor reduce his balance. Some experts have called for that rate to be set at 70 to 80 percent instead.

Last year, 934 people with no economic activity declared themselves insolvent, down 3.9 percent from 2010, according to the National Statistics Institute (INE). Some of these stories may have a happy ending, but it's uncommon.

"These people are usually in no condition to complete a complicated process such as [insolvency]: it takes time; it takes money to pay for lawyers and for the administrator, who also charges a fee," says Manuel de la Rocha, a colleague of Jesús Quijano and also a speaker during the recent legal reform.

All of these hurdles, plus the absence of specific protection for individuals in arrears, leave families somewhat unprotected when they become bankrupt or over-indebted.

"Procedures should be simplified, for instance by introducing a mediator," says De la Rocha. The Catalan nationalists of the CiU coalition grouping proposed notary intervention in mediation proceedings during the last congressional term. The reform of the Insolvency Law also mentioned the option of out-of-court settlements, whether through notaries, mediators or other figures.

Some people are proposing the option of deed in lieu of foreclosure, meaning mortgage holders in default can just hand over the property to the lender and any remaining debt is canceled. This is what Minister De Guindos has now put to the banks, but take-up on this will be entirely voluntary.

"The problem is that mortgages include signed deeds and contracts, and those cannot be modified by law, because the state would be expropriating one of the parties and would have to offer compensation," continues De la Rocha. Be that as it may, for the moment De Guindos has done nothing more than ask the banking sector for a favor, and wait to hear the reply.

The latest idea to reach Congress was put forward by the State Association of Social Services Directors and Managers, which is asking for a legal figure "to protect families efficiently" when they declare themselves insolvent. This group also proposes mediation "through private agreements before a notary." After that, the matter would move on to the courts.

Association members have met with Economy Ministry representatives to explain their proposals, and following the meeting they suspect that the biggest obstacle lies with the financial system.

"The problem is not with the lawmakers, nor with the judges, whom we know to be in favor of such a legal figure; the problem is the banks. But they should understand that it is good for business to improve the financial situation of hundreds of thousands of families. Banks were responsible for half of the crisis, but now they have half of the solution in their hands," says Luis Barriga, an association member. "Nobody is asking them to forgive debt just like that; there are middle-of-the-road solutions. A subsidized society is not good for anyone."

So which families would be eligible for this new type of legal protection in a situation of involuntary insolvency?

"The main thing would be to certify that the indebtedness occurred in good faith," adds Manuel Ramírez, association president.

"There are 20,000 social workers who could deal with something like that. We are also mediation specialists - that's what we do with cases of protection of minors and domestic abuse. We can also seek out all sorts of resources to refloat families in trouble. In this case it would not be very expensive, since the network of workers is already in place; what we need to realize is that this is a priority issue. It would be enough to reorganize the workload and the workforce."

It does not take much to realize that this is, indeed, a priority issue. The poverty rate has jumped from 23.4 percent to 27 percent in the last two years; there are over five million people out of work; severe social exclusion has grown by two percentage points to 18.6 percent since 2007; social services now see eight million people compared with the recent total of five million.

"It is inexplicable that with one of Europe's flimsiest social protection systems in place, things have not blown up yet in Spain and social peace still reigns," says José Manuel Ramírez. "But families are at their limit. The authorities must be aware that whatever they don't spend today on social protection will be spent tomorrow on security, police and prisons."

"I don't think we will see an eruption in the shape of major street protests or violence, although maybe we will, because when you have nothing to lose..." says Gustavo García Herrero, who heads the municipal shelter in Zaragoza. "The more likely scenario is an increase in dramatic family situations, because what began as a constant drip a few years ago is no longer just isolated cases."

"The family network is breaking up, and in the coming years we will see higher suicide rates, more mental illnesses, greater domestic violence, and increased problems at school. This will be the outward manifestation of this lack of protection that many over-indebted families who were perfectly normal suddenly find themselves in," warns Ramírez.

Association members talk about alarming cases of families who have moved back in with the grandparents to share the latter's meager pension, "and some of these grandparents go get their meals at soup kitchens because there isn't enough money for everyone."

"Or families simply break in half, with the husband going back to his parents' place and the wife and kids going back to hers. These are always conflict situations," says one member.

García Herrero still remembers how, not so very long ago, the city of Zaragoza announced the elimination of the last remaining shantytown shack. "It has taken us many years to consolidate a social system of rights and protection," he says. "We may soon start walking in the opposite direction."

The government, this group feels, should establish a nationwide framework to guide regional authorities in developing their own debt relief regulation.

"We are aware that local and regional governments are very concerned and that they'd be willing to reorganize their own social services to make room for these mediation processes between families and their creditors. but we need a legal framework for that. Pretty soon, it may be too late."