In 2013, as Juan Muñoz Pino, a 50-year-old dental technician, sank deeper and deeper into debt, he began to think the only solution was suicide. Instead he sat down with his lawyer, then saw a psychiatrist, who recommended a psychologist. And eventually, he found a solution that few people in debt in Spain have been able to pursue until recently: he declared himself bankrupt.
Two years on, with a judge having approved an agreement with his creditors, he is able to pay back part of what he owes, while another part has been cancelled. Over the next four years, he will be subject to a strict payment plan supervised by his insolvency administrator, Laia Folguera.
This means that if he needs more fuel for his heating over the winter, he will have to get Laia’s approval, and if he wants to buy a secondhand car, Laia will have the final say. His lawyer sends a twice-monthly report to the courts, while she takes care of what he spends.
Giving people who get over their heads in debt a second chance has only been possible in Spain since 2003
Laia looks through Muñoz’s paperwork and eventually pulls out a file: his debts amount to a total of €540,427, of which €418,504 is owed to the bank, €7,000 to the taxman, and €650 to Social Security, while the value of his home is no more than €250,000. He faced ruin, which is what tends to happen to people who get into this kind of debt in Spain. It is spelled out clearly in Article 1:911 of the Civil Code: “The debtor responds with all his or her present and future assets.” A debt is never cancelled, and is even inherited by other family members.
The key to a breakthrough in Muñoz’s case was overcoming his bank’s resistance. “In the end, banks are people,” explains Laia. “For months, the person managing the debt refused to do any kind of deal. But fortunately, that person was replaced and that gave us an opportunity.” At the Jausas law firm in Barcelona, Muñoz is a success story.
Debt forgiveness in three laws
Spaniards were first able to arrange an agreement with their creditors under a law passed in 2003, although banks systematically refused to enter into any kind of arrangement.
A decade later, a new law aimed at helping small businesses provided a new opportunity whereby it was possible to mediate if the debtor was prepared to pay off a mortgage, back taxes, and Social Security contributions, as well as 25 percent of other debts. The courts would then release them of their duty to repay the remainder.
The so-called “second opportunity” law was passed in February of this year, extending bankruptcy facilities to individuals. One of its chief features is that once negotiations are underway, mortgage payments are suspended for two months. Applicants’ assets, including their home, are sold. A maximum five-year repayment plan is agreed based upon the bankrupt’s income. If a serious effort is made to meet the repayment plan, all pending debts are cancelled at the end of the period.
Giving people who get over their heads in debt a second chance has only been possible in Spain since 2003, when legislation was introduced to allow individuals to enter into an arrangement with their creditors. But there were relatively few cases until further legislation was passed this February.
The problem with the 2003 law was that it required agreement between creditor and debtor. In the case of failure to meet mortgage payments, which has affected hundreds of thousands of households in Spain since the crisis began in 2008, if the bank refused to cooperate, as was usually the case, nothing could be done. In 2010, around 5,000 companies were declared insolvent, and just 900 individuals; by 2014, that figure had fallen to 646, none of whom succeeded in reaching agreement with their banks.
Other countries’ legislation makes it easier for bankrupts to settle their debts. “In the United States, a country where failure is more tolerated and there is a more deep-rooted entrepreneurial culture, the vast majority of bankruptcy cases are individuals,” says David Grasa, a lawyer at MMM. “In 2014, there were 884,956 cases (including liquidation, agreement, and payment plans) out of a total of 911,086 bankruptcies.” In 2011 there were 129,8000 bankruptcy cases in Germany, 143,871 in the United Kingdom, and 56,079 in France, compared to just 999 in Spain.
Further legislation introduced in 2013 included some advances to help small businesses. This year’s so-called “second opportunity” law established mechanisms to help mediate between creditors and debtors, as well as allowing judges to approve repayment plans, including mortgages, over five years, and that give debtors enough money to live on.
Grasa also handled the case of a retired couple whose debt was eventually pardoned by a judge. The pair had five children. “He had worked for a bank, she was a teacher,” he says. “They got into difficulties in mid-2011 as a result of unforeseen costs when two members of the family were diagnosed with cancer. They borrowed money and were meeting their mortgage repayments. The law says that their assets have to be liquidated, but the sale of the house can be put off because it was not providing them or the creditor with income. That asset was excluded, and in the end, they were left with a healthy debt they could repay.”
José Manuel de Castro, the judge who oversaw the case, says the couple were lucky: “They were just in time to benefit from the new law and so we could close the case without having to sell their home. Otherwise, it would have been very difficult.”
Castro and his colleague José María Fernández Seijo work out of a Barcelona court, and have made strenuous efforts in recent years to help families hold on to their homes. In 2011, Seijo cancelled the debts of a retired couple who were unable to arrange a repayment plan and whose assets had been seized. Seijo ruled that the debts should be cancelled “once all other solutions have been exhausted.”
Both Seijo and Castro believe the new legislation giving debtors a second chance is a major step forward. “It is a little bit complicated, but it makes for a more agile and cheaper system. It comes at a time when a lot of people in Spain are exhausted,” says Castro. Both judges say that the banks will reach agreements in confidence: “They don’t want media repercussions.”
In Spain, the banks have too much influence over politicians, which is why they have behaved like predators”
Under the new law, debtors must first contact a notary public, who will then appoint a mediator whose job is to get debtor and creditor to reach agreement. Julio Rocafull is a mediator: “Mediation is based on the idea of a clean slate. But it isn’t easy getting the banks to accept a haircut of up to 90 percent.”
Others in the field say they are skeptical the new law will have much impact. “It’s not very useful,” says Jesús María Ruiz de Arriaga, who runs a Madrid law firm specializing in bankruptcies. “If you are in financial trouble, you’re not going to be able to pay a lawyer; most of these people couldn’t even pay for their funeral.
“In Spain, the banks have too much influence over politicians, which is why they have behaved like predators. This law isn’t going to help anybody. Not even the state, because somebody who can’t pay will disappear into the hidden economy. I have clients who come to my office who are on the verge of losing their homes: before they enter the office they head to the bathroom to take a shower.”
Juan Muñoz’s life over the next four years will be dominated by his repayment plan. He has sold his home and now lives with his sister, but he has avoided being evicted and more importantly, remains in the system, unlike so many Spaniards in the past who have been unable to pay their debts, and seen every paycheck, every bank account in their name, every asset tracked down until the debt is paid, or the debtor dies and passes it on to their family.