How does “dación en pago” (handing over property to pay off a debt) work?

Question

José Manuel Alburquerque · Accepted Answer

The debtor hands over an asset to the creditor, normally a property, to pay the debt instead of paying in money. It is only possible if the creditor accepts it, because nobody is obliged to accept payment in something other than what they are owed. The debt is extinguished to the extent agreed, so the agreement should state expressly that it cancels the whole debt. If the property is the debtor's mortgaged principal residence and the bank has signed up to the “Código de Buenas Prácticas”, the Code of Good Practice for mortgage debtors, a debtor in a very difficult financial situation can insist on it if they meet the requirements. In that case the debt is cancelled in full, for the guarantors too. What it is and how it is agreed Neither the Spanish Civil Code (“Código civil”) nor the “Código Civil de Cataluña”, the Catalan Civil Code, regulates the transfer of property in payment as such. The courts apply to it the general rules on payment, which give rise to these consequences: The creditor's agreement is required. In Spain the debtor has no general right to pay by handing over an asset. If the agreement does not say that the debt is cancelled in full, the difference between what was owed and the value given to the asset may remain outstanding. If the debt had a guarantor, the guarantor is released as soon as the creditor accepts the asset in payment. It is not valid to agree, when the loan is signed, that the creditor will keep the mortgaged house if the loan is not repaid. What is valid is to agree the transfer in payment later, when the time comes to pay. The principal residence and the Code of Good Practice For a mortgaged principal residence there is the Code of Good Practice, approved by a Royal Decree-Law (“real decreto-ley”) of 2012. Banks sign up to it voluntarily, but once they have signed up they must apply it. It can be requested by a debtor who falls within the so-called exclusion threshold (“umbral de exclusión”), which requires, among other things: That the family's income does not exceed three times the IPREM, a public index used to set entitlement to aid, with higher limits in some cases, such as disability or dependency. That their financial or family circumstances have changed significantly in the previous four years. That the mortgage payment exceeds 50 % of the family's net income, or 40 % in those special cases. For the transfer in payment, that the home was bought for 250.000 euros or less. The transfer in payment is the last step. First the debtor must ask for the debt to be restructured, for example by extending the repayment term. If that and the Code's other measures are not viable, the transfer in payment can be requested within the twenty-four months following that request. It is not available if the auction of the home has already been announced or if the home has charges registered after the mortgage. If it applies, the bank must accept the home and the debt is cancelled in full, for the guarantors too. If the debtor asks for it at the same time as the transfer in payment, they can stay in the home for two years at a social rent, paying 3 % each year of the debt they had at the time of the transfer. For example, with a debt of 150.000 euros that would be 4.500 euros a year, about 375 euros a month. If the bank has not signed up or the requirements are not met, the transfer in payment is a negotiation like any other. Tax The debtor pays no income tax on any gain they may make when handing over their principal residence to pay off a mortgage with a bank or another institution that lends money professionally, if they have no other assets sufficient to pay the whole debt. It is enough for it to have been their principal residence at some point in the previous two years. This also applies to someone who mortgaged their home to secure another person's debt. Subject to similar requirements, they are also exempt from the municipal capital gains tax (“plusvalía municipal”), the town council's tax on the increase in the value of the land. The creditor receiving the property pays the “impuesto de transmisiones patrimoniales”, the Spanish property transfer tax. Outside those cases, for example if commercial premises or a second home are handed over or if the creditor is a private individual, there is no exemption. The debtor may have to declare a gain for income tax and pay the municipal capital gains tax.