What happens if I accept a debt write-down?

Question

José Manuel Alburquerque · Accepted Answer

A write-down (“quita”) is an agreement under which the creditor forgives part of the debt, normally in exchange for you paying the rest within a set period. If you do what was agreed, the forgiven part is no longer owed. Accepting it amounts to acknowledging the debt, so the time limit for claiming it starts again. If you then fail to pay what was agreed, the creditor will normally be able to claim the whole debt from you again. The forgiven part may be taxable under income tax or under the “impuesto de donaciones”, the Spanish gift tax, depending on who forgives it. What accepting it means A write-down is a partial release of the debt, that is, the forgiveness of part of it. The “Código Civil de Cataluña”, the Catalan Civil Code, does not regulate it, so the Spanish Civil Code (“Código civil”) applies. When it is negotiated with a bank or a fund, it is usually a settlement (“transacción”), an agreement in which each side gives something up to avoid a lawsuit. Nobody is obliged to grant one, but there is nothing improper about asking for one either. When you accept it: You acknowledge that you owe the money. That interrupts the limitation period, which starts again in full. Before accepting, check whether the debt was already time-barred or whether you have defences, such as unfair terms or a miscalculated amount, because they could reduce it more than the write-down itself. If the write-down depends on you paying the agreed amount within a set period and you do not pay it, the creditor will normally be able to claim the whole debt again. It depends on how the agreement is worded. If the debt has guarantors, in principle they are not liable for the forgiven part either, because a guarantor cannot owe more than the debtor. If the agreement says that the creditor keeps its rights against them, the point is disputed, so the agreement should make it clear. This applies to a write-down agreed with the creditor. If the debt is reduced in insolvency proceedings (“concurso de acreedores”) or written off under the second chance procedure (“segunda oportunidad”), which allows an individual to be released, with the court's involvement, from debts they cannot pay, guarantors are subject to their own rules. Tax How the forgiven amount is taxed depends on who forgives it: If a relative or a friend forgives it to do you a favour, it is a gift. You pay the gift tax, under the Catalan rules if you live in Catalonia. Anything taxed as a gift is not also subject to income tax. If the write-down results from a negotiation, for example with a bank, a fund or a company, the forgiven part is, in principle, a gain that you must declare in your income tax return. Write-downs under an arrangement approved in insolvency proceedings and the discharge granted under the second chance procedure are not subject to income tax, provided the debts do not come from a business or a professional activity. It is advisable to work out the tax before signing, because it can considerably reduce what you save with the write-down. How to put it in writing The agreement must be in writing and should state: How much is owed in total and what amount is being paid, with an express statement that this payment settles the whole debt. When and how it is to be paid. It is also advisable to provide for what happens if a payment is late. What happens to the guarantors and the guarantees. If there is a mortgage, that it will be discharged when the agreed amount has been paid. That the creditor will remove you from the registers of bad debtors (“ficheros de morosos”) once you have paid. Pay by bank transfer and keep the receipts.