Some aspects to take into account when you want to exempt the unsatisfied liability and keep the main residence

There are many individuals who go into insolvency proceedings with the intention of discharging their debts and thus obtaining a second chance. Apart from other issues that we are not going to go into in this post, such as the problems regarding the exact scope of this exoneration (which specific debts will be forgiven) or whether these people can really see their liabilities exonerated (i.e. whether they are bona fide debtors), there is a question that almost all these debtors ask themselves: will I be able to “save” my primary residence?

It is worth starting by recalling the philosophy behind the reform introduced by Law 16/2022 (which amended the revised text of the Insolvency Law, TRLC), in order to put an end to the extraordinary legal uncertainty that existed in recent years before the law came into force. In theory, the message to debtors is clear: if you want to keep your home (with or without a mortgage), you must opt for the payment plan route (which is one of the two ways offered by the Insolvency Act to obtain exemption from unsatisfied liabilities). Moreover, as article 497 TRLC specifies, it will have to be a five-year payment plan and not a three-year plan. In other words, in order to save the habitual residence, the “slow route” of the payment plan must be chosen and not the “fast route” of exoneration through liquidation, which would also include the home.

We believe that the message was coherent. The problem is that, although it was very clear, it became muddied, first in the parliamentary process itself and then in the application of the law.

Let us confine ourselves for the time being to this inspiring philosophy. This certainly puts debtors and their legal advisors in a dilemma, because even if it is with the laudable aim of preserving the habitual residence, five years to obtain exemption is a long time.

Where is the attempt to tackle this? By means of the insolvency proceedings without assets provided for in articles 37 bis and following of the TRLC, making it clear that the property, in reality, when a mortgage loan is pending, is “worth nothing” and in any case, has a lower value than the loan that is still outstanding, so that it will not be able to offer satisfaction to creditors other than the bank that holds the mortgage. In this way, it could theoretically pass the “test” of article 37 bis TRLC [specifically, we would find ourselves in the case of letter d) of said legal precept] and consider that we are dealing with a bankruptcy without assets.

Unsurprisingly, many insolvency proceedings are filed for without assets, in the hope that the court, in an act of faith, will believe the debtor who states that his or her home does not exceed (or only slightly exceeds) the amount of the mortgage debt remaining to be paid. The incentive to try this route is obvious, as the insolvency proceedings would be processed in “express” mode and, immediately afterwards, the debtor could request exoneration of the liabilities and continue to pay the mortgage, thus keeping his or her habitual residence.

In fact, this is the big problem that the commercial courts are facing in practice, and they are adopting very different positions: from those who, with a certain “broad brush”, take for granted the very low valuation presented by the debtor, almost never supported by an appraisal and even less so, issued by an appraisal company approved by the Bank of Spain, but rather by providing the “cadastral reference value”, or simple “market valuations” taken from Fotocasa, Idealista or similar portals; even those courts with a more critical and sceptical spirit, which are reluctant to see in these cases a true insolvency without assets, and proceed to appoint insolvency administrators and open an insolvency proceeding with all the pronouncements.

Incidentally, the question we should ask ourselves is whether this scenario of insolvency without assets (ex art. 37 bis et seq. TRLC) is compatible with a payment plan, and whether it would be possible for the court to impose it ex officio when it considers that we are not really facing insolvency without assets. The commercial courts of Barcelona, in a series of agreements to unify criteria, have understood that this is the case, although this possibility is not provided for in the Law and, in our opinion, is not very coherent (why would someone who claims to have no assets want to propose a payment plan?).

It is a different matter if, in the alternative, in the event that the court does not consider it to be a bankruptcy without assets, the debtor expresses its willingness to avail itself of this payment plan.

Let us leave aside for the moment this possibility of insolvency without assets, let us continue with the philosophy of the Law and let us think: if we want to keep the property, it seems that there is no other option than to go down the payment plan route. But what are the risks involved in this particular route and why does it not give the debtor absolute peace of mind that he or she will be able to obtain exemption without at least losing ownership of the main residence?

We pointed out at the beginning of this entry that, according to the legal design, if the debtor wants to save the main residence, he/she would have to propose a payment plan for five years (this is what art. 497 TRLC indicates).

However, we cannot forget article 498 bis (which regulates the challenge of the payment plan), introduced in the final phase of the processing of Law 16/2022 (as clearly denoted by the addition of the “bis”), expressly gives creditors the power to challenge the payment plan proposed by the debtor when they understand that they would be better off in a liquidation scenario (known as the “best interests of the creditors”), with “any creditor affected by the discharge” being entitled to do so.

In addition, the payment plan can be challenged by creditors representing at least 40 per cent of the dischargeable liabilities when the plan does not offer the sale of all assets (except those indispensable for the continuation of the debtor's business activity) or the realisation of the debtor's habitual residence.

It can be seen, therefore, that, although the creditors do not have to expressly approve the plan, this right of veto is attributed to them (which, moreover, is imposed on the judge, without the latter having any room for manoeuvre). As we can see, offering a payment plan and wanting to keep the habitual residence is like flipping a coin, as it will be conditional on creditors who represent that 40% of the liabilities not opposing it. And of course, what has ended up being embodied in article 498 bis is not what was “sold” to us from the outset (that all those debtors who wanted to keep the home could do so, but by formulating a five-year payment plan).

This explains why there have been so few payment plans so far, as almost all of them are intended to be carried out under 37 bis et seq. of the TRLC. This is just further proof that exemption is, in many respects, much more difficult than before Law 16/2022.

Therefore, and to conclude this part, we could say that if the debtors do not clearly fall within the factual situation of insolvency without assets and have a habitual residence that they wish to keep, they will have to offer their creditors a payment plan that assures them that at the end of the five years they will receive more than what they would presumably receive if the assets of those debtors were liquidated. At the same time, they will have to be confident that creditors representing at least forty percent of the liabilities will not decide to challenge the plan. These are risks that debtors need to be aware of when they turn to their legal advisors to try to manage critical situations such as those described above.

There is another novelty introduced by Law 16/2022, which is also related to the habitual residence, and that is the possibility of requesting the court to recalculate the mortgage repayments when the outstanding debt exceeds the value of the mortgage guarantee itself. This would consist, in short, of adjusting the monthly instalments of capital and interest to the real value of the property calculated in accordance with the Insolvency Act itself.

This is undoubtedly an interesting tool provided by Article 492 bis TRLC. But does it apply to all cases of exemption (as it seems from the location of the article, in section Two “On the common elements of exemption”), or only to those in which we opt for the payment plan route (as literally referred to in the rule)? In our opinion, the rule is intended to be applied, above all, in payment plan scenarios that arise when foreclosure has not yet begun and when the aforementioned particularity of the outstanding debt exceeding the value of the security interest is present. However, the rule is based on there having been a true valuation of the collateral with an appraisal by an entity approved by the Bank of Spain (as established in articles 273 and 274 TRLC), which shows that the part of the loan pending payment is greater than the “value of the collateral”. And this will require that definitive texts have been issued in the insolvency proceedings, which is something that does not always occur in insolvency proceedings involving individuals, and even less so in cases such as the one described above, where we will normally be dealing with a true insolvency without assets under art. 37 bis TRLC.

For this reason, some commercial courts and doctrine are postulating extending the application of this rule also to cases of exoneration with liquidation, with reasonable arguments: otherwise, it would be privileging, precisely, the “irresponsible” entities that granted a loan far in excess of the value of the property; and if we do not apply it to these cases it would not be possible to achieve the exoneration of the “surplus” (what is left over beyond the value of the guarantee).

Fernando Martínez Sanz