The following article, unlike previous ones, is not subject-focused. Its purpose is to include in one text a loosely assorted recollection of tax and financial-related frequently asked questions by putting them all together in one text for simplicities’ sake. This will simplify people’s life on not having to skim through a myriad of legal texts in search for the right answer to their queries. In addition, I’ve also included a batch of associated legal novelties which make for significant amendments.
Lawyer – Abogado
8th of July 2011
FAQ Related to the Ongoing Financial Crisis
1. In the event of bankruptcy, up to what amount do Spanish banks guarantee deposits? In the wake of Lehman’s financial meltdown, which threatened contagion to the entire financial system, the Bank of Spain raised in 2008 the protected amount to €100,000 per account holder. The ensuing widespread fear brought the spectacle of fellow European countries frantically raising national deposit guarantees in a clumsy competition to attract each other’s savings’ deposits. This unleashed an undeclared war of liquidity as was the case of Britain and Ireland, with British citizens flocking frantically to Irish banks as its Government had raised unexpectedly, amid growing public concern on the state of its banks, the safeguarded deposit limit to well above that of its UK counterpart.
Subsequently the EU, to thwart this budding deposit dickering, put an end to it by adopting the €100,000 cap as standard for all EU banks. This ensured that 95% of all deposits were now safeguarded under the protection of national deposit-guarantee schemes.
Any money you have exceeding said amount, will be forfeited in the event of you lender’s insolvency. Which is why, following the saying, you should not put all your eggs in the same basket. I would advise, depending on your wealth, to spread your risk opening accounts in different banks with a capped amount of 100k in each account. Just to be on the safe side. I’d rather err in the safe side than being overconfident in the wrong side, wouldn’t you agree? Better safe than sorry.
In Spain, there are three Public institutions tasked with guaranteeing saver’s deposits. The FGDEB oversees banks, the FGCDA savings banks and finally the FGDCC guarantees deposits at Credit Unions.
Spain’s weakest financial link is deemed to be its regional Savings Banks (Cajas de Ahorros, in Spanish) which have invested heavily in the real estate sector. For this reason, the FGCDA has been allocated with the highest amount of – taxpayer’s – funds in view of unexpected losses, or maybe not. The FGDEB comes close in second place with slightly over 3 billion euros (as of 2009) in provisioned funds.
Notwithstanding the above, the Bank of Spain, on the wake of EU and IMF recommendations, has fostered Spanish Savings Banks into a frenzy of merging and acquisitions with the idea of propping up their beleaguered coffers. The theory behind this is to create huge supra regional financial institutions with a healthy balance sheet that are deemed too big to fail by the market. Sounds familiar? A prominent example of this ongoing process would be Bankia. I’ll make a huge effort of self-restraint and bite my tongue – hard – so as not to make some witty criticism on the flawed logic behind this reasoning such as the ones we are regularly treated by the FT’s Alphaville blog and which make for some enjoyable reading for their ever ingenious sarcasm.
2. Should my Spanish lender default, how long does it take for them to pay me the guaranteed amount? This is an excellent question as in truth it doesn’t matter one iota how much is guaranteed if you simply do not know when you’ll be paid the safeguarded deposits. As they say, the Devil is in the detail.
Last month, concretely on Friday the 17th of June, EU member-countries unified the deadline and set it at only 20 days for reimbursement. This measure is yet to be ratified by all EU members. Brussels wanted to reduce it to only seven days but some countries opposed. In the US by comparison, the deadline is only 48 hours.
3. What is the statutory time limit for a mortgage-backed loan? The technical reply is 20 years. However, creditors at any point in time can interrupt this by requesting the debt be settled whether out-of-court or through a certified law court notification. In which case, the time limit resets itself to zero and the twenty year limit starts anew.
In practice the reply is never, because Spanish creditors always make sure to contact debtors at periodical intervals, through law firms, so the claim remains always live and outstanding on their books. Unlike the UK, in Spain a defaulted mortgage-backed loan can haunt you for the remainder of your life and the interests will only roll over adding to the overall debt.
4. What amount does collateral (normally real estate), securing a defaulted mortgage loan, fetch in a Public Auction? The rules have changed recently. It used to be that in a second bid, lenders normally withheld the asset for 50% of its appraisal value for the specific purpose of a mortgage-backed loan. This has now been mercifully addressed by the Spanish Government after widespread public outcry and has been raised to 60% thus reducing the overall debt burden of the defaulted borrower. It’s not much, truth be said, but the changes are indeed in my opinion pointing in the correct direction. Hundreds of thousands of borrowers in Spain have defaulted since 2007 and are caught in an ever increasing financial snowball with not a chance of hope to rebuild their lives as the debt mounts exponentially over time eventually spiraling out of control if unchecked.
5. What is the required deposit to bid in a Public Auction? It used to be 30% of the appraisal value specific for auction purposes. This deposit is required, by law, to qualify as bidder and is lodged into a law court’s bank account prior to the auction taking place. The valuation can be found in the Mortgage deed. To delve further, please read my article Bank Repossessions in Spain.
The Government has now amended this figure and has brought it down to 20%. So anyone wanting to bid in a Public Auction “only” needs a down payment amounting to twenty per cent of the valuation specific for auction purposes. Should one be outbid, the deposit is refunded, in full, to the bidder.
The reasoning behind this amendment is because law courts are clogged by Public auctions as a direct consequence of unpaid mortgages coupled in by an endemic shortage of liquidity. As credit in Spain is almost shut off by lenders, few people are able to afford to bid as it is hard to raise a 30 or 20% cash deposit with such short notice.
The Government realizing the existing problem, has redrafted the procedural rules so they are more lenient in the hope of allowing more bidders to access auctions and thus offload lender’s cumbersome real estate portfolios. This measure will, hopefully, allow lenders to ease the glut of property from their books which only detract from their liquidity, lowering their credit-rating, as they have associated ongoing maintenance costs i.e. Community of Owner’s fees, property taxes etc.
6. Up to what amount of my wage is protected from being embargoed by creditors? Art 607 of Spain’s Civil Procedural Law rules this in detail. As a general rule-of-thumb, and not to get lost in the minefield of exceptions, the limit used to be Spain’s Minimum Legal Wage (SMI, in Spanish) with a 10% addition in the case of those borrowers who defaulted on their mortgage loans. The MLW was currently set for 2011 at €641. The MLW is adjusted annually, in line with inflation, on approving and publishing Spain’s Budget Law.
The Government attending to the plight of hundreds of thousands of Spanish families who’ve defaulted on their mortgage loans has raised the legal threshold by 150%. This translates to €960 as the new general threshold which cannot be seized by lenders on defaulting a mortgage-backed loan in Spain. However, here comes the small print, if the borrower has family members it takes care of, such as minors or other members of legal age which are out-of-work an extra 30%, taking the MLG as basis for all calculations, is added per member.
So as an example, a married father with a toddler and a wife, both jobless, would have a combined minimum threshold, which cannot be seized by lenders, of approximately €1,350. This almost doubles the afore cap which allows debt-laden families to at least make ends meet at the end of every month without having to resort to other family members or even charity in the worst cases. In Spain, traditionally, extended Family has always acted as safety nets when Government, Church or even Society at large, fail to help those in difficult times.
7. Is it true that Spain’s Tax Office is clamping down as of late in undeclared lets? I’m afraid so. Due to the much publicized downfall in property-related tax revenues the Spanish Tax Office, nudged by the Government which has recently replaced its General director by a more aggressively proactive one, has decided to offset its abundant losses by becoming creative and less lenient in its practices. And this of course means targeting undeclared lets which were traditionally rife in Spain. The Spanish Tax Office has a statutory time limit of four years to pursue unpaid taxes. To help in its crusade, it has struck an agreement with utility companies to cross-check tax declarations with household utility consumption. Where it detects that a second home has been fiscally declared as standing empty but the utility consumption clearly indicates otherwise, it will request from the Landlord a full explanation which, if proven unsatisfactory, will lead to payment of due taxes, interests and a possible fine by the tax offender.
8. Is it true that if I buy a below market value (BMV) property I can be fined by the Spanish Tax Office at a later date? Yes, it’s true. The Spanish Tax Office has in its books a valuation for every real estate asset in Spain which is related to its Cadastral value. The Cadastral value is a valuation that is taken as benchmark to calculate a number of property-related taxes in Spain, levied both by local and regional Authorities. So basically, if you snatch up a nice bargain under the sun, maybe 6 months down the line you will receive a nasty letter from the Tax Office that sets your heart throbbing looking to extricate a purported tax shortfall that you ‘under-declared’ at the Notary, whether knowingly or not; regardless. This can be either avoided altogether or else even challenged successfully, no strings attached. For more details, please read my dedicated article: La Complementaria or ‘Bargain Hunter Tax’.
To avoid it, All your conveyance lawyer needs do is request a binding valuation from the Tax Office on the value of a property prior to its purchase (exchange at the Notary Public). This valuation is normally only binding for the following 3 months after which it becomes void and a new one must be commanded. You know that if you buy below said valuation you will be taxed for the shortfall in taxes.
Additionally the Tax Office valuation for tax purposes can be in fact challenged administratively. These legal procedures are in fact very fast, as in months, not years, unlike Civil ones, with which we are all too familiar. The reason being is that a fair number can be challenged on technical grounds which are not reviewed by the court, they are simply taken as a fact and the case against you is thrown out of court and filed away with no further taxes to be paid. These cases are for the most part very affordable, in comparison to say Civil ones, as they do not imply a full blown out legal procedure. So you can be talking of being charged as little as €1,500 in legal fees (plus 18% VAT) by your lawyer plus the expenses of a new valuation carried out by a surveyor of your own choice (normally a chartered technical architect) to challenge that of the administration which tend to be flawed at best, if not downright skewed at worst, I dare say.
9. Is it true you can file for personal bankruptcy in Spain? Yes, it’s true. However, unlike the UK, where personal bankruptcy is not only an option but it’s even recommendable to cope with a fleeting financial downfall of which you can recover in some years’ time and get back on your own two feet. In Spain it is devious and not recommendable at all unless you are wealthy, which seems to defeat its own purpose if you come to think of it really. Personally, I don’t regard it as a viable option in most cases i.e. the typical mortgage loan default.
In Spain, out of hundreds of thousands of families which have defaulted on their mortgage loans over the last 4 years very few, in the hundreds, have applied for this legal figure. The reason being is that the process is both expensive for the average citizen, hence my comment that it’s only an option for affluent people looking to re-negotiate their financial commitments (meaning they actually have a leverage to negotiate with financial institutions due to their large estate), and time-consuming to the point it becomes a tedious chore. You will also become a financial pariah for the remainder of your lifetime.
The law court appoints an administrator to oversee your estate, who is paid a wage out of your own assets. You may find yourself (real case) queuing up and filing administrative papers for as much as ten hours just to withdraw a ten euro note from your own bank account, needing the compulsory administrator’s prior permission. Frankly, not worth the time.
Bottom line, less well-off borrowers need not apply. This really ought to be addressed by the Government to allow it to be a real option for the average borrower as in other European countries. Currently, it is not and should be avoided altogether.
10. Is it true that Spanish lenders can pursue you abroad for negative equity? Yes, it’s true.
It is advisable you pay your debts in timely manner, especially in Spain, and more so if you own assets, whether in Spain or abroad (within the European Union they are easier to seize following EU Regulation, read above article). As always, seek legal advise from a lawyer before taking any – rash – decision. At least you will have a clear picture of what your legal options are. At times, you will be pleasantly surprised to find you have more options than what you initially bargained for. You won’t know, if you don’t ask.
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2011 © Raymundo Larraín Nesbitt. All rights reserved.
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