Is it possible to retain the property under the Second Chance Law?

The reform of the Recast Text of the Insolvency Act introduced by Law 16/2022 substantially modified the treatment of insolvency for individual debtors. Prior to this reform, the total cancellation of liabilities almost systematically required the liquidation of all assets, leading to the compulsory auction of the debtor's home.

Currently, the legal procedure offers two main routes to obtain the Exoneration of Unpaid Liabilities (EPI):

• Exoneration through a payment plan: Allows the debtor to retain ownership of their assets, including their primary residence, by committing to pay part of the non-exonerable debt over a predetermined period.
• Exoneration through asset liquidation: Applies in cases where retaining the assets is not economically viable or when the debtor prefers to liquidate assets to reduce the outstanding debt before the remaining balance is forgiven.

Consequently, applying the Second Chance Law to a primary residence does not inevitably lead to repossession or sale of the home, provided there is a coherent financial proposal that is compatible with existing mortgage liabilities.

Requirements to protect the primary residence in insolvency proceedings

For a commercial court to authorise the exclusion of the property from the liquidation process, compliance with a series of fundamental conditions must be proven:

1. Being up to date with mortgage repayments

The mortgage loan enjoys the status of a special privileged credit. To prevent the bank from initiating or pursuing mortgage foreclosure, the debtor must keep mortgage repayments up to date or demonstrate the financial capacity to meet them regularly within the new payment scheme.

2. Proving that the property's value is lower than or similar to the outstanding debt

A crucial factor in judicial assessment is the absence of realizable net equity. If the market value of the home is lower than or roughly equivalent to the remaining mortgage capital to be amortised, selling the property at public auction would not generate surplus funds to settle debts with other creditors. Under such circumstances, liquidation serves no purpose for the insolvency proceedings, justifying the retention of the residence.

3. Submitting a viable and tailored payment plan

To qualify for discharge without liquidating assets, the indebted individual must draft a payment plan tailored to their actual income. This plan prioritises living expenses and mortgage repayments, allocating any surplus resources to the partial amortisation of non-exonerable credits, such as certain public law debts.

4. Proving status as a good-faith debtor

Regulations require that the debtor has not been penalized for very serious tax or Social Security infringements, has not been convicted of crimes against property or the socio-economic order in the last decade, and has not provided false data or intentionally caused their insolvency.

The payment plan: operation and implementation periods

The payment plan is the mechanism that puts property protection into practice. It allows debt that is not immediately forgiven to be deferred, bringing predictability to household finances.

The key aspects of this mechanism are:

• Duration of the plan: The standard term set by law is three years. However, in cases where the primary residence is not liquidated and the debtor makes a significant repayment effort, the duration of the payment plan extends to five years.
• Maintenance of mortgage conditions: Mortgage instalments are not subject to write-downs in insolvency. The debtor continues paying monthly instalments according to the terms previously agreed with the bank or under formalised restructurings.
• Treatment of public sector debt: Legislation sets quantitative limits for the discharge of debts owed to the tax agency (AEAT) and Social Security. The residual amount of these debts must be included in the payment plan proposal.

Scenario analysis according to market value and mortgage balance

To anticipate whether the Second Chance Law and primary residence protection will allow you to keep your home, it is advisable to assess the gap between the official valuation of the property and the loan balance:

Property with a mortgage higher than its current market value

If a home is valued at 160,000 euros but the outstanding mortgage stands at 185,000 euros, there is no realisable equity. Judicial enforcement would not generate liquidity for ordinary claims; therefore, courts routinely authorise the exclusion of the property from the liquidation process.

Property with a market value well above the outstanding mortgage

When the property has a market value of 300,000 euros and the remaining mortgage balance is only 40,000 euros, the home contains substantial realisable equity. In this scenario, retaining the home is more complex, unless the proposed payment plan sufficiently compensates creditors through guaranteed periodic contributions.

Subsidised housing (VPO) in the Comunidad de Madrid

Asset evaluation acquires specific nuances in the case of Official Protection Housing (VPO) or Publicly Protected Housing located in the Comunidad de Madrid.

If the property under review is subject to public protection regulations in Madrid, specific administrative rules come into play:

• Cap set by Maximum Sale Price (PMV): Property valuation is not subject to free market fluctuations, but to the maximum price per usable square metre established by regional regulations in the Comunidad de Madrid. This official value conditions the court's assessment regarding the liquidation margin.
• Regional rights of first refusal and pre-emption: The Comunidad de Madrid retains rights of pre-emptive acquisition in property transfers under active protection regimes.
• Voluntary disqualification procedure: Depending on the protected housing regulations and the years elapsed since its definitive classification, voluntary disqualification (descalificación) can be processed through the Madrid regional administration. This step removes price restrictions from the property, which is advantageous if an orderly sale is chosen to settle outstanding liabilities.

Options when keeping the primary residence is not viable

There are circumstances where maintaining mortgage repayments while simultaneously fulfilling a payment plan is financially unviable for the household. In such cases, attempting to retain the property at all costs can exacerbate financial instability.

In this context, a negotiated and coordinated sale of the property offers a sensible alternative to auction or mortgage foreclosure. A planned sale makes it possible to achieve a price closer to market value, clear the mortgage debt, and use any surplus to satisfy other claims or enter insolvency proceedings in a stronger financial position to request debt discharge.

To execute these transactions with complete technical and legal security, expert professional guidance is essential. At Sky Real Estate, we work closely with the firm Sky Law, recognised in the European Legal Awards 2023-2025. Furthermore, our company is registered as a Real Estate Credit Intermediary under ICI number D-286 with the Banco de España, certifying our regulatory rigor when liaising with banking institutions to agree refinancing solutions, settlement agreements, or the sale of mortgaged properties.

If you need to review your debt status, assess the impact on your assets, or explore alternative negotiation routes with your creditors, you can obtain technical advice on our specialized service to sell a property with debt or a mortgage.