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Consumer Bankruptcy in Europe (II): Spain is Different!

posted by F. Javier Arias Varona

Two or three examples of EU national laws on consumer bankruptcy were given in the previous post. Now is the time for Spain: what’s the situation here? The title of the post suggests that we are out of the main trend in EU in this subject. That is why I put that "Spain is different" slogan that has been widely used to describe my country in tourism ads, that fits perfectly here: we have no consumer bankruptcy provisions in our Insolvency law, dating from 2003. This could sound surprising, taking into account that all the recent reforms of insolvency laws in the countries surrounding us have implemented them (Portugal's reform is less than one year younger and, as already seen, the discharge for individuals is part of its content).

The reasons for this are not clear, but in my opinion, two facts were relevant. The first one is that consumers' indebtedness is much lower than in other European countries and mainly in mortgages. Data collected by EU in 2002 showed that average use of credit per household were as low as 942€ (it is almost 18.000€ in UK) and consumer credit per disposable income rate was just 10% (28% in the UK). Figures are increasing, but even now, the main part of credit in every household is mortgage (Spanish national statistics show different results, but all of them ranges from 84% to 93% of the whole household indebtedness in 2006). The second relevant fact (and this view is personal) could be the huge impact that the reform of 2003 was intented to have in our insolvency law. After almost 50 years trying to update our legislation (with rules dating back to the middle nineteenth century in their original form), without success, it was very important to pass this law and probably the discharge was a secondary issue opposite to the most relevant things to be discussed. You should take into account, for instance, that our typical insolvency proceedings (quiebra and suspension de pagos) were just for businesses and to make the new proceeding accessible to individuals were already a dramatic change. In fact, media paid a lot of attention to the first case of a familiy filing for bankruptcy and discharge was not even mentioned (well, they were not very technical in their appreciations, anyway).

In this situation, what should an individual expect from bankruptcy in Spain? Is it useful? I hardly think that. Costs are high, actually, and there is no relief, no automatic stay for mortgage debts, no discharge… It does not seem surprising that only a few number of individuals has filed for bankruptcy since the new law entered into force (53 out of 900 in year 2006). Probably, the question to be put should not be why they do not file, but… why do they file? I confess that I do not know the answer as no study has been yet made (although it is in my "Things-to-do-brain-folder") and the amazement is bigger considering that the main part of the debt should be paid back to one only creditor, the bank, so it could be easier to reach an agreement out of the insolvency proceeding.

The situation described above could change somehow, as the increment in individuals' indebtedness and the eventual problems faced in case of an economic downturn could push politicians to pass a law for consumer bankruptcy or a reform in the insolvency law. But if it were the case, the discussions will probably focus on mortgages, as it can be clearly seen in how trade unions or consumer associations speak about this question right now. That situation will undoubtedly be a test for the bank and credit industry power in our society.

With such a long post, divided in two different parts, I forgot our small pill of happiness for today. It is starting to be hot, so I think an experiment with fountains could fit well. Forgive me for this scientific link, but I think that an academically driven blog is the perfect place to show what science can make for mankind.

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