OVER-INDEBTEDNESS

Legal protection of the European consumers before the familiar economic bankruptcy

The excessive indebtedness in families in the last years is an incontestable fact, that it is even reason for warnings for regulating organisms as is the Bank of Spain, which is continuously suggesting to the financial organizations that moderate the volume of the loans granted to families.

Although it is sure that the default level is in historical minimums, it cannot serve as excuse to foment the use of the credit because an appreciable raise in the interest rates could have catastrophic consequences in the familiar economies, inducing that thousands of families could lose all their personal patrimony.

Regrettably, it does not exist specific communitarian normative that puts effective means for the prevention, protection and solution to the cases of familiar over-indebtedness. And many State Members, as for example Spain lacks of national norms that provide a satisfactory solution in these cases.

The only partial European regulation and which does not solve most of the questions related to this subject is the relative one to the consumer credit. In theory, due to the free movement of goods and services, all European citizens can subscribe a credit in any other country apart from his self. But actually this right is not applied: to the barrier of the language the reluctance of the financial establishments is added to allow a credit to a non-resident one. In addition, the absence of harmony between the legislation of the different states constitutes a risk factor for the borrower and the lender: in case of litigation, which regulation must be applied? And before which jurisdiction?

The preparation of a specific communitarian regulation about consumer credit began in 1965. The European Commission continued with the preparations till the presentation of a final proposal before the Council in February 1979. In 1986, after a long period of discussion, was adopted a Directive, which was completed in 1990 and 1998. This one has a double objective: on the one hand, offering the European consumers a basic protection against the abusive conditions of the credit and on the other hand, making easy the credit between the borders, mainly with the free movement of contracts in the conditions of the origin country. Although the present works of the European Commission have considered specific dossier of sale on distance of financial products, it has not been like this till now with the harmonization of the concept usurious interest and the legal systems that frames the supply and the concession of credits. The way that leads to the European legislative harmonization is still long...

RECORD IN THE EUROPEAN COMMUNITY

The European Economic Community from the first moment considered the need of protection of the credit consumer. Already in his preliminary program for a policy of protection and information to the consumers, approved by Resolution of the Council the 14 April 1975, it is devoted as one of the priorities of the communitarian policy the regulation harmonization of the consumer credit.

After more than twelve years of previous works, the EU Cabinet approved the Directive 87/102/CEE, of 22 December 1986, relative to the approach of the legal, prescribed and administrative measures of the States members in the matter of consumer credit. This Directive has been latterly modified in two occasions. First, by the Directive 90/88/CEE of the Council, the 22 February 1990, the second of these modifications takes place by the Directive 98/7/CE of 16 February 1998 that affects the annual percentage of financial loads and the way of calculating it.

At the moment we are in the heat of process of approval a new communitarian norm about consumer credits. We should use the opportunity to start up the mechanisms necessary to prevent the over-indebtedness, which should be referred to the previous information for the consumer, to the solvency studies, the verification of the level of indebtedness of the applicant before granting the credit, the transparency of the costs and the exercise of the revocation right which have already been treated specifically in another study.

The European Economic and Social Committee (CES), consultative body of the UE, presented an opinion about the "Familiar over-indebtedness". The CES considers that the over-indebtedness is a phenomenon that implies social, economic, financial and political aspects in a communitarian scale, elements all of them that influence in a direct way the attainment of the inner market. To achieve the confidence of the consumers, the development of the transborder financial market must be equipped with the necessary transparency in its regulation, even in case of breach. From this diagnosis, the CES establishes, even considering the subsidiary principle, that this phenomenon has to be object of scale harmonization of the Union.

The CES Opinion justifies the position of harmonizing the over-indebtedness in three cases:

-. Equalization of the concurrence conditions between those who grant the credits to individuals.

-. To harness the inner market, avoiding the problems that can generate the existence of national legal orderings.

-. Fulfilling the article 153, paragraph b) section 3 of the Treaty, in which one inquires the Community to develop measures "that support, complement and supervise the policy carried out by the States". The CES understands that the over-indebtedness is framed in the scope of the communitarian policy.

The CES also states other reasons to carry out the harmonization in this scope:

-. The introduction of the Euro and the impulse that will give to the transborder commerce should benefit the credit.

-. The development of the e-commerce, the sale at distance, as well as the recent approval of the Directive of Remote Commercialization of financial Services.

-. The next enlargement of the Union also advises a harmonization in this field.

The Opinion finalizes with conclusions and recommendations to the Commission and the States members. Between those we should enumerate:

-. That the Commission elaborates a Green Book that analyzes the consequences of the present situation; that elaborates a legal frame of prevention and rectification harmonized before the over-indebtedness situations; that defines and establishes a network of information exchange between the States members; etc.

-. In relation to the States members that request to the Commission that studies and presents harmonization proposals that must give to the consumers in credit contracts, the use of the data relative to the insolvency, etc.; that anticipate the elaboration of an autoregulated frame and codes of conduct for the rectification of the over-indebtedness situations; that create mechanisms of conflicts resolution through extrajudicial systems, that are derived from trans-border credits; and, finally, the CES proposes to the States that, from the school age, develop informative and educate actions trying to prevent the over-indebtedness.

National regulations

The different norms of the States members are characterized by the absolute disparity of criteria when regulating the familiar excessive indebtedness. Thus some legislations lack of specific regulation that solves the situations of familiar bankruptcy, as for example Spain and others establish a specific system of resolution that specially protects the consumers, as it is the case of France.

Spain

The only Spanish legislation of protection of the over-indebtedness is the article 11 of the sale in instalments of personal property of 1998, which grants a moderating faculty to the Courts of Justice, which, with exceptional character and by right causes appreciated discretionary, such as familiar misfortunes, unemployment, industrial accidents, long disease, etc., will be able to indicate new terms or to alter the agreed ones, determining, in its case, the surcharge in the price by the new postponements of payment. Also they will have moderating faculties of the penal clauses agreed for the case of advance payment or breach on the side of the buyer.

In spite of the existence of this way orchestrated through moderating faculty of Judges and Courts, the lack of procedure, content, etc., of this faculty turns it hardly applicable, to such an extent that does not exist the evidence of application of this article.

On the other hand the new civil suit law establishes some systems to palliate the rigor of the mortgage executions without confronting at any moment the original problem: the over-indebtedness.

According to the article 693.3 LEC the mortgage lender can ask that the ejecution will be for the total debt, although he has the faculty to ask that it has communicated to the debtor that, till the established day for the auction, he could release the state though the consignation of the exact quantity for principal and interest was debt in the date of the demand, raised, in the case, with the loan expiration and the delay interests that produce during the process and result partly or totally unpaid.

So, if the good object of the mortgage is the familiar house, the debtor could, only once, even without the agreement of the lender, release the state though the consignation of the quantities mentioned above.

Definitively though this modification, the debtor is allowed to consign the debited quantities, restricting like this the capacity of the lender to alienate the property object of mortgage guarantee; in most of the cases the familiar house.

It is normal the bank practice though which the credit entity lender of a loan with mortgage guarantee, proceeds to ejecutate this property in cases of unpaiment of only one of the instalments. This is due to in the mortgage constitution registry the anticipated expiration of the guarantized obligation, for the cases of unpaiment of any capital or interest instalments. In this way the lender will demand the executive process established in the article 681 and next articles of the civil suit law. Before the disproportion of this practice, in the recent reform of this law, appears the possibility to the debtor of rehabilitate the loan paying the unpaid instalment, and that even without the agreement of the lender, when, in this case, is a loan for the housing.

For the object of our study, however, we understand that this measure is not enough, because it will not offer a definitive solution to the situations of familiar or personal insolvency, which causes in most of the cases this unpaiments, due to that allows only the delay payment of one instalment “for once”. And it is not convenient forget that the life of a mortgage loan is in average 20 years, for what we think it is ridiculous this proposal which not offer a real solution to a complex problem.

This is still more evident in the exigency of payment of some delay interests agreed properly in the loan writing. Indeed, to the payment of the pending capital they are going to demand the interests corresponding to the date of presentation of the executive demand. According to the article 12 of the LH, in the mortgage inscriptions one will express the amount of the assured obligation and the one of the interests, if they had been stipulated, differentiating between ordinary or remunerative interests and the interests from delay. The first ones come from the will of the parts and expire in accordance with the terms. On the other hand, the delay interests come originated by a breach from the indebted one and its function is compensatory. The consignment regulated in the article 693.3 of the LEC tries to avoid the continuation of the execution, reason why will only be necessary to brief, in principle, the exact amount of the interests overcome to the date of presentation of the demand. In relation with the delay interests, these can be demanded as long as they have been established in the writing of constitution of the mortgage, reason why for that the indebted releases the good through the consignment must be included in the same the interests of delay.

Seen the exposition that offers the reform of the Civil suit law, we must conclude that in our opinion they cannot appear as solution to the problem of over-indebtedness, relative or personnel.

In first place, as we have seen, because it does not address the core of the problem, that is not indeed the non-payment of an instalment of a mortgage credit, but to determine and to stop these legal situations, making an exception with the immediate demand of the pending obligations, which could have been obtained suspending the use of those clauses of advance expiration or, as it affirmed the sentence of the Supreme Court of 27 March 1999, declaring its invalidity for being opposite to right.

And secondly, because it demands the fulfilment of the obligation to pay interests of delay in the terms that the own credit organization, we do not forget it, establishes unilaterally, which cannot but correspond consequently to a situation of breach and to a compensatory intention from which all preventive norm of the overindebtedness must flee.

The new civil suit law includes alternative means of execution (but execution after all) unavoidable of the most favourable credits for consumers, to avoid the diminution of the good that the auctions entail:

1) It is foresee the possibility of agreement between the executant and the executed to sale the good without need the auction (whenever it is not harmed to third).

2) The possibility that the good is sold by organizations specialized by the request of the executant or the executed one with permission of that.

The new civil suit law promotes the participation of the citizens in the auctions, to avoid the curse of the auctioneer.

In the case of overindebtedness and impossibility of payment of the contracted credits, in Spain, failing regulation that protects us we could try with the next actions:

1) Trying to negotiate directly with the entity with which the credit was contracted to avoid the ejecution and the seizure of our goods. We could try to negotiate the payment of small quantities during more time or even rescind or condonation of partly of the debt, this is especially clear in the case of financial entities.

2) Trying to achieve another loan in another bank entity o from a relative in order to pay the first one (in case of being in condition to pay the new one).

3) In last step we should try to sell the flat before the ejecution due to, with total guarantee we would earn more money than in the auction, we cold obtain so small price that we could have debts (and without the property).

Other norms that prevent the abuse in the recovery of the interests in the credit contracts is the law of 23 July 1908 concerning the void of the contracts of usurious contracts, known as “Law Azcárate” or usury repression.

The regulation against the usury, although old and inaplicate since her date of birthday in 1908, refers to the agreement of abusive interest include in a credit contract and another stipulation that change the normal conditions of the contract, in prejudice of the debtor, and in abuse of the contractual equity.

Usury offers two aspects in our norm; in one hand the civil sanction of invalidity, mentioned already in the Law of 23 July 1908; and in the other the penal sanction, indicated in the Penal Code for the cases of habituality, concealment or loans to minors. From the strictly civil point of view, which is tried with this norm is to declare null a contract, it is to say that it does not produce effect between the parts, which would entail to the same ones to restitute the perceived things. This declaration of invalidity, that in last instance are always the courts those who establish it, produces as fundamental effect that the parts have to restitute the perceived thing. In such cease the borrower is forced to give only the received sum, being excused of the payment of usurious or not interests. In case that he had satisfied part of this amount, as well as his overcome interests, the moneylender must give back to the consumer what exceeds of the lent capital.

In relation to the subject of overindebtedness, it seems evident that the normative profusion in the banking scope, as well as a greater level of administrative control, exerted by the Advisory and Claims Service of the Bank of Spain, leaves at the present time the mentioned Law Azcárate somewhat out of position. That without regretting the interest rates and commissions that in many cases must pay the consumers by loans or banking credits.

Despite the scope of application of this law still can be of utility, as much in those assumptions in that the consumer carries out a contract of this type with certain financial entities which escape of the general control of the banking norm, like before those credit organizations officially recognized and registered that applies, in their case, these usurious rates.

Finally, in matter of prevention of overindebtedness of the consumers it does not have to mentionate the Spanish Law 7/1995, of 23 March, Consumer Credit, which being in a great extent a mere transposition of the Directive on consumer credits suffers from its same defects and virtues, despite we redirected us to the critics exposed in the corresponding study on this matter.

CONCLUSIONS AND NORMATIVE PROPOSALS.

We are passing from a culture where the saving was important to a culture where the indebtedness is the important thing in the today generation.

The data of indebtedness in the States members show us how in one of the most preservative and consolidated societies as is the German one, they had one of the most elevated levels of indebtedness of the last years.

The indebtedness must comprise a new familiar culture. Now we must introduce criteria to manage the indebtedness, to take it as an element of normality, not of excessive risk. We must find ways to manage it in a useful form and where the risk is controlled.

The overindebtedness takes place when the indebtedness is superior to the patrimony and the rents that you have, and this situation is frequent. If we are not careful can take to a duality of the society, those that have resources and enough rents to be able to manage it well and those rents are not enough and are pushed to an indebtedness level that cannot confront.

The indebtedness becomes uncontrollable when we are in the limit and before an unexpected we can not faced the situation. The interests of the credit cards go from a monthly 2% to an annual 24% when we do not pay and right now many families feed themselves with the credit card from the 15 of every month. In supermarkets we pay with credit card from half-full of month.

We must be prudent in the indebtedness, but it is necessary to be realistic. They offer us to have more than what we can because we can postpone it and we will have facilities to pay it. But if the expenses go off we cannot control the situation.

There is a business of the indebtedness and perhaps there are aspects of the indebtedness that are not legal, when there is an abuse of the weakest part, which is the consumer.

In concrete we denounce these aspects:

- Cost of the money of cards. Thought for monthly payment, but in fact there are few who are paying what corresponds to the present month. This makes that the interest raise, more than a normal loan.

- The overdraw. The payments are domiciled and it is easy it to enter in an overdrawn situation and the interests of the 2,5 that you have agreed go off.

- Mortgages. Two questions that compulsory should fulfil-. 1. - That information by written about the interests and the set of expenses that the mortgage takes implicit will be done. But nowadays are still few those that give this information in writing. 2. - That what is in writing is the cost by the term, that up 20 years a table is given to the consumer in order to know the real cost of the mortgage and if their conditions are better they had the possibility of amortization without onerous expenses. Now it is induced to the most onerous and it is not facilitated to them that they can improve the position that they have created. This shows that there is a business that we do not have to accept and that implies usurious practices which re not worthful in a modern, dynamic and competitive economy.

According to the CES Opinion:

- The phenomenon of the overindebtedness has become general in all the countries of the European Union and it is already present in countries of the enlargement, having tendency to worsen with the border security and the transborder transactions.

- Most of the countries of the European Union have conceived prevention systems of the overindebtedness situations.

- It is necessary to harmonize the regime of treatment of the terms of substantial right as the procedures of housing overindebtedness, as happen for judicial or administrative;

As a conclusion it is possible to affirm in first place that, by all the exposed, it does not exist in the European legal body a specific norm for overindebtedness situations.

The preoccupation of the legislator has been focussed in offering the consumer the greatest possible clarity when contracting these financial products or services, searching an equity between the parts, but they do not help to superate overindebtedness situations, once they have happen.

For that, as we said, it is necessary a specific regulation.

This norm must contemplate all the possible situations of overindebtedness, either for loans to acquire goods of first necessity or for playful reasons. However, it is evident that the treatment and level protection have to be different. The concept of familiar overindebtedness has to be ample, including those cases in which the familiar economy is not yet in situation of definitive insolvency or the non-payment has still not taken place but the impossibility to do it is anticipated in front of the set of obligations in attention to the forecasts of familiar income. Also they must be included those assumptions of passive overindebtedness which take place when the financial crisis of the familiar economy brings their origin in contingencies referred to the life risk (death, disease, unemployment, etc.).

As far as the solutions or remedies to familiar overindebtedness two are the ways: prevention and the procedures to face the debts avoiding the definitive familiar ruin.

Related to the first remedy some levels of information focused directly to prevent this problem turn out. This suitable information must be demanded at advertising level and also at prenegotiation and contractual level.

- Publicity: It is necessary an indeed control of the aggressive publicity that urges the excessive consumer regulating its contents and forms. The clearest example is the announcements in which loans of little quantity in 24 hours are supplied without letting know to the consumer the financial costs of the operation (compensatory interest, commissions, etc) which in these cases usually are excessively high in comparison with the existing average in the financial market. Another example, is the advertising campaign that stimulate the use of credit cards which hide the greater financial cost that takes his use. An obligatory norm must be dictated which protects the right of information of the consumers, demanding that the publicity informs the consumer in a compressible way of which are the financial costs that are going to assume

- Information right: The new norm of consumer credit regulates the content of the previous information contained in the previous offer to the consumer treating to guarantee that the consumer knows all his obligations and his real cost. This information right must be extended to all kind of financiation, included the mortgage credits. And it must be sanctioned with the invalidity of the contract for those assumptions in which the financial ones fail to fulfill their obligations of information. In any case, we have to grant to the consumer a sufficiently ample period of reflection and the offers have to be always binding for the financial organizations, in way that the contract that finally signs the consumer will have to reflect without modification of the previous information provided by the organization. Also the consumer organizations have to play a key role in the information and formation of the consumers for the prevention of the overindebtedness. We should commit to all the companies that finance families to provide the excellent financial information of all its financial products to the consumer associations, information that will have to maintain updated rigorously under pain of strong economic sanctions.

- Revocation right: Due to the agility in which are developed the financial operations could happen that for a certain service it is not possible that the consumer could carry out previous thought. In these cases it must be guaranteed that the consumer can carry out a revocation of his consent in an easy way and with the low possible cost for the consumer.

- Study of the consumer solvency: the financiator at the moment of granting the financing has to know real the patrimonial state of the consumer, for it is not enough only with the documentation that can have the own consumer, will have to settle down a system in which is registered all loan, debt, credit or similar that has the consumer to whom the financial organizations have access. Once certificate the financial statement of the consumer, the financial organization must have preserve to exceed certain limits in spite of the opposite will of the consumer. It should be reinforced the indispensable control of risks of the credit organizations trying to avoid future situations that affecting the economic situation of a country or even international, it can cause crises that directly lead familiar situations of overindebtedness.

- In contracts it is had to appear in an outstanding place with legible letter of non inferior size to a minimum that it is settled down legally all the aspects related to the financial costs, commissions, and other that the consumer has to pay under pain of void. The differences between the previous offer and the contract will be solved always in the most favourable way to the consumer due to not being he who cause the same ones.

The consumer has also right to formation. We are in a tremendously consumer society in which the citizens lack of adapted formation as consumers that prevent the situations of excessive indebtedness. This formation must already begin in the school within the obligatory education of children and young people, for that it is necessary to teach the own teaching staff and to establish specific subjects on consumer. But, in addition the experience of consumer associations should be used to foment the formation of the consumers though campaigns developed by the consumer organizations more specialized in this subject in collaboration with the public authorities.

As far as the solution system or remedies of the overindebtedness once produced, this norm should contemplate the creation of an administrative body, with attendance and intervention of the Consumer Associations, which tried to approach the parts for solving the temporary problems of consumers to confront their payments.

Previously this body would admit or not this proceeding not considering different circumstances, that there would be contemplated in the future norm, and between which would emphasize the one of the good faith of the consumer, its economic possibilities...

In this phase should be included as much situations of excessive indebtedness by essential goods, between which it deserves to emphasize housing, and those with different aims which in opinion of the administrative body and in accordance with the concrete circumstances of the case deserved special protection.

Finally, a third phase, of judicial nature, where only could end those situations of overindebtedness whose financing object has fallen on essential goods, and on that it has not reached a previous agreement in the administrative previous phase.

The procedure would have to be especially fast, and in as much it was not solved, the deserving organization could not come, in his case to the execution of the goods of the indebted one.

We walk to an economy where it is going to predominate that our relation with the institutions is the indebtedness, and for that reason our performance as consumer organization is necessary to rebalance possible abusive situations.

The consumer credit has not only a very important economic function and a considerable benefit for the organizations, but also a social dimension that demand a regulation of the overindebtedness that produce a qualitative improvement of the indebted situation which is not consistent with the benefit of the economy and the creditors. The overindebtedness without any doubt is an European and social phenomenon which must be boarded like so with an European harmonized regulation (creation of European and national observatories of the credit, common norms and advising offices) in which the consumer organizations play a role of prevention, advising and participation in the defense and conflict resolution system. A consumer network at European level on the credit and overindebtedness would have to participate in the elaboration of the banking codes of conduct in this problem. This network should fulfill at European and national level the following objectives: 1) Eliminate problems to consumers 2) Cooperate with the banking organizations and federations in the prevention and resolution of the problems and conflicts 3) Connect the norm, the practice and the political decision making in relation to this problem.

It is absolutely necessary to take a step in the protection of the consumers at communitarian level, for which a specific norm is required though, the approval of a Directive on familiar overindebtedness and the creation of the corresponding bodies of management and control.

1) Objective of the procedure:

The objective would be control the overindebtedness of the physical people produced by the manifest impossibility of the indebted one of good faith to face their non-professional debts and win, imposing to indebted and lenders an obligatory conciliation

2) Beneficiaries of the procedure:

Two requirements will be fulfilled to consider the individual, physical person, beneficiary of this type of procedure:

2.1) He is indebted of good faith (in principle, following the general theory, the good faith is presumed), point this that will determine in last instance the judge supervisor of the procedure. We could determine some direct exclusions of the good faith (as could be hiding the goods, attack them…)

2.2) The individual enter within the determined quantities to consider him indebted, the best way to determine these quantities would be establishing a relation between the loads of reimbursement of the debts due to credits and the rents or resources of the affected (the jurisprudence of different countries has indicated in several decisions: when the load of the credits surpasses half of the rents of the couple.

3) The necessary bodies to carry out the work would be:

3.a) A Tripartite Commission, in which would be included, in equal number to obtain a balance, members of the Administration, the concessionaire organizations of credits and the consumer associations. And that would be in charge of developing all the procedure under the supervision of a judge (thus avoiding aggravating already the excessive overload of the courts).

3.b) A judge who would only take part in some appraised moments of the procedure and at the request of the parts to solve some specific questions and of great importance in the procedure. The one of the consumer address will be the competent judge (like the Tripartite Commission). The judicial body should be the most specialized possible in these cases (in Spain this competence could be assigned to the new Mercantile Courts)

3.c) A file of collection of non-payment incidents, that would gather the people put under these procedures and the measures adopted for the solution. This file would have informative value.

4) Faculties of the bodies to remedy the overindebtedness situation:

A payment plan will be able to settle down consisting of: period of grace, division or stage of the debt, or the accomplishment of partial form of the familiar patrimony to settle the debts with the obtained amount, with the possibility of establishment of acquittals and condonations, reductions or suspensions of interests or debts, and could prevent to him, the indebted, the accomplishment of certain acts that would aggravate their insolvency subordinating the continuity of the plan to their observance. In any case they had to establish minimum quantities and unattachable properties to guarantee that relatives can continue subsisting. And the most important consequence of all of it is that after the conclusion and fulfillment of the established payment plan, or the partial execution of the familiar patrimony or after a period of time, families will have extinguished their patrimonial responsibility on the leftover debts that have been uncovered. In a way that the consumers can recover economically.

5) Special attention must deserve some concrete problems, as:

5.1) The married economic regime.

5.2) The one of the mortgaged properties with more of one proprietor.

5.3) The need of special procedures, more direct, to regulate clear cases that can produce overindebtedness, as is the widow's pension or unemployment (that in the present economic-social conjuncture is not at all a strange phenomenon).