Payment in lieu means delivering an asset to settle a debt. In the specific case of mortgages, when a person cannot afford to pay the instalments, they surrender the house in exchange for settling the mortgage loan. It is effectively paying off the debt with an asset instead of money. With this resource, the bank then sells the property to the highest bidder in a public auction, thus settling the debt. Dación en pago (payment in lieu) appeared for the first time in Royal Decree 6/2012, where you can consult the requirements that must be met to be able to apply this measure. These include the need for the debtor's financial situation to be highly precarious (the so-called exclusion threshold). The debtor must also tick a number of other boxes: they must be unemployed and have no other assets with which to settle the debt, and moreover the mortgage loan instalment must exceed 50% of their monthly income.
A few years later, with the arrival of Law 1/2013, some of these requirements were modified. This law is therefore colloquially known as the second chance law, and allows the debtor to apply to remain in their home on a rental basis for two years as long as they pay off 3% of the debt as annual rent.
Advantages of dación en pago (payment in lieu)
The main advantage of payment in lieu is to avoid foreclosure when you are unable to keep up with mortgage repayments. The debtor surrenders the home but does not have to pay default interest or be subject to an attachment of assets. For the bank, the advantage lies in the fact that it cuts out the cost of having to foreclose and allows it to obtain the property in less time.
Payment in lieu is not obligatory under the terms of the Mortgage Law, but is a voluntary agreement between bank and customer.