Dacion en pago is a Spanish term that means the giving back of the property mortgaged to the lender in exchange for the discharge of a mortgage debt. This procedure is usually resorted to by borrowers who cannot anymore meet their mounting obligations on the mortgage. As the debt accumulates and becomes unmanageable, dacion en pago becomes a solution of last resort that a borrower can take.
For a dacion en pago to be acceptable to the lender or the bank, the property must not be in negative equity, meaning you must not own more money than what the property can fetch when it is sold in auction. Also, for this option to be accepted by the lender, repossession proceedings against the property should not yet have been started by the lender.
Dacion en pago is usually resorted to by borrowers to avoid having their property repossessed. When your property reaches the repossession stage, it is usually the case that you owe more money than what the property will fetch when it is sold in an auction. Thus, even after the property is auctioned, the bank or lender can still run after you for the difference between the amount you owe the bank or lender (which would usually include the expenses incurred in the repossession procedure, lawyer’s fees and applicable interests) and the money that is generated from the auction or sale of the property.
Homeowners who have an existing home loan which they feel they will not be able to manage or pay may take a look at the dacion en pago option to avoid repossession by the banks. Dacion en pago may prove to be a win-win solution for both the borrower and the lender. It frees up the borrower from mounting debt and the lender can take possession of the property mortgaged without resorting to the usually lengthy and expensive repossession procedure.