A Creditor Can Protect Against Debt Limitation by Using a Mortgage or Co-Ownership

The constant increase in unpaid debts within the legal or contractual timeframe no longer surprises anyone. The same goes for uncollectible claims, which even banks confirm, albeit reluctantly.

However, the problems faced by creditors of ‘small claims’ are little known to the public, such as common maintenance fees, certain claims based on credit cards, and similar, whose debtors either do not have regular income suitable for garnishment or their income is so encumbered that garnishment in the long term is almost impossible. At the same time, such debtors often own or co-own very valuable real estate, most commonly an apartment. Often, the problem is not limited to a somewhat poor legal text (primarily the Enforcement Act, which has been amended incredibly frequently, regardless of whether it was a matter of adopting an amendment to an already amended text or a formally new law, as is the case now), but also to a rather strange interpretation of the legal norms contained in that legal text. One of those strange things in interpretation is the problem of the judicial practice’s stance that it is unacceptable to seek enforcement through the sale of real estate for the settlement of a monetary claim amounting to, for example, one or two percent of the value of the property.

Accumulation of Small Debts The Enforcement Act does not contain a limitation that would prevent the sale of real estate worth one million kuna for the settlement of a claim of 10,000 kuna (this is the amount obtained from non-payment of a common maintenance fee of 250 kuna for 40 months if statutory default interest is not counted; if included, that period is much shorter). However, unlike in some previous times, the Enforcement Act contains clear provisions stating that at the first auction, real estate cannot be sold for less than two-thirds of its market value, and at the second auction (which must be held at least 30 days after the first), it cannot be sold for less than half of its market value.
In a situation where the real estate market is almost dead, it is clear that the chances of someone being interested in such a purchase are slim, especially since successful enforcements during the sale of apartments the first or second time are more of an exception than a rule. Keeping all this in mind, creditors often decide not to waste time and money, as even for minimal claims, court fees must be paid, along with possible financial expert assessments and attorney fees. Therefore, they procrastinate in initiating lawsuits to establish the monetary claim and obligate the defendant to pay it, and later with enforcements. Such behavior is risky because the limitation periods are relatively short (the general limitation period is five years, for rent and lease three years, and one year for radio and television subscriptions, mail, telegraph, and telephone), unless it concerns a final court decision – in that case, the period is ten years.

How to ‘Outsmart’ the Limitation Nevertheless, there are at least two solutions that are either rarely used or not used at all in practice, which can contribute to protecting creditors in such cases. The first applies Article 102, paragraph 6 of the Enforcement Act, according to which the creditor has the right, no later than at the second auction hearing, to propose that if the property is not sold at that hearing, a mortgage be established on the property in his favor to secure the claim for which enforcement has been determined. No special fee is paid for this proposal. By registering the mortgage, the creditor has not settled his claim, but he has freed himself from the fear of limitation and achieved a transparent effect for everyone, as no one can claim they were unaware of the existence of the claim secured by the mortgage. It should be emphasized that the mortgage successfully protects the creditor even in the case of bankruptcy, regardless of all priorities.

Bad Practice The second possible solution (which we have not encountered in practice at all) is the application of the principle that the lesser is contained in the greater. This means that enforcement, if possible on the entirety of the property, is also possible on its ideal part. The creditor can convert his claim into an ideal part of the property he buys at the second auction for half of the market value, thus becoming a co-owner. Every co-owner has the right to division, as well as a proportional share of the compensation for the use of the property, regardless of who had possession.

We believe that the worst solution is to do nothing, that is, to wait for someone who has been avoiding fulfilling their obligations for years (even though they have very valuable property) to suddenly change their mind. This harms themselves as a creditor, but also all other actual or potential creditors because it creates an atmosphere in which obligations can be unpaid without any harmful consequences. We have offered two solutions that do not require any changes to the regulations and do not entail additional costs, only a change in practice.