How the world is dealing with the issue of debtors
It has been about 140 years since failing to pay a bill could land an Englishman in Marshalsea. The debtors' prison, as readers of Charles Dickens will recall, was the lockup on the Thames made legendary in his novels The Pickwick Papers, David Copperfield and Little Dorrit. Marshalsea was notorious long before its literary debut, however, as home to thousands of debtors, cast into prison, sometimes for decades, by their creditors until they or their families made good on their debts. It wasn't until the Bankruptcy Act of 1869 that debtors were set free. "No person shall be arrested or imprisoned for making default in payment of a sum of money," the law stated.
Britain wasn't the only country that once-upon-a-time incarcerated debtors, however. The US had debtors' prisons until 1833, when the federal government and most states eliminated prison as a sentence for non-payment of debt. Prison still looms for fraud and failing to pay alimony or child support, but falling behind on one's mortgage doesn't mean an orange jumpsuit. Here in the UAE, however, falling behind on one's debt payments is still a criminal offence that can result in jail time. Bounce a cheque and the recipient is entitled to file a complaint with the police. Once such a complaint is filed, it is difficult if not impossible to leave the country. In point of fact, it is illegal.
That is putting some expatriates - and their banks - in a pickle. With the economy quickly cooling, job losses are rapidly mounting. When an expatriate loses his or her job, their visa is cancelled, giving them a month at most to leave the country unless they find a new employer to sponsor their visa. New employers are in increasingly short supply. For those expatriates who have lost their jobs and with them their ability to service whatever credit-card debt, car loans or mortgages they may have in the UAE, therefore, the temptation must be great to simply turn out the lights, park the car and jump on the first plane out of the country, never to return.
This is called absconding and it is looked upon rather dimly under the law. But once someone has absconded, there is little a bank can do. The UAE's extradition treaty with India, for example, has provisions to haul back anyone who has bounced a cheque here. Seriously, though, mounting a diplomatic offensive to extradite someone for missing payments on their Toyota Yaris? The problem is that the laws protecting financial transactions and creditors were designed for a bygone era of the UAE's fast-moving economy, circa 2002. There was a time not so long ago that cheques were a novelty and the notion of taking paper in lieu of cash - itself a somewhat big leap of faith - seemed radical. Making it illegal to bounce a cheque helps reassure recipients that there is more than just the buyer's word standing behind it.
Most modern nations have moved beyond cheques to electronic payments involving credit cards and debit cards. Credit cards allow people to buy things with money they don't yet have. Debit cards make an instantaneous transfer of funds from buyer to seller without cash changing hands and therefore represent a lower risk than cheques. But here in the UAE, lenders have been using the law against bouncing cheques to overcome another area of legal and financial uncertainty. Without a proper credit bureau to evaluate potential borrowers, banks have been giving out credit with little more than a handshake - and a hard look at the borrower's employer.
Elsewhere, the interest rate on the loan is enough to compensate the lender for the risk the borrower does not repay. Beyond that, there is the collateral: if you don't pay up, heavily tattooed men come and take your Yaris away or foreclose on your home and auction it off to complete strangers. Credit card debt is unsecured, meaning it has no collateral. That's why it bears such a high interest rate.
Foreclosure in the UAE, however, requires a court order, which can be a lengthy process. It is much the same in the UK, where such orders are difficult to obtain and so normally banks simply repossess homes, selling them off, settling the loan and paying the difference to the borrower. Rules in US states vary, so many banks avoid knotty foreclosure procedures by issuing borrowers deeds of trust that allow seizure of property in arrears with little fuss.
Here in the UAE, banks use cheques as a Damoclean sword over borrowers, particularly those they fear may simply disappear. The implicit threat is that, while you may leave before the bank can foreclose, you won't get far if you bounce a cheque. Many banks thus ask borrowers to make a series of post-dated loan repayments by cheque. The problem with this has always been that bouncing cheques is something that almost everyone who has used them has inadvertently done at one point or another, with no criminal malice. Applying severe penalties for such commonplace misdemeanours does little to discourage them. On the contrary, the effect is a lot like a loan-shark charging unreasonably high interest rates. Anyone who misses a payment is unlikely to wait around to discuss it, whether in a jail cell or in the clutches of a goon trying to break their kneecaps.
It's almost impossible to collect from a borrower buried in concrete and prohibitively expensive to collect from one who's slipped across the border. Arresting, detaining or incarcerating deadbeat borrowers may feel good, moreover, but it does little to improve a borrower's ability to repay, as Marshalsea's customers eventually discovered (it is creditors, not borrowers, who successfully lobby for legislation). For the same reason, lenders typically prefer to go into restructuring talks with corporate borrowers that default rather than have them legally wound up and sold for scrap. They stand to lose less money.
Bankers in the UAE already know this. That's why few debtors - or cheque bouncers - actually end up in prison, lawyers say. Most cases end up being arbitrated and resolved amicably, even if the bank ends up with the keys to the Yaris. Nonetheless, steps should be taken to ensure there are ample avenues for expatriates to discuss financial strains with their banks. Most importantly, measures are needed to make sure that immigration issues don't make expatriates feel they have no option but to flee to avoid a debtors' cell.