How the UAE's insolvency law changes the outlook for The Debt Panel
The new federal law may help readers of The National, who seek advice from our panel of experts for their debt woes
Helping UAE residents resolve their chronic debt problems has been the mission of The National’s The Debt Panel since it first went live in April 2016.
Almost 200 debtors have had their issues tackled by our panel of financial experts, all receiving practical advice to ease their struggles.
While some have been able to turn their finances around, others continued along the same path, either because they ran up even more debt through overspending or because they could not find a way out of their financial mess.
Legal guidelines around insolvency and debt resolution are an absolute must to ensure a healthy banking environment in an economy.
Ambareen Musa, Souqalmal.com
However, there has been a significant development this year that may change the fortunes for many from January. A new Federal Decree Law on the Insolvency of Natural Persons, approved by the UAE Cabinet last month, will help debtors by decriminalising liabilities and allowing them to either settle their financial obligations through a court-approved payment plan or insolvency and the liquidation of their assets.
“Legal guidelines around insolvency and debt resolution are an absolute must to ensure a healthy banking environment in an economy,” says Ambareen Musa, the founder and chief executive of UAE financial comparison website Souqalmal.com and one of our panellists.
She says an insolvency framework changes the outlook for readers of The Debt Panel because it helps to strike a balance between allowing struggling borrowers a clear legal route to resolve their liabilities while also ensuring lenders’ rights are protected.
“The UAE’s case is unique with more than 90 per cent of the population made up of expatriates,” Ms Musa says. “The previous lack of insolvency guidelines would force struggling expatriate borrowers to take extreme measures to deal with debt default: either getting caught in a debt spiral taking on expensive credit card debt to repay existing loans, or borrowing from illegal moneylenders at extremely unfair terms, or worst yet – fleeing the country and leaving their debts behind.”
Under the new law, individuals who have missed repayments or fear they will miss their next payment must approach the local court in the emirate they live in within 40 days to start insolvency procedures.
If a repayment plan is agreed by the debtors and creditors through a court-approved adviser, debtors have three years to repay their liabilities and they can continue to work while they repay the debt. However, if they do not have the means to pay because of job loss or have missed repayments for more than 50 consecutive working days, creditors can request the liquidation of the debtor’s assets, the Ministry of Finance said in November.
With many of The National’s debt letters from former UAE residents who have absconded to avoid a jail sentence over their heavy liabilities, the new law is significant. It means there is now an official channel they can go through to resolve their liabilities, rather than leave the country.
The law “should indeed help to reduce people fleeing the country when in chronic debt”, Matthew Dyson, an associate at law firm Pinsent Masons, told The National last month. “The key to this, though, will be how stakeholders react to the new law and whether the new law is successful in eroding some of the stigma attached to bad debt.”
This is something Sumera Hasan, a single mother of four, agrees with. She first wrote to The National in May last year because she was receiving up to 10 calls a day from collection agents over a Dh43,000 liability that had mushroomed to Dh90,000. Her finances are now under control because the bank agreed a settlement of Dh25,000 after her story was published. But she says the insolvency law would have saved her “the mental trauma” of dealing with debt collectors.
“I could have had my self respect and reputation that got tainted in front of colleagues and employer,” she adds.
For Ryan, who did not want to reveal his full name, and first contacted The Debt Panel in June 2018, the law is a game changer.
“The majority, if not all, of debtors have every intention of paying back what they owe if they can,” says the marketing executive from the Philippines. "This new law presents an opportunity for them to do so without having to run around in circles or just run away.
“I’ve experienced first-hand how difficult it is for banks to extend this kind of support with them hiding behind technicalities such as 'your credit score is low’, 'your company is unlisted’, etc. I understand that banks are under no obligation to provide concessions to a debtor since we did sign an agreement with them, but they should at least listen when debtors approach them as obviously the end goal is to get them paid.”
Ryan, a married father-of-two, owed more than Dh150,000 on a loan and five credit cards when he first got in touch with The National. While he had converted all the credit cards to loans to secure fixed monthly instalments, he needed to restructure the loan payments as well, to ensure he could successfully pay off all the debt. The lender refused. However, after The Debt Panel’s advice he managed to secure a Dh250,000 consolidation loan.
“I cannot say if this new law would have helped,” he adds. “My case was just a borderline problem compared to others and would have been easily worked out without special considerations had I been employed by a company-listed organisation.”
The main thing, says Keren Bobker, a financial adviser at Holborn Assets and a debt panellist, is that debtors now have “a government-endorsed way of discussing debt with creditors without fear which should lead to sensible and affordable solutions”.
“We know that a significant number of people leave the UAE when they get behind in order to avoid police and court cases and potential imprisonment so this may lead to people staying to face the music. Where people really do want to repay what they have borrowed they should be able to do so while keeping their job in the UAE,” she says.
However, with the law not taking effect until January, Philip King, head of retail banking at Abu Dhabi Islamic Bank and also a debt panellist, said in an answer to a query last month that it “remains to be tested”.
While the concept of an insolvency law is a big step for the UAE, it may not be able to help everyone.
To be eligible for a repayment plan organised by a court-appointed adviser, a debtor must either be about to miss a debt repayment or have missed repayments in the past 40 days, according to a guide issued by the MoF last month.
A repayment plan can only last for a maximum of three years but it can be cancelled if the debtor stops paying or fails to stick to the plan. Similarly, the insolvency option only applies if the debtor owes more than Dh200,000 and cannot solve their issues through a repayment plan. Plus the onus will be on the debtor to behave responsibly and not revert to overspending simply because they now have a court-approved repayment plan.
“It's important to remember that even if you manage to get access to an affordable repayment plan, your credit report will reflect your struggle with debt,” Ms Musa says. “This will limit your chances of qualifying for loans and credit cards in the future.”
Another challenge is the law relies on the banks, the experts and the individuals co-operating, says Steve Cronin, founder of DeadSimpleSaving.com, a non-profit website helping people invest their money sensibly by themselves, and another expert on The Debt Panel.
“Banks may find their ability to recover interest and fines are limited, and this can be a significant source of capital for them. But they may be more likely to get the original amount lent back,” he says.
Updated: December 25, 2019 10:19 AM