UAE welcomes new insolvency law for struggling borrowers

The UAE Cabinet has just announced a new federal law that aims to protect bankrupt borrowers from facing jail time and legal prosecution.

This is not only great news for struggling borrowers who are unable to keep up with their debt obligations, but the UAE economy as well. Legal guidelines around insolvency and debt resolution are an absolute must to ensure a healthy banking environment in any country.

The Souqalmal.com team explains everything you need to know about the new law and how it impacts us as residents of the UAE.

What do we know about the law so far?

The new law will effectively decriminalize debt default, so defaulting borrowers don’t face the threat of jail time and legal prosecution. The law will allow borrowers to continue employment, while working with a court-appointed expert to work out a repayment plan to clear their debts within a three-year period.

What does this mean for borrowers and lenders?

Close to 90 percent of the UAE’s population is made up of expats. The previous lack of insolvency guidelines would force struggling expat borrowers to take extreme measures – By relying on expensive credit card debt to repay existing loans, borrowing from private moneylenders or ‘loan sharks’ at extremely unfair terms, or worst of all – Fleeing the country, leaving a debt trail behind.

We’re looking at the new legislation as a well-timed and much needed intervention. It helps take away some of the fear from the borrowers’ minds, especially those being harassed by debt collectors who resort to intimidation and threats to recover unpaid debts. Having a court-appointed expert mediating between banks and borrowers will definitely bring a more disciplined and humane approach to debt recovery.

Borrowers and lenders, both stand to benefit from the new law. It will help strike a balance between allowing struggling borrowers a clear legal route to declare insolvency and work with the country’s legal system to settle their debt obligations, and ensuring at the same time that lenders’ rights are protected.

How does this compare to insolvency laws in other countries?

Court-approved repayment plans are a standard debt relief measure and part of bankruptcy proceedings in various countries around the world.

Chapter 13 Bankruptcy in the United States allows for an individual’s overwhelming debt to be restructured under the legal protection of a federal court. This provision helps set up a court-approved repayment plan spanning a period of three to five years.

Individual Voluntary Arrangement (IVA) in the United Kingdom allows individuals to make affordable repayments against their debts over a period of five to six years. At the end of the IVA, any left-over unsecured debt is written off.

Restructuring fees lowered – How does this help?

It’s common knowledge that the overdue debt situation only gets worse with time. As the interest, late payment fees and penalties start piling on, the debt grows and becomes all the more unmanageable. Therefore, lowering restructuring and rescheduling fees and waiving some of these penalties under the new law, would go a long way in ensuring both parties come to a mutually acceptable resolution faster.

No jail threat – How does this impact borrowers?

The new law takes away the threat of jail time for borrowers unable to discharge their debt obligations. So the next time someone isn’t able to keep up with their debt repayments, they would first think about taking the legal route to resolve their debt situation instead of simply exiting the country and running away from their financial obligations.

In conclusion…

The financial insolvency law gives borrowers, who have no realistic way of repaying their debts, a legal recourse of handling their financial obligation to the banks. This doesn’t mean it is an easy way out of debt.

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. This will limit your chances of qualifying for loans and credit cards in the future. So, as a borrower, you must try your best to cut back on excessive borrowing – After all, prevention is better than cure!