Debt management: prevention and mitigation against the Covid-19

In 2020 the world economy came to a standstill, and the world’s major industries nearly stopped. The reason behind it is COVID-19. This article will discuss the UAE’s prevention and mitigation measures with regard to debt management during COVID-19. It is well known that creditors lend to debtors for a fixed time, a certain amount, and a specific interest rate. In the UAE, ‘3 to 5 residents are affected by debts’, and if you are reading this, most probably, you are likely to be part of this fraction as well. How do you become part of the fraction that is not affected by debt? The answer is quite simple: you talk to a lawyer. Therefore, please let us deconstruct the narrative of lenders and debtors, the consequences and the solutions.

A lender is an individual, an organization, or an institution that provides funds to another individual, organization, or institute with the expectation that the funds provided will be returned. On the other hand, a debtor is an individual who owes these funds.

The following research was conducted in the UAE market, taking into consideration the options available to the debtors and lenders. There are quite some benefits that could be used for further improvements in their financial position. The most common form of such benefits for the debtors is to approach a bank, usually the bank from where the initial loan was taken. Another option is using your end of service gratuity. Furthermore, leading banks in the UAE have announced a series of relief measures, including zero interest, installment plans, reduced charges, and deferred processing fees for their customers since the COVID-19 pandemic.

Moreover, debtors should consider debt consolidation, which refers to taking a new loan to pay off other debts and liabilities. The main idea is that by taking a new loan, one will combine their debts and liabilities into one large debt and proceed to pay off this new debt with lower and re-negotiated terms. In this way, the debtor will improve his chances of completing the loan repayment. The new and re-negotiated terms are usually at a lower interest rate and lower monthly payments, or on occasion, both.

When it comes to the loan repayment, the creditors or lenders try to make sure that they have enough financial and legal instruments to guarantee that the debtors will pay back their loans. Unfortunately, due to the COVID-19 pandemic, the repayment process became more problematic. More importantly, the creditors’ ability to collect the debts were limited by the temporary absence of the legal enforcement and judicial proceedings. The UAE witnessed a period of lockdown, which saw a limited ‘closure of emirate and federal level shut down of the courts.’ Creditors opted for the following three options: non-payment, deferring and defaulting payment. Defaulting payment is never a great sign for the economy. It is thought to be worse for the creditors if such behavior [defaulting payments] extends and is ultimately normalized.

The creditors fears of not recovering the loans are justified, but there is a silver lining and somewhat retribution for debtors and lenders. The UAE law and the financial banking industry has catered to both debtors and lenders, but the effect of COVID-19 has limited debtors repayment options. Failure to make the repayment see consequences and penalties. Firstly, there exists a travel ban to protect the lender from the debtor absconding. Second, an issuance of a fine rather than imprisonment, which is a refined response that is attractive to both debtor and lender, but could hinder the repayment process. The third solution is made available by the banking institutions that have made it possible for the debtor to repay the lender by selling their assets. Usually, these assets are liquid. Generally, debtors tend to use the nuclear option, which is the sale of their home using the proceeds to repay the lender. Fourth, the UAE law sets out in the Federal Decree-Law No. 9 of 2016 on bankruptcy, for the companies, a process for protective composition, bankruptcy and restructuring, liquidation, and voluntary liquidation. Similarly, the Federal Decree-Law No. 19 of 2019 on insolvency, for the individuals, regulates the application for opening the financial settlement proceedings and the process an individual needs to follow. The law further estops any lawsuits or ability to take legal action or judicial measures against the debtor when the judicial authority has accepted the debtor’s matter. The law aims to assist the individual, organisation or institution and not otherwise, to improve the chances of the debtor repaying the lender.

The UAE economy is protected and safeguarded by the legal framework governing the banking and finance institutions and judicial authority. The processes made available are clear and simple. Debtors and lenders are well equipped with preventative and mitigating debt management instruments, even during the COVID -19 in 2020.

Bibliography:

Cyrus Izibili

Legal Consultant

Debt management: prevention and mitigation against the Covid-19

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