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Dubai News

What banks look at when settling bad debt in UAE

date

17-Nov-2019

Dubai: Debtors are morally and legally obliged to pay their dues to banks and financial institutions while settlement or consolidation are only the last resort if they have fallen on hard times, advocates said. 
 
The reminder comes following hundreds of enquiries from UAE residents after Gulf News published a story on how a Dubai resident “Andrea” was able to settle two credit card debts of Dh1.7 million with Dh15,100 in June.The resident had lost her job 10 years ago and could not repay her debt. She eventually defaulted and went into hiding for a decade.
 
Gulf Law Director Attorney Barney Almazar, who worked with Andrea to arrive at a settlement with the bank, said his office received similar debt settlement requests after the story came out. He said, however, that though Andrea’s case is extraordinary, it will not be the norm.“[Andrea’s settlement] is really a special case and we don’t expect that this amount of condonation will become a precedent,” Almazar told Gulf News. Almazar and his team have handled many clients with debts to settle with banks through the years.
 
The most common vary between bank loans such as personal or salary loans, car loans and credit cards and sometimes both. The amount borrowed and the length of time of default also differ from case to case.
 
Almazar, however, refuted comments by some residents that they would “borrow money and just settle with banks” later on. “We cannot name banks for privacy reasons, although what I would like to stress is that borrowers should honour their obligation to pay what they have borrowed. We should not have the mindset to borrow and then resort to ‘settlement’ with the intent of shortchanging the bank. That would be an abuse of the system,” Almazar said.
 
There is hope:
In cases when residents end up having to skip payments due to financial hardships because of job loss or emergency, even when police cases have been filed against them, there is still hope, Almazar said. Residents only need to reach out to their bank directly so both parties can agree on a repayment scheme. “Most settlements will end up with the borrower paying back the principal amount to the bank, having the interests, penalties and surcharges waived,” he said.
 
“Bank operations are highly regulated by the government. Waiving off receivables is the last resort - so defaulters must show good faith in their settlement. It is very unlikely for banks to refuse settlements as long as there is no bad faith on the part of the debtor. At the end of the day, banks prefer to have a healthy balance sheet and the debtors to have a good credit standing.” “I have not encountered a situation where the bank refused any form of settlement. Even those with existing cases, banks will still settle.”
 
There have been circumstances, however, when the negotiation will hit a road block. This could be when a bank will not accept the offer of the debtor and the debtor is not in the position to take the bank’s offer.“In such instances, we look at the reasonability of the offer and we aim to balance the commercial interests of the bank and the civil rights of the borrowers. The Central Bank plays a very important role in bringing back the parties to the negotiation table. The Central Bank has a mechanism where debtors can request the assistance of the regulators to mediate. It is a much informal process and practical approach than resorting to the courts,” Almazar said.
 
No one strategy for all:
Gaurav Bhalla, Founder and CEO, Lotus Loans and Overdues Rescheduling Services based in Dubai, who has handled more than 2,700 customers in the UAE, said there is no “one strategy fits all approach” in debt settlement or consolidation as each and every case is unique. “After analysing the case, we explore options like one-time settlements, long-term payment plans based on the repayment capacity of our clients and subject to the rules and regulations of the lending institutions,” Bhalla told Gulf News.
 
“The primary objective is to arrange for repayment plans so as to enable our clients to become debt free considering the debt burden ratio as prescribed by the Central Bank of UAE.” Bhalla said debt consolidation is dependent on the credit policies of the banks, which are getting stringent given the current market conditions.
 
But one of the most prominent cases they have handled was that of the liabilities of 22 financial institutions in 2017 with an overall exposure of Dh560 million. He said they were able to get a settlement plan with a down payment of Dh35 million after one year of negotiation.“Banks are extremely supportive in understanding the financial woes of clients who are undergoing financial hardships especially if the root cause of the default is due to a job loss, reduction in income, unexpected medical expenses leading to reduction of the repayment capacity,” Bhalla said.
 
“Residents who are undergoing financial hardships should come forward and have open discussions regarding their financial affairs… debt should not be considered as social stigma. Friends and family should be made aware of the financial turmoil with an intent to arriving at a solution,” he added. Almazar said in his years of practice in the UAE, even the most “impossible” cases do get resolved.“As long as there is intent to pay, banks will work with the defaulters. It is a matter of the borrower laying down all the cards and being honest. Banks gain nothing if their clients go to jail. With the right approach, proper documentation and knowledge of the law, a good faith settlement is always on the table. The common denominator that I have observed with the banks is that they will welcome settlements made in good faith. Banks are not in the business of putting people behind bars,” Almazar said.
 
Factors considered for debt settlement:
Paying capacity is always the primordial consideration. However, banks will also take into consideration changes in the personal circumstances of the borrower from the time he made the loan and his present financial state. Banks will have more leeway if you have a good payment history. You can even request for a suspension of payments for a couple of months. Other factors that will be considered in negotiation: Will include your present salary, possibility of having a co-borrower or guarantor, history of any bounced cheques, assets in the UAE and/or home country, maintenance needs of the family, current residence - whether in the UAE or elsewhere, health and age.
 
Personal circumstances of the debtor: Banks will consider your payment history, present earning capacity (as well as your spouse), current location (inside or outside the country), if a case has been filed against you for bounced cheques, your available assets, age, health and other personal circumstances. All these factors play an important role in the negotiation. 
 
Legal side: Did the bank follow the Central Bank regulations when it granted your loans, did it loan you more than what you could pay - these are some of the questions that will weighed.
 
“Borrowers should also understand that banks are bound by guidelines imposed by law. For example, they can only lend up to a maximum of 20 times the monthly salary with amortizations not exceeding 50 per cent of the borrower’s pay. If the bank acted outside these parameters, the borrower can raise a complaint with the Central Bank,” Almazar said.
 
Common debt misconceptions: “Insurance will pay the bank anyway” - When the insurance pays the bank, the insurance steps into the shoes of the bank, and therefore, the insurance company will be the one to enforce the right of the bank to collect from you.
 
1) Car loan: Surrendering your car will not automatically cancel your liability. In most cases, the proceeds of the car sale is not enough to cover your remaining loan balance. My suggestion is for you to sell your car to an end user who will assume the loan. You may even recover some of your payments from the buyer. Remember, the loan is not cancelled even upon surrendering the car. If the value of the car is less than what you owe the bank (which is the usual case), you are still liable to pay the balance.
 
2) Insurance and job loss: Insurance for loans will only pay the minimum payment due for a certain period of time only and if the cause of termination is not voluntary on the part of the debtor. This means resignation or termination for lawful cause (such as violation of labour laws) will not be considered covered. Always remember that you will need to file your claim with the insurance company. It is not an automatic process.
 
The claim has to be evaluated first. You will need to present your termination letter clearly stating the reason for your separation. Worse, even those who have been terminated due to company closure or redundancy (qualified for insurance) think that the insurance will automatically pay for their loans. This is not the case as you are required to notify your insurance provider and file for your claims.
 
3) Automatic freezing of End of Service if you have a salary loan: This will happen if you will not coordinate with your bank. As your loan payment is drawn against your salary, banks have charged a lower interest rate compared to loans which are not tied to your salary. Banks can restructure the loan to suit your new remuneration. There are available alternatives even if your new company is not listed with your bank. Never compare your situation with others. Personal circumstances vary and banks will have different approach depending on the totality of circumstances.
 
4) “Not disclosing existing loans when applying for new loans/ providing altered pay slips to increase salary”. “Doing these with the aim of securing an approved loan will not do your any good. By not being truthful to your disclosures with the bank, you are limiting your options for settlement. Worse, this will definitely put you on default sooner or later as your amortizations exceed your income,” Almazar said.
 
5) “You cannot close a credit card without paying in full.” Credit card interest rates are high compared to personal loans. Do not prolong paying only the minimum. You can cancel your card by simultaneously converting your balance to a personal loan. The monthly dues can be even lowered and you will be assured that you will be debt free upon completing the payment term.
 
Information: Barney Almazar, Gulf Law Director
Janice Ponce de Leon is a former reporter for Gulf News
 

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