Ever rising number of expats falling prey to debt traps has always been a cause for alarm Image Credit: Supplied

Dubai : One in every 20 cheques issued by UAE residents bounces, a report reveals.

The first four months of this year have seen a staggering half-a-million cases of bounced cheques being reported by banks here.

A new study conducted by International Swiss Debt Management (ISDM) consultancy shows that 85 per cent of UAE residents are debt-stricken. Shockingly, a quarter of these are female.

Alarmed by the rising numbers of Indians falling prey to the debt trap, the Indian Consulate in Dubai last week invited a group of banking executives and psychologists to dispense badly-needed advice to citizens in dire financial straits. "We felt there's a need for it," Indian Consul General Sanjay Varma told XPRESS during the open house (see photo, right) attended by around 150 Indians. "A lot of people have been ruined in the past before they knew it," he said. Varma's concerns are not misplaced. According to some estimates, around 1,300 Indians and 200 Filipinos are languishing in UAE jails, many of them due to bounced cheque cases.

Yet you don't need to despair if your debts are getting on top of you: financial stress is a reality almost everyone faces today. It's not easy to face up to debt. And there's no magic button you can press to make it go away.

But you don't have to go to jail for it. Generally, banks are ready to listen to debtors - after all, they want their money back.

Financial experts say prudent thinking and simple debt management habits can help you deal with your woes.

XPRESS, in consultation with these experts, brings you five options you might want to consider:

1. Consolidate your debt:

An ideal solution and one you cannot delay.

The region’s first debt management company, International Swiss Debt Management (ISDM), works with banks to help individuals and small businesses reduce their debts. The company claims to have evaluated Dh500 million worth of personal debts of around 3,000 people in the UAE since it started operations early this year.

For an upfront consultation fee of Dh350 (which can go up to Dh5,000 when the debt problem is resolved), ISDM charts a debt management plan and, if need be, helps clients find a low interest rate loan to replace the multitude of higher-interest rate debts. That’s precisely what they did for American expat John A., 44, who approached ISDM after a bank slapped a police case against him for falling behind on payments. John’s monthly take-home salary is Dh40,000, but it wasn’t proving enough to pay off the bills on his seven credit cards and the instalments on his Dh600,000 personal loans.

Following ISDM’s intervention, John cleared credit card bills worth Dh120,000 with the help of an interest-free loan he took from a family member. Two banks also agreed to restructure personal loans amounting to Dh300,000 and extend the payment period. John resumed lower monthly payments for two other credit cards on extended payment period.

At the end of each month, John is still able to take home Dh15,000 for his family’s needs. It also helped that he moved out of his three-bedroom villa to a much more affordable two-bedroom apartment. “When people are in debt, they become resentful, angry, awkward, ashamed, unable to work at their optimum potential … their mental state is affected,” says ISDM’s Managing Director Yohannes Mazeingia.

“They have to really sit down and discuss the situation calmly and objectively,” he adds.

2. Talk to your bank

Don’t ignore phone calls from your bank – instead, talk to them. Some banks are willing to knock off 40 per cent on credit card payments if you pay in full and as a final settlement. “Banks are willing to give ‘haircuts’ (discounts on loans of distressed/jobless borrowers) of up to 50 per cent,” a Dubai-based banker said. Negotiating with his bank helped Indian expat Sachin wriggle out of a tricky situation after his bank filed a police complaint over non-payment of loans totalling Dh220,000. Sachin, who earned Dh13,500 a month, prioritised the police case (involving Dh60,000) to clear his name and get his passport back. His banks agreed to an advance payment of Dh21,000 (which he borrowed from friends) with the rest to be paid in six monthly instalments (guaranteed by six cheques of Dh6,500 per month).

Three other banks agreed to restructure his loan and reduce the monthly payments. The deduction from his salary was reduced from Dh3,800 to Dh2,800 (on personal loans of Dh100,000) and payment period extended from three to five years.

3. Attack high rates

Take a personal loan to pay off your credit card debt. The rates on personal loans vary but no matter what the variation is, it is still much lower than what you pay for a credit card.
Muthuswamy, 45, draws Dh15,000 as an administrative manager in a private firm. He has two credit cards (with limits of Dh90,000 and Dh60,000).
He has no debt – but also no savings.

When he needed money to get medical treatment for his mother, he got his credit card company to transfer Dh70,000 into his account to be paid back in 18 instalments of Dh6,000 each.
However, following a friend’s advice, who made him realise he was paying an interest rate of 36 per cent per annum, Muthuswamy took a personal loan of Dh50,000 at a more reasonable 14 per cent per annum. In addition, he availed of a Dh20,000 balance transfer offer from his second credit card, payable in 30 months at 16 per cent.

His EMI has now been reduced from Dh6,000 to a manageable Dh2,166.

4. Escalate the issue

Don’t be intimidated by the banks - remember, they are here to serve you. If you feel you have been wronged, take up the issue with the highest authority. Clearly and concisely explain your case without delving into unnecessary detail. Also highlight the different possible solutions and the benefits/detriment of each. Banks want their money back and are always ready to listen to debtors. They have several restructuring options but their junior staff is often not aware of these. And that’s why you need to meet their senior management.

In 2008, Asian civil engineer, Arnold 39, took a Dh250,000 personal loan from a bank. But earlier this year he lost his job. Luckily, he landed another job with the same pay. But since his new company did not figure in the list of ‘approved’ companies, the bank “froze” his salary account. It refused to let him to continue with the loan and insisted on immediate repayment of the entire principal (approximately Dh200,000) amount. Before long, collection agents started harrassing Arnold.

Not one to take things lying down, Arnold sought an appointment with the collections’ manager and explained his willingness and ability to repay the loan. The manager promptly agreed to restructure his loan.

5. Mobilise your friends

Take all the help you can get. Get your family and friends – and even colleagues – involved in the debt freedom mission.

Who knows some of them might be willing to lend money to help you get back on track. Ferdie F., a Filipino secretary who earns Dh7,500 a month, has been weighed down by eight maxed-out credit card oustandings amounting to about Dh80,000.

He ignored collectors’ calls, which led to one guarantee cheque bouncing. He was forced to surrender his passport to the police. A debt collector made a dramatic scene at Ferdie’s office, warning him to “Pay today or I will kill you.”

Ferdie sought help from his colleagues. They forked out Dh3,100 to pay three months worth of past dues, averting a major crisis. The breather allowed Ferdie to negotiate with his banks who agreed to convert his high-interest credit card balance (36 per cent per annum) into personal loans (14 per cent interest) with payment up to six years.

Due diligence

While banks and borrowers try to find a win-win way out of the loan mess, one of Dubai’s top lawyers, Dr Habib Al Mulla of Al Mulla and Co, has criticised local banks for not doing due diligence and simply giving out loans to people, asking only for a blank cheque as collateral. Al Mulla, founding chairman of the Dubai Financial Services Authority, also criticised the banks for turning the state and police into debt collectors, while conveniently hiding behind the ambit of the cheque fraud law, he said.

Getting to terms

  • Restructuring – A borrower negotiates with the bank for a reasonable payment solution within his budget.
  • Settlement – A borrower who lost his job or faced pay cuts works for a final settlement amount agreeable to both himself and the bank.
  • Consolidation – Borrower works with a bank to consolidate his liabilities into one payment with a lower monthly instalment and an extended loan term.
  • Bouncing cheque case – Non-payment of a loan or credit card bills beyond a period usually leads to a bouncing cheque case as most banks cash the guarantee cheque given at the time of obtaining the loan or the card. UAE Penal Code prescribes jail term of up to 36 months for writing cheques “in bad faith” and “deliberately”.