An individual may pass through difficult financial circumstances that render him unable to pay the instalments of his loans or bank financing on their due dates, thereby exposing him to the risk of default and its consequences. However, the law and banking practice offer means to reorganise the indebtedness rather than letting it worsen — from debt rescheduling and amicable settlement with the bank, to the organised court settlement, where needed, under the Insolvency Law. In this article we review the difference between these means, the debtor's rights, the risks of default, and the importance of acting early to protect your financial and legal position.

How to Reschedule and Settle Your Debts With Banks, and What Are Your Rights and the Risks of Default Under UAE Law?

First: The Difference Between Rescheduling and Settlement

Many people confuse two closely related but distinct terms. Understanding the difference between them is the first step toward choosing the most suitable path for dealing with indebtedness:

Second: Amicable Settlement Directly With the Bank

Direct negotiation with the bank is often the first and fastest option for addressing default before it worsens. Its chances of success increase when the initiative is early, and when the request is supported by evidence of the change in financial circumstances and the ability to commit to an adjusted repayment. Among the most common options raised on this path are restructuring the instalment and repayment tenure, consolidating debts, or agreeing on a settlement that ends the dispute.

The most important practical rule is to document any agreement in writing, and not to rely on oral promises, in order to preserve rights and to avoid a later dispute over the content of what was agreed.

Third: The Legal Umbrella Upon Default — The Insolvency Law for Natural Persons

When an amicable settlement cannot be reached, the Federal Decree-Law on Insolvency provides an organised legal framework for natural persons. The law defines insolvency as the state of the debtor's inability to pay his due debts, or the anticipated inability to meet them in the near future.

The provisions of this law apply to debtors who are natural persons not subject to the provisions of other laws (since companies are subject to the bankruptcy law). The philosophy underlying it is rehabilitative rather than punitive; it aims to enable the debtor to settle his debts through a repayment plan approved by the court, so as to restore his financial balance without harming the creditors' interests.

Fourth: Who Has the Right to Initiate the Procedures, and How?

The law allows recourse to the court to commence the procedures for settling financial obligations, and among the most prominent of those entitled to do so are:

A distinguishing feature of this framework is that it allows the debtor to submit an application to the court to commence the settlement without need for direct confrontation with the creditors; an expert (trustee) then prepares the plan for settling the financial obligations, which is approved in accordance with the provisions of the law.

Fifth: The Risks of Default and the Importance of Acting Early

Leaving a default unaddressed exposes the debtor to pursuit by creditors and to claim and enforcement procedures, with the restrictions on his financial standing that may result. By contrast, organised recourse to the Insolvency Law grants the good-faith debtor important protection, as it aims to organise the repayment of his debts and to temporarily freeze pursuits during the settlement procedures, allowing him to catch his breath and reorder his affairs.

Hence the importance of acting early; the sooner the debtor takes the initiative to negotiate or to pursue the appropriate legal path, the wider his options and the lower the cost of resolution — unlike where the situation is left to worsen.

Sixth: Practical Tips to Protect Your Position

A sound assessment of each case on its own merits is what determines the optimal path, since circumstances and documents differ from one debtor to another, and early legal guidance helps to protect rights and to avoid the escalation of obligations.

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Legal Disclaimer

The information contained in this article is of a general nature and is published for the purpose of spreading legal culture and enhancing community awareness. It does not constitute legal advice specific to any particular matter, nor a substitute for it. The applicable rules vary according to the circumstances and documents of each case, and it is therefore advisable to consult the firm for tailored advice before taking any action. Please note that the Arabic text of this article is the authoritative reference in the event of any discrepancy between it and this translation.

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