I am facing a difficult situation with the repayment of my Dh165,000 debts. I borrowed the money for my Dubai IT business, which I set up in July 2015. The business has not been performing as well as expected, so I had to let my four staff go in January when no new business came in. All the debts are in my name, as I am the owner of the company, and in total I owe:
Credit card with bank A: Dh65,000
Loan with bank A: Dh40,000
Credit card with bank B: Dh25,000
Two credit cards with bank C: Dh25,000
Credit card with bank D: Dh10,000
Total: Dh165,000
I have been searching for a job and am hoping to earn Dh10,000 to Dh15,000. I am looking to freeze the company license for the time being, as I cannot get an investor or partner. Three of the credit card payments are pending for this month. We only have cash of Dh4,500, of which we need Dh2,800 to pay the rent on our home. I also need to support my family in India and I have other payments to make too: Dh10,000 for the quarterly office rental bill, and car rental bills (one cheque of Dh4,000 this month and another of Dh6,000 for next). I am trying to sublease my home and find cheaper bachelor accommodation. I would like to continue the business, but I don't have sufficient working capital to required to undertake new projects . What action should I take to resolve this unstable situation? SP, Dubai
Debt panellist 1: Shaker Zainal, head of retail banking at CBI bank in the UAE
The situation you find yourself in is perilous, and you need to take action immediately before your debt becomes uncontrollable.
As the majority of your liabilities are from credit cards, which will be accruing high rates of interest, you need to rectify this situation as soon as possible to avoid your debt spiralling even further. You have a few options available to you.
Depending on what bank or financial institution your cards are from, you may be eligible to transfer your credit card debt into an easy payment solution, which traditionally comes with zero or lower interest rates. This will significantly reduce your monthly payments, and also mean that you need to restructure your liabilities over a longer tenure.
When you find a job, you should also consider a buyout loan from another bank. Approach banks that offer this facility and explain to them the situation to find out if you can apply for a debt consolidation loan. Some institutions might consider merging your entire debt into one monthly payment, which will make your payment schedule more sustainable, given your current income. Again, this will most likely mean that you need to restructure your liabilities over a longer tenure.
Another option is to visit a debt management company, who may be able to negotiate a settlement with your lenders. Always try to solve the issue yourself first, if you can, as the debt management company will charge you a fee for their services.
Also, you must find ways to cut costs and increase your liquidity: Move to cheaper accommodation and cut back on all unnecessary spending. You may also consider suspending your car lease and use public transport instead, until you find a job. Finally, if you have assets available, you may consider selling some of them to reduce your overall debt burden.
You may also be eligible to take action under The Federal Bankruptcy Law, which came into force on December 29, 2016. The law offers creditors and debtors increased flexibility in dealing with financial distress while ensuring certainty and security for business owners and investors, who can rely to some extent on protection for their businesses during a restructuring. To explore more on this option please contact your personal lawyer.
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Debt panellist 2: Steve Cronin, founder of DeadSimpleSaving.com, which helps people invest their money sensibly
I’m sorry to hear about your business situation – a business is like a child (and equally expensive) and there is a real danger you will do unreasonable things to save it.
First, you need to make peace with your business being over or at least dormant. You must stop the cost bleed associated with ongoing business. Freeze or cancel the license. You do not need an office, so try to stop paying the rent by terminating the lease or finding a replacement. Do you actually need a car right now, versus taking taxis and the metro? Can anyone else support your family for a few months?
Keep the company website up in case a lead does come in over time. Can you work as a contractor to other IT firms that do have projects? Is there any other work you can do while you search for a job, even if it is helping people with their laptops etc? If you can, find a job with a well-established company that the banks are comfortable with. This will reduce your interest payments significantly and it might be worth accepting a lower salary temporarily for this.
You must talk to all your banks and explain that you are facing a temporary cash flow issue. Bank A especially may be able to give you a consolidation loan to convert your credit card debt, though make sure this loan does not have rates anywhere near 40 per cent per year.
You must tackle your credit card debt in whatever way you can, otherwise merely paying the minimum payments will still cause the debt to expand rapidly. Currently, it is not clear how you will pay even the minimum, which is why you must talk to the banks rather than ignore them.
Finally, get professional advice on how the new bankruptcy law applies to your situation, in case that can provide some relief.
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Debt Panellist 3: Rasheda Khatun Khan, a wealth and wellness planner and founder of Design Your Life
Being a responsible credit card user really does determine the outcome of your financial situation, so we have to go back to the beginning here. There are some initial business decisions that have been made to guarantee the company running into major financial meltdown.
1. Taking out a loan or using a credit card to start a new business, without putting in capital yourself or having a back up repayment plan, is not a good place to start. You need to start a business with a positive cash flow, not a negative one. Remember if you use cash from a credit card, you are paying around 35 per cent interest or more on it if you do not pay off the outstanding balance in full. Unless your business can make more than 35 per cent profit, it does not make financial sense.
2. Know when to quit. If you know your company is not bringing in any business, give yourself a time frame of when to consider a new course of action. Simply racking up debt is not the answer.
3. Have a plan. Having a solid business plan and projections will keep you aligned to what you need and want your business to do. It will also help you make better decisions as you go along.
Now, to manage your way out of this current situation, you need to:
1. Approach your bank to request a consolidation loan for your credit card debt. This way you can reduce the interest you are paying and have a manageable monthly repayments. If you can manage all credit cards on one loan, this should be your first approach.
2. Freeze or dissolve your business. If you have any assets sell them and use the capital to clear your dues. Try to end your office lease agreement and any other business expense.
3. If you have any personal assets, now is the time to consider selling to release cash and reduce your debt.
4. Focus efforts on securing new employment. Use your resources and contacts to explore potential opportunities.
Just addressing the immediate problem is only half the solution. At the same time, you must look at your ongoing living expenses and find a way to manage within your income. Otherwise it might be time to consider whether living here is too costly for you.
The Debt Panel is a weekly column to help readers tackle their debts more effectively. If you have a question for the panel, write to pf@thenational.ae