Experiencing debt can be emotionally and financially stressful in any circumstance, but managing debt as an expat living overseas, finding that changes to living costs, interest rates or tax liabilities have impacted your financial liquidity can be particularly complex.
The general guidance for foreign nationals remains universal; keeping pace with repayments and mortgage or loan contracts should avoid serious issues where debts spiral, and borrowing costs continue to mount up.
However, if you find yourself in a challenging situation, a strategic and robust approach is necessary to identify the best course of action to bring your finances back under control.
Increases in Living Costs and the Average Cost of Debt
Global inflation and a sluggish post-pandemic recovery have caused countless issues for individuals and businesses in almost every country. The first action in any debt scenario is to take a step back and evaluate things rationally.
As of February 2023, the average inflation rate across the EU was 8.5%, and although that is anticipated to fall to 6.9% when March figures are available, that still indicates a sizeable change to expendable income and the cost of servicing existing debts.
We all appreciate that higher central bank base rates directly impact the interest rates earned on savings and charged on borrowing, which can mean that a previously well-managed debt becomes considerably more expensive.
Creating a Plan for Managing Debts
Waiting for interest rates to fall is unwise, as late payments may incur charges, fines and penalties which can exacerbate the volume of debt, so we suggest the following:
1. Beginning by cataloguing all debts – the creditor, total owed, interest charges, monthly repayment requirements and repayment due dates.
2. Making regular updates to your records, ensuring you have keen oversight of exactly what you owe, to whom, and how much it is costing.
3. Creating a reminder system to avoid missing a due date or setting up automatic payments or direct debits to prevent your repayments from falling behind.
Missing one or two repayments can have a tangible effect on the finance charges and interest rates you pay. The initial focus is to keep pace with your repayments and ensure you have an accurate understanding of all debt obligations.
Depending on your country of residence, there may also be regulations or other considerations, especially where debts relate to taxes or additional charges.
In this situation, we suggest you consult an experienced financial adviser promptly to gauge the best way forward or whether there is scope to negotiate a manageable repayment plan.
Prioritising Debt Repayments as an Expat
The list we recommended is key since the regulatory caps on interest rates or charges will differ between locations. In most cases, the sensible approach is to maintain minimum repayments on all debts, to avoid penalties, but to prioritise those accounts with the highest interest charges. Usually, that will be credit card debt, but this isn’t always the case.
Your ongoing debts list will indicate those accounts with the steepest costs, helping you calculate which obligations you should repay first, even if the balances aren’t the highest.
If you have the means to do so, it may be worth repaying smaller debts with a minimal balance quickly since the fewer debt accounts you are trying to manage; the easier it becomes to keep track.
Another option is to communicate with the lenders, as the rise in interest rates and living costs is far from isolated. Most reputable financial institutions will have a mechanism in place where they can consider changes to your financing agreements.
Examples might include repayment holidays, extending your loan term, or accessing other ways to restructure or postpone payment liabilities until you have regained control over your financing.
If you don’t speak the language, working with a local adviser or consultant is strongly advisable since they will be able to guide you through the available options and liaise with lenders or the tax office on your behalf.
Managing Debt as an Expat From Another Country
Expats living in one country with debts in another may assume that there are few consequences to leaving an unpaid debt overseas. Still, it is essential to note that an overseas creditor may have legal recourse to act against you.
Much depends on the nature of the debt, but a creditor could potentially:
- Deploy a debt recovery agency to make contact or seize assets.
- Begin court proceedings to recover the funds owed.
- File a request for your bank account or assets in the country to be frozen.
While these outcomes are more extreme, they are far from impossible. It is never wise to ignore repayment notices or overdue accounts since, long-term, this could affect your residency status and prospects of applying for future visas, work permits or citizenship.
Additionally, if you have debts within an EU country, you will find that all member nations and many others worldwide participate in bilateral agreements ensuring cooperation between insolvency services and court systems.
In effect, if you were to disregard overseas debts while living abroad as an expat, you could be made bankrupt in your absence, putting assets and property in another country at risk.
Budgeting for Long-Term Debt Repayments
Budgets are a logical way to manage your finances, spot changes to your income or expenditure, and create a long-term plan to assess how best to repay your debts.
Many lenders or agencies will be more likely to consider a repayment plan request if you demonstrate your ability to repay, even if the timescales differ from your original agreement.
Our advice is to create a contingency budget or cash savings account, held separately from less liquid investment assets, allowing you a cushion to fall back on when your finances take an unexpected knock.
Without an emergency fund, budgeting can still be useful, highlighting where your cash flow may mean you are unable to meet a debt repayment obligation and giving you the ability to determine where you may be able to make changes to avoid falling into arrears.
Liquidating assets, cutting back on expenditures or sourcing new income streams may be viable ways to resolve the issue – but taking no action is never the answer.
For further information, please see previous Chase Buchanan Wealth Management guides around Where to Start With Financial Planning and Compound Interest, which may help demonstrate why unpaid debts can increase as interest payments accumulate.
*Information correct as at March 2023