Personal Insolvency in the UAE: From Settlement of Financial Obligations to Insolvency and Liquidation

Personal Insolvency in the UAE: From Settlement of Financial Obligations to Insolvency and Liquidation

Estimated reading time: 28 minutes

A Practical Guide to Federal Decree-Law No. 19 of 2019 and the Effect of Insolvency Proceedings on Debt Enforcement

Financial distress does not necessarily mean that an individual in the UAE must immediately face liquidation of his or her assets. Federal Decree-Law No. 19 of 2019 concerning Insolvency introduced a structured legal framework for natural persons facing existing or anticipated financial difficulties, providing two fundamentally different routes: settlement of financial obligations and insolvency followed by liquidation of assets.

The distinction is important.

The first procedure is essentially rehabilitative. It attempts to preserve the debtor’s financial position and reorganise debts through a court-supervised repayment plan.

The second is a collective insolvency procedure under which the debtor’s assets are placed under the control of a court-appointed trustee and liquidated for the benefit of creditors.

For both debtors and creditors, one of the most important practical questions is what happens to lawsuits, attachment orders and existing execution proceedings once an insolvency application is filed.

This article examines the process from both a theoretical and practical perspective, including the amendments introduced by Cabinet Resolution No. 47 of 2021.

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1. Who Is Covered by the UAE Personal Insolvency Law?

Federal Decree-Law No. 19 of 2019 is directed at natural persons experiencing insolvency, defined broadly as existing or anticipated financial difficulties that render the debtor unable to settle his or her debts.

The law should be distinguished from the UAE’s corporate and business bankruptcy regime.

Federal Decree-Law No. 51 of 2023 concerning Financial Restructuring and Bankruptcy now governs bankruptcy and restructuring within its own scope. Consequently, where an individual carries on commercial activities, determining which statutory regime applies may require consideration of the nature of the debtor’s activities and legal status.

For an ordinary individual facing personal debts such as loans, credit facilities, guarantees or other civil obligations, Federal Decree-Law No. 19 of 2019 remains the principal personal insolvency framework.

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2. The Two Main Procedures

The law establishes two substantially different mechanisms.

A. Settlement of Financial Obligations

This is intended primarily for a debtor who is experiencing financial difficulties but whose financial position may still be capable of rehabilitation.

The debtor remains involved in the management of his financial affairs and, under the supervision of a court-appointed expert, attempts to agree and implement a restructuring plan with creditors.

The purpose is not to liquidate everything the debtor owns but to achieve an organised settlement.

B. Insolvency and Liquidation of Assets

Where rehabilitation is no longer realistic, the proceedings move toward insolvency and liquidation.

A trustee appointed by the court assumes responsibility for the insolvency estate, verifies creditor claims and liquidates the assets that are legally available for distribution.

This procedure substantially restricts the debtor’s control over his property.

The distinction is therefore broadly:

Settlement = rescue and reorganisation.

Insolvency and liquidation = collective enforcement and liquidation.

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3. Applying for Settlement of Financial Obligations

Under Article 3, a debtor facing current or anticipated financial difficulties may apply to the competent court for settlement of his financial obligations.

This is not filed as an ordinary lawsuit against a particular creditor. It is an application to the court seeking the protection and supervision of the statutory settlement procedure.

The debtor must make comprehensive financial disclosure.

The application should include, among other matters:

• a summary of the debtor’s financial position;
• sources of income inside and outside the UAE;
• employment, professional or occupational status;
• projected liquidity and sources of funds for the following 12 months;
• a complete list of creditors;
• the amount and maturity date of each debt;
• details of securities granted to creditors;
• a detailed statement of movable and immovable assets inside and outside the UAE;
• the approximate value of those assets;
• details of pending lawsuits and judicial or legal proceedings;
• an express declaration concerning the debtor’s present or anticipated inability to pay;
• the amount reasonably required to support the debtor and his dependants;
• the debtor’s proposals for settlement;
• nomination of an expert;
• disclosure of transfers outside the UAE during the preceding 12 months; and
• any additional documents required by the court.

Complete and accurate disclosure is fundamental.

Concealing assets, giving false information about debts or assets, or attempting to prejudice creditors can result not only in rejection or invalidation of the restructuring procedure but potentially in further legal consequences.

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4. Timing Is Critical: Settlement Is an Early-Intervention Procedure

A debtor should not assume that the settlement procedure remains available indefinitely after default.

Article 12 requires the court to discontinue settlement proceedings where, among other matters, the debtor has ceased paying a due debt for more than 40 consecutive working days because of inability to pay.

This makes timing extremely important.

A debtor who can foresee financial difficulties should therefore consider the settlement procedure before the financial situation has deteriorated beyond the statutory threshold.

In practical terms, settlement of financial obligations is designed principally as an early-intervention mechanism, rather than a procedure to be commenced after prolonged default.

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5. What Happens After the Settlement Application?

Once a properly completed application is before the court, the court is required to decide it within the statutory timeframe.

If the application is accepted, the court opens the financial settlement proceedings and appoints one or more experts.

The expert then examines:

• the debtor’s assets;
• liabilities;
• creditor claims;
• sources of income;
• reasons for financial distress; and
• the realistic possibility of restructuring the debts.

Creditors are required to submit evidence of their debts and securities.

The expert prepares a report for the court and, if settlement appears viable, is directed to prepare a settlement plan in cooperation with the debtor.

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6. The Settlement Plan

The restructuring plan is prepared under court supervision and circulated to creditors.

The law establishes voting thresholds intended to ensure that the plan has meaningful creditor support.

Generally, approval requires creditors representing at least two-thirds of the value of the relevant debts, subject to the detailed voting and quorum requirements contained in the law.

The proposed implementation period must not ordinarily exceed three years from the date on which the court ratifies the plan.

It may, however, be extended with the statutory creditor approval.

Before ratification, the court must also be satisfied that affected creditors will receive under the plan no less than what they would reasonably have received if the debtor’s assets had instead been liquidated.

Once ratified, the plan becomes binding in accordance with the law.

During implementation, the expert supervises performance and provides periodic reports to the court.

Importantly, appointment of the expert does not ordinarily remove the debtor entirely from the management of his affairs during the settlement procedure. This is one of the principal differences between restructuring and liquidation.

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7. The Effect of Settlement Proceedings on Execution

This is one of the most important protections granted by the law.

Once the court accepts the application and opens the settlement procedure, Article 7 suspends the creditor’s right to seek execution against the debtor’s assets and prevents creditors from commencing insolvency and liquidation proceedings while the settlement procedure remains in force.

The distinction between filing an application and obtaining an opening order is important.

Merely submitting a settlement application does not, by itself, provide the same statutory stay. The operative protection arises from the court’s decision opening the procedure, although the court may take interim measures to preserve the debtor’s assets while the application is being considered.

What about an execution file that already exists?

Where execution proceedings have already commenced, the debtor should immediately place the insolvency court’s opening decision before the relevant execution court and request implementation of the statutory stay.

The practical consequence is that coercive execution against assets should cease while the statutory stay remains operative.

For example, this may prevent further steps toward:

• attachment of bank accounts;
• attachment and sale of vehicles;
• attachment and auction of real estate;
• garnishment of receivables; or
• distribution of execution proceeds,

subject to the specific circumstances of the execution file and any rights enjoyed by secured creditors.

An attachment that existed before commencement of insolvency proceedings should not automatically be assumed to have disappeared merely because enforcement has been stayed. The distinction between suspending enforcement and cancelling an existing attachment or security right can be legally significant.

The appropriate orders should therefore be obtained from the competent court in relation to each existing execution file.

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8. Secured Creditors Are Treated Differently

The stay is not absolute.

A creditor holding a debt secured by a mortgage or other qualifying priority may apply to the court for permission to enforce against the relevant security once the secured debt has become due.

The court must consider the application and, among other matters, the priority attaching to the security.

The insolvency regime therefore does not simply extinguish mortgages or other legitimate security interests.

This distinction is crucial for banks and other secured lenders.

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9. Failure or Termination of the Settlement Procedure

Settlement does not always succeed.

The court may terminate the procedure where, for example:

• a viable settlement cannot be achieved;
• implementation becomes impossible;
• the debtor fails to perform the plan;
• the agreed implementation period expires without completion;
• the debtor voluntarily seeks termination; or
• circumstances arise showing prolonged inability to meet obligations.

A plan may also be declared invalid where fraud, concealment of assets, false information or other abusive conduct is established.

Depending on the circumstances, failure or invalidation of the settlement procedure may lead directly to insolvency and liquidation proceedings.

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10. When Must the Debtor Apply for Insolvency and Liquidation?

Article 28 originally referred to a period of 50 working days.

However, Cabinet Resolution No. 47 of 2021 modified the applicable rules.

Under the amended framework, the relevant period is 65 consecutive working days.

The Resolution also fixed the relevant debt amount for the debtor’s statutory filing obligation at AED 250,000.

Accordingly, where the applicable statutory conditions are met and the debtor has ceased paying qualifying due debts for more than 65 consecutive working days because of inability to pay, the debtor must consider the obligation to apply for the opening of insolvency and liquidation proceedings.

This should be distinguished from the earlier 40-working-day threshold relevant to continued eligibility for the financial settlement procedure.

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11. When Can a Creditor Seek the Debtor’s Insolvency?

Creditors also have the right to commence insolvency proceedings, but the statutory threshold is relatively high.

Following Cabinet Resolution No. 47 of 2021, a creditor or group of creditors must hold qualifying debts totalling at least:

AED 1,000,000.

The creditor must first formally demand payment.

If the debtor then fails to pay for 65 consecutive working days from notification of the demand, the creditor may apply to open insolvency and liquidation proceedings, subject to compliance with the other statutory requirements.

The creditor must produce evidence of the debt, maturity and any related security together with evidence of the formal demand.

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12. Appointment of the Trustee

If the court opens insolvency and liquidation proceedings, it appoints a trustee.

The trustee performs a role substantially different from that of the expert during the financial settlement procedure.

The trustee takes responsibility for the insolvency process, including:

• identifying creditors;
• receiving and verifying claims;
• investigating the debtor’s financial position;
• identifying assets;
• obtaining information concerning assets held by third parties;
• pursuing property belonging to the debtor;
• supervising or conducting liquidation; and
• distributing proceeds according to statutory priorities.

The decision opening the procedure is also published, and creditors are invited to submit their claims within the applicable statutory period.

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13. A Final Opportunity for Amicable Settlement

Even after the insolvency process begins, liquidation is not necessarily immediate.

Before liquidation starts, Article 35 permits the court, upon the trustee’s recommendation and the debtor’s request, to grant the debtor a period of up to three months, renewable for a similar period, in an attempt to reach an amicable settlement with creditors.

The court should only do so where this does not prejudice creditors.

This mechanism can be extremely useful where the debtor may, for example:

• be expecting proceeds from the sale of an asset;
• be able to obtain family financing;
• be negotiating a substantial reduction with lenders; or
• have a realistic means of producing an immediate global settlement.

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14. Effect of Insolvency and Liquidation on Pending Lawsuits and Execution

The legal consequences become considerably stronger once insolvency and liquidation proceedings are opened.

Article 51 provides that, during insolvency and liquidation:

• lawsuits against the debtor may not ordinarily be commenced or continued;
• legal or judicial proceedings against the debtor are restricted; and
• all judicial execution proceedings against the debtor’s assets are suspended.

This creates a collective insolvency process.

Instead of one aggressive creditor obtaining payment first through an individual execution file, creditors must generally participate in the insolvency proceedings and receive distributions according to statutory priority.

Again, secured and preferential creditors may seek permission from the court to enforce qualifying security.

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15. What Happens to an Existing Execution Case?

Consider a debtor who already has several execution files against him.

Before insolvency proceedings, each creditor may independently attempt execution against:

• bank accounts;
• salary within the limits permitted by law;
• vehicles;
• shares;
• real estate;
• receivables; and
• other executable property.

Once the insolvency court opens insolvency and liquidation proceedings, Article 51 changes that position.

Execution against the debtor’s assets is stayed.

Practically, the opening order should be filed immediately in every relevant execution proceeding and appropriate suspension orders obtained or recorded.

Individual execution should then give way to collective administration of the insolvency estate.

However, practitioners should distinguish between:

1. suspension of an execution proceeding;
2. cancellation of a previous attachment;
3. enforcement of a mortgage or privileged security; and
4. personal precautionary measures such as a travel ban.

The Insolvency Law expressly addresses judicial execution against the debtor’s assets. It should therefore not automatically be assumed that every personal measure recorded in a separate execution proceeding disappears without the appropriate judicial order.

Where a travel ban, coercive order or other personal enforcement measure exists, a specific application should be made to the competent court addressing that measure.

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16. Effect on the Debtor’s Property

Once insolvency and liquidation proceedings are opened, the debtor loses substantial freedom to deal with his assets.

Among the consequences provided by the law are:

• maturity of the debtor’s debts;
• restrictions on transactions involving the debtor’s property;
• restrictions on acknowledging debts;
• removal of the debtor’s unrestricted ability to manage or dispose of assets;
• prohibition on payments exceeding AED 5,000 without the trustee’s consent, subject to statutory exceptions; and
• restrictions on granting new personal guarantees or security.

Assets acquired by the debtor during the insolvency procedure may also have to be disclosed and may become part of the insolvency estate.

The trustee may continue certain activities temporarily where doing so will achieve a better realisation for creditors.

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17. Assets Protected From Liquidation

The Insolvency Law does not leave the debtor without the means of subsistence.

Article 39 excludes certain property from liquidation, including:

• the debtor’s pension or social assistance; and
• amounts or assets determined by the court as necessary for the reasonable living requirements of the debtor and his dependants.

The court may also permit the debtor to retain assets necessary for continuing his employment, profession or trade where appropriate.

Can the debtor’s home be sold?

Potentially, yes.

The debtor’s residence is not automatically immune in every insolvency case.

However, the trustee must apply to the court, which is required to consider factors including:

• the interests of creditors;
• whether the debtor has another suitable residence;
• the number of dependants living with the debtor;
• whether the proceeds would permit acquisition of alternative suitable accommodation;
• humanitarian and social considerations; and
• legal restrictions affecting disposal of the property.

The court therefore undertakes a balancing exercise rather than treating the family home as an ordinary asset without further consideration.

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18. Interest After Insolvency Proceedings Begin

Another significant consequence arises under Article 52.

Opening insolvency and liquidation proceedings suspends the accrual of legal and contractual interest against the debtor, including compensation attributable to delay in payment, in accordance with the statutory provisions.

This can materially affect the ultimate calculation of creditor claims, particularly where the debtor has substantial bank or financing obligations.

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19. Distribution Among Creditors

Liquidation does not mean that whichever creditor commenced execution first necessarily receives everything.

The trustee distributes proceeds under the statutory priority regime.

Broadly, secured creditors are entitled to priority against the proceeds of their security to the extent of that security.

The law then recognises categories of preferential claims, including, in their statutory order:

• judicial fees and expenses and the remuneration and expenses of the expert and trustee;
• expenses incurred for the common benefit of creditors in preserving and liquidating the estate;
• qualifying employee wages and end-of-service entitlements;
• maintenance obligations ordered by a competent court; and
• amounts payable to government authorities.

Ordinary unsecured creditors participate after the applicable priority claims.

Where the proceeds of collateral are insufficient to satisfy a secured creditor completely, the unpaid balance generally participates as an unsecured debt.

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20. Insolvency Does Not Automatically Erase the Debt

This is perhaps the most important misconception about the UAE Personal Insolvency Law.

A declaration of insolvency is not automatically equivalent to a discharge of all remaining debts.

After liquidation and final distribution, the court closes the proceedings.

Where a creditor’s admitted debt has not been paid in full, Article 46 permits that creditor, following closure of the insolvency and liquidation proceedings, to pursue the debtor’s property for the unpaid balance.

The accepted debt can serve as the basis for that subsequent enforcement.

Therefore, insolvency should not be presented as a mechanism enabling a debtor simply to surrender existing assets and walk away debt-free.

Its principal purpose is to regulate financial distress, organise creditor claims, protect legitimate priorities and conduct liquidation in an orderly judicial process.

Remaining debt may subsequently be resolved through payment, settlement, waiver or the other mechanisms provided by law.

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21. Consequences of a Declaration of Insolvency

Where the debtor’s assets are insufficient and the court formally declares insolvency following liquidation, further consequences may arise.

These include restrictions on:

• obtaining new loans or financing for the statutory period;
• entering certain new obligations without permission; and
• the recording of the debtor in the relevant insolvency register.

The law nevertheless provides mechanisms for rehabilitation.

Rights may be restored after the relevant statutory periods, and earlier rehabilitation may be possible depending on the percentage of debt repaid.

Full payment of accepted debts permits rehabilitation without waiting for the ordinary period.

Settlement with all creditors or release by creditors from outstanding balances may also support rehabilitation under the statutory provisions.

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22. Practical Examples

Example 1: A Salaried Debtor Who Can Still Restructure

An employee earns AED 35,000 per month but has accumulated several bank loans with monthly instalments of AED 45,000.

He has recently begun missing payments but has stable employment and can realistically pay AED 20,000 per month toward his debts.

Early application for settlement of financial obligations may be appropriate.

A plan could potentially restructure repayment over a longer period while stopping individual enforcement once the court opens the settlement procedure.

Waiting until prolonged default has occurred may make that procedure unavailable.

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Example 2: Insolvency After Prolonged Default

A debtor owes several banks AED 2 million, has lost his principal source of income and has been unable to pay any qualifying debt for more than 65 working days.

He owns assets but their total value is substantially below his debts.

The circumstances may justify or require consideration of insolvency and liquidation rather than financial settlement.

Once insolvency proceedings are opened, existing execution against the debtor’s assets will generally be stayed and creditors will instead participate in the collective insolvency procedure.

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Example 3: Creditor Seeking Insolvency

A creditor is owed AED 1.3 million under an enforceable obligation.

The creditor serves the debtor with the required demand for payment.

The debtor remains unable to pay for more than 65 consecutive working days.

Subject to the other statutory requirements, the creditor may seek commencement of insolvency and liquidation proceedings.

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Example 4: Mortgage Creditor

A debtor enters personal insolvency proceedings but owns mortgaged real estate.

The mortgage creditor does not necessarily lose its security because insolvency has commenced.

The creditor may seek the court’s permission to enforce its security, and its secured position will be recognised in accordance with the law.

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23. Enforcement Position at Each Stage

Stage	Position of Ordinary Enforcement
Before any insolvency application	Ordinary lawsuits and execution continue under the normal rules
Application filed but not yet accepted	No general automatic statutory stay merely because an application has been submitted; the court may take protective measures
Court opens financial settlement proceedings	Creditor enforcement against the debtor’s assets is stayed, subject principally to rights of secured/preferential creditors with court permission
Settlement plan under implementation	Stay generally continues while the settlement procedure remains effective and the debtor complies with the plan
Settlement terminated or invalidated	Protection may cease and insolvency/liquidation may follow depending on the statutory conditions
Insolvency and liquidation opened	Lawsuits and judicial execution against the debtor are restricted and all judicial execution against the debtor’s assets is suspended, subject to statutory exceptions
Liquidation completed and proceedings closed	Creditors whose admitted debts remain unpaid may, subject to the law, resume enforcement for outstanding balances

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24. Choosing the Correct Procedure

The correct course depends less on the total amount of debt than on the debtor’s overall financial reality.

Settlement of financial obligations is generally more suitable where:

• financial distress is identified early;
• meaningful income continues to exist;
• the debtor can realistically fund a repayment plan;
• creditors may receive more through restructuring than liquidation; and
• the debtor has made full and transparent disclosure.

Insolvency and liquidation becomes more relevant where:

• default has persisted;
• debts materially exceed available assets and realistic income;
• restructuring is no longer feasible;
• creditor enforcement has become widespread; or
• the statutory conditions for compulsory insolvency have arisen.

For creditors, commencing or responding to personal insolvency proceedings requires equal care. The creditor must preserve proof of debt, register claims on time, identify available security and ensure that any preferential or secured status is properly asserted.

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Conclusion

Federal Decree-Law No. 19 of 2019 established a sophisticated distinction between financial difficulty that can still be rehabilitated and insolvency that requires liquidation.

The settlement procedure gives an honest debtor an opportunity to reorganise debts under judicial supervision while temporarily protecting assets from individual enforcement.

Where restructuring is no longer possible, insolvency and liquidation create a collective process in which the trustee identifies and sells available assets and distributes the proceeds according to statutory priorities.

From a practical perspective, timing is often decisive.

A debtor who waits too long may lose the opportunity to use the settlement procedure. Conversely, a creditor who ignores an insolvency opening order may continue execution steps that are inconsistent with the statutory stay.

Most importantly, personal insolvency under UAE law should not be confused with an automatic debt write-off. The law regulates debt collection and liquidation, but outstanding admitted liabilities may survive closure of the insolvency proceedings unless they are paid, compromised or released in accordance with the law.

Because insolvency cases frequently interact with existing court judgments, execution files, attachments, mortgages, bank facilities, guarantees and travel restrictions, each matter should be assessed on its particular facts before an application is made.

Principal Legal Sources

• Federal Decree-Law No. 19 of 2019 concerning Insolvency.
• Cabinet Resolution No. 47 of 2021 concerning the debt amounts and periods applicable under Articles 28 and 29 of the Insolvency Law.
• Federal Decree-Law No. 42 of 2022 promulgating the UAE Civil Procedure Code, insofar as general execution procedures are concerned.
• Federal Decree-Law No. 51 of 2023 concerning Financial Restructuring and Bankruptcy, where classification between personal insolvency and the business bankruptcy regime requires consideration.

This article provides general legal information and does not constitute legal advice. Personal insolvency cases should be assessed individually, particularly where existing judgments, execution proceedings, secured debts or assets in several jurisdictions are involved.

Frequently Asked Questions

What is the main difference between settlement and insolvency liquidation?

Settlement of financial obligations is a rehabilitative procedure intended to reorganise debts through a court-supervised plan, while insolvency and liquidation is a collective process in which a trustee manages and liquidates available assets for creditors.

Does filing a settlement application automatically stop execution?

No. The article distinguishes between filing an application and the court accepting the application and opening the settlement procedure. The statutory stay arises from the court’s opening decision, although interim protective measures may be available.

Can secured creditors still enforce security?

Yes. Secured creditors are treated differently and may apply to the court for permission to enforce against qualifying security once the secured debt has become due.

Does personal insolvency automatically cancel all debts?

No. Personal insolvency under UAE law should not be confused with an automatic debt write-off. Unpaid admitted liabilities may survive closure of insolvency proceedings unless paid, compromised or released in accordance with the law.

Can an existing execution case continue after insolvency is opened?

Once insolvency and liquidation proceedings are opened, judicial execution against the debtor’s assets is generally suspended, subject to statutory exceptions. The opening order should be filed in each relevant execution proceeding so that appropriate suspension orders are obtained or recorded.