For many expats, the opportunity to move abroad will mean earning more money and the chance to save a large portion of it to enjoy in years to come or to make an investment.
However, there are a number of issues that expats need to deal with and those who have debts before leaving need to take some simple steps to ensure they avoid falling into trouble.The most obvious solution to reducing debts while living abroad for a homeowner is to rent out their home so they have a rental income that will help pay the mortgage and pay for any maintenance issues on the property while they are living away.
It is also a straightforward process, which is helped by engaging the services of a reputable letting agent who will run the property effectively while the owner is abroad, such as finding tenants and ensuring they pay their rent on time.
This also means the expat has a property to return to which will hopefully have also appreciated in value so their investment has been a good one. They must however plan their return carefully and ensure the tenant receives plenty of notice to vacate the property.
This element of planning finances for expats is always a crucial step, particularly since the expat will receive notification, generally at least three months and up to six months, that their posting will be overseas.
This will provide time to organise and plan and while it’s always a good idea to pay off debts such as credit cards and overdrafts while at home, this is not always possible and must be catered for.
Expats should also appreciate that it’s one less headache to deal with when living abroad and when currency fluctuations hit their debt at home will grow in value.
This means that their mortgage will become more expensive but when their home currency strengthens, it becomes cheaper.
It’s also important to tell lenders that you are leaving the country and make sure they have contact details so they appreciate what your personal circumstances are; this also applies to the mortgage lender since there may be rules about putting tenants into the property without notifying them first.
Another issue facing expats is the question of taxation. One of the main reasons for working overseas is to boost their income and benefit financially but the expat needs to be aware of their tax status and appreciate that having financial commitments in a new country may impact upon that.
It’s always a good idea to have specialist financial advice because some people may end up paying tax in two countries when they do not have to do so.
Saving money while working overseas
Speaking with a financial adviser will also highlight that it is more effective to pay down debt than it is to save money while working overseas since debt is more expensive to maintain because interest rates are relatively low on savings accounts.
Also, when working and investing overseas, there may be a tax liability on any investment that is made which may make it less lucrative. The money might therefore be more effective on repaying debts.
As we highlighted earlier in this article, one of the main reasons for moving abroad as an expat is to earn more money, so there needs to be an honest calculation when deciding on making the move to ensure that the expat has enough money to cover their new outgoings as well as their current ones.
Indeed, the affordability of moving abroad should be the main focus of the potential expat’s attention, because leaving debts behind and then returning in a few years to find the financial situation is worse means that the posting will have been a costly exercise.
Expats need to work out what their outgoings are every month, which not only means calculating them at their current rate but taking into account what their new expenditure is likely to be. This means having to account for paying rent on a home in their new country and also being able to cover their mortgage should their home not have any tenants paying rent – this is known as a void period and can last a month or two between tenancies.
Essentially, paying back debt while living overseas is not a difficult task if the expat is going to generate enough disposable income to enjoy their new lifestyle while also trying to pay off debts in their home country.
Costs to think about
There are also other costs that expats need to appreciate that they don’t currently spend money on, such as travelling to and from their home and their new country which will be expensive. The cost of living might be more than the expat anticipates.
There’s also the question of being able to pay debts while living abroad, so it’s a good idea to maintain a current bank account which will help with managing debt. This is also a good idea if payments are made monthly from a specific account then the expat can simply place money in it for these bills to be met. Servicing debt is a crucial part of avoiding falling into trouble with lenders.
Another positive reason for maintaining a current bank account when moving abroad is that it is not always the case that lenders must be notified that you have moved overseas but it’s always worthwhile checking. Some lenders may insist that the debt is cleared before the borrower leaves the country, which may bring further financial implications.
Also, should the lender discover the expat has left the country they may come to the conclusion that they have fled to avoid repaying their debt. This will cause a variety of problems but the lender will probably start a legal action against the expat’s last known address.
If the expat owns their property and that’s the address the lender in the UK has, they can make a charge against it in the expat’s absence.
It is possible to set up a new bank account in the new country but it’s becoming more difficult for expats to find foreign banks and international bank accounts that meet their needs – if those financial institutions will take an expat on as a client.
The other issue when paying debts regularly every month is that the currency fluctuations will affect how much is being paid into the account and there may be transfer costs as well as which may have an impact on how much disposable income the expat has.
Essentially, the easiest thing for an expat to do is to dedicate a substantial portion of their disposable income to paying down debt in their home country and sacrifice part of their newfound lifestyle so they can return home debt free.
However, the most effective thing an expat can do is to clear their debts before moving. The months of preparation for the move are also a great opportunity to generate extra cash which could be used to pay down debts.
Many people will look to sell items from their home such as electrical goods and furniture. The money generated can be spent on debt.
It’s also possible to cash in shares and saving schemes to generate money for repaying debt. Many expats, particularly those who are heading abroad for several years, will be selling their cars and motorbikes and other ‘big ticket items’.
While it may be tempting to keep hold of the money made from the sales, it makes much more financial sense to clear debts and leave the country knowing that their debts are under control or have been repaid.
A lot of this selling of personal items will depend on how long the expat has to prepare for their move overseas, but making a little bit of effort could be a good long-term tactic.
Moving abroad to avoid debts
We should also discuss the issue of expats who are moving abroad to avoid their debts, who believe that because they’re in another country they will be free of the stress and hassle. This would be a mistake.
Firstly, just because the expat has moved overseas it does not mean they are out of reach; the lender can still make contact and even bring legal action to make a claim against your assets in your home country.
There’s also a possibility the lender will sell the debt to another lender in the country the expat has moved to, which really is not an easy situation to endure.
The other issue to bear in mind for expats planning to return is that their credit record will be tainted in their home country and this will remain on file for several years to come; a bad credit record will severely restrict the expat’s ability to obtain credit such as a mortgage.
Also, not every overseas posting is the dream assignment that many expats are expecting since many will find there are problems and issues they had not planned for.
Some expats may also become homesick and miss their family and friends and decide to cut short their overseas posting and return home. The only problem is they may not have maintained their debt repayments, which means they are returning to a tight financial situation and hassle from their lenders.
Essentially, running away from a debt doesn’t really resolve it, which means having to deal with it before moving or using the extra income to pay down debt so that when the expat returns home it is under positive and financially healthy circumstances.
Struggling with debts
There will undoubtedly be a large number of expats who are struggling with their debts currently and believe that this may restrict their opportunities for moving abroad, but it does not have to be this way; preparing carefully and using their boost in income to pay debt will be a good long-term strategy.
For many, this strategy will form part of a debt management plan, which is an informal repayment agreement between the expat and their creditors. It may also be possible to reduce repayments while they are living overseas or even to repay more so the debt is repaid earlier.
There’s nothing to stop an expat who moves to another country from coming to an agreement with their lenders which means having to negotiate and come to an acceptable arrangement.
This is obviously a good idea for an expat to repay debts while living overseas, but they should conduct their negotiations in their home country rather than facing the cost of expensive international phone calls, particularly when they are in different time zones.
Outstanding tax bills
For those expats who move abroad and have an outstanding tax bill then they need to be aware that many tax authorities have arrangements with other countries for the tax to be collected by the new country and then repaid to the expat’s home country. Again, this is a debt that is probably worth paying before the expat leaves but they can come to an arrangement for repayments over a set period, although these must be maintained.
Despite the help and extra income to repay debts, some expats, particularly Brits, may find that they want to file for bankruptcy while living overseas. This is a possibility if their debts are too great.
The laws are different for expats from Scotland but for those from England and Wales they can undertake debt management from their new country or opt for bankruptcy or even an Individual Voluntary Arrangement (IVA).
The options available for clearing debts while living overseas depend largely on how much money is owed; if it’s less than £5,000 then bankruptcy may be an expensive route to follow and for those who owe more than £10,000 then bankruptcy makes sense, as does an IVA.
However, specialist debt advice for expats will be necessary but it is possible to undertake these options as well as a debt management plan to repay money using a third party to help negotiate with lenders, but it takes time and effort.
So, if you want to know how to reduce debts while living abroad, most of the solutions are similar to those when living in your home country – communication is key with lenders and making an effort to pay off debts before leaving will be a huge help.
For those who can’t do that then repaying debts from abroad is a possibility, but the lender will probably need to be told you have left and if the debts are still problematic then the options for IVAs, bankruptcy and informal negotiations are also opportunities for expats to deal with their debts.