Bankcruptcy is a word that immediately brings a negative vision to our minds. It happens everywhere in the world and is not partial to a certain country, race or nationality. In Malaysia, the total number of bankruptcy cases nationwide has risen from 70,009 in 1999 to 106,000 in 2003 and today the figure stands at 160,000.
Bankruptcy law exists to help both the bankrupt and the creditor. It will stop the creditor from harassing the debtor and it safeguards the rights of both parties.
What is Bankruptcy?
Simply said, it is a legal process initiated by an individual or a company due to the inability to settle his debts. Bankruptcy happens when a person is unable to settle his debts (known as a debtor) owed to the people or party who loan him the money. The people or party who gave out the loan is known as the creditor. Creditors can be a banking institution or even a company giving out hire-purchase schemes.
To protect himself against possible harassment or from any other legal actions by the creditors, the debtor may file for personal bankruptcy.
On the other hand, the creditors may take action first against the debtor by serving him a bankruptcy notice to recover the money owed by the debtor.
Before filing a bankruptcy petition either by the debtor or creditor, the following criteria have to be met:
- The sum involved is RM30,000 or more
- The sum of money must be ascertainable (liquidated sum)
- There is a default period of six months for the act of bankruptcy to have occurred
- Before the petition date, the debtor must have reside in Malaysia for at least one year
How Does a Person Become a Bankrupt?
Generally, a person falls into bankruptcy due to several reasons. Those mentioned below are not uncommon in Malaysia.
- Taking Up a Loan
There are various loans available to cater for different needs and wants. These loans can be personal loans, study or education loans, housing loans and even buying a car under a hire-purchase scheme.
- Acting As a Guarantor
A guarantor can be a social guarantor or a corporate guarantor. A person who stood as a guarantor for loans like education, house, car hire purchase, scholarship and also third-party loans is known as a social guarantor.
A corporate guarantor is a person who stood for loans relating to business loans, for example in a business partnership.
A guarantor is also liable to face bankruptcy when summoned by the creditors. The creditors will go after the borrower first and if that fails to recover the amount owed, they will go after the guarantor to settle the debts.
- Defaulting On Credit Card Payment
The inability to pay up the amount owed in the credit card account is also one reason to go bankrupt.
In May 2008, it was reported in one of the national newspaper that last year in 2007, there were 1,873 bankruptcy cases due to credit card usage. Although the figure is still low, there is a trend showing the numbers has been rising from 1,397 in 2004, 1,479 in 2005 and 1,656 cases in 2006.
What Does It Mean To Be a Bankrupt?
When a person has declared bankruptcy, the court will appoint the Director General of Insolvency (DGI) to administer over the bankrupt’s assets in order to settle the outstanding debts. The DGI will initiate an investigation to find any assets or properties that belong to the bankrupt and to sell or dispose them to repay the creditors.
For a Malaysian, being a bankrupt is tough for the individual. Among other things, the individual faces the following hurdles or restrictions:
- He has to give up all his belongings and assets.
- He is not allowed to open a bank account without the approval of the DGI.
- He is not allowed to travel outside from the country without first getting approval from the DGI or the court. The DGI will hold his passport.
- He is not allowed to do any business nor become a company director nor even be part of the company’s management.
- He has to sacrifice a certain percentage of his monthly income to the DGI to repay his debts.
How To Avoid From Becoming a Bankrupt?
A straightforward answer to avoid becoming one of the statistics is simply to take responsibility for one’s financial affair or well-being. It means not to take huge loans to purchase something if you do not have the ability to pay back the monthly installments. It also means being in-control of one’s spending habits and not to over-commit on too many loans including hire purchase.
The same goes for the social guarantor who does not have the resources and means to settle the debts on the borrower’s behalf. So think rationally (not emotionally) and act carefully before signing on the dotted lines.
For those intending to open a business, do your research work properly and thoroughly. Ensure that you have enough financial resources and stamina for the start-up and for the first few years. Most businesses do not make money initially and may take a few years to show a profit. Imagine the worst scenario happening and whether you can survive financially. Having just the start-up capital is not enough, you need to have back-up plans and support available.
There are cases however when ill-fate strikes and a person becomes bankrupt due to unforeseen circumstances such as a serious illness, a debilitating accident or being cheated in a business partnership.
Then there are cases where a person willingly files for bankruptcy for the sole purpose of wiping off all his unsecured debts. These ‘non-genuine bankrupts’ take advantage of the legal process to ‘write off’ their bad debts and the amount can run up into the millions but is still living a luxurious lifestyle.
How a Person is Discharge From Bankruptcy
A bankrupt will be discharged from bankruptcy when
- He has settled his debts in full to the creditors.
- If the creditors accept the repayment scheme offered by the bankrupt, then the bankrupt can make an application to the court to get an order of discharge.
- Certificate of discharge:
The DGI can also use his discretionary power to discharge the bankrupt by issuing a certificate of discharge. This is possible after a period of five years from the date of bankruptcy even though there still remain unsettled debts. However, the DGI will have certain criteria to evaluate before making his judgment such as the bankrupt’s conduct or behavior, the age and the financial status.
- Order of discharge:
The bankrupt can make an application to the court to request for an order of discharge. The court will refer to the DGI’s report before any decision is made to grant a discharge or not or to grant a discharge with conditions attached.
When face with debts, a person should seriously consider before choosing to file for bankruptcy. There may be other better options to choose from. Besides the restrictions mentioned above, the bankrupt may face other personal challenges. His future plans and personal development may be negatively affected due to his “bankrupt reputation”. Society naturally will see him in a different light and treat him differently. In addition, it may affect his ability or opportunity to apply for future loans in order to advance himself in his career or business.
Therefore, consider yourself to have been forewarned on this subject matter after reading this article.
For more detail information and to gain a deeper knowledge on the subject of bankruptcy, the following websites can be referred to:
This article is shared by Jacquelyn Wong, a regular contributor for KCLau’s Money Tips.