Generally, the idea of getting bankrupt never crosses our minds, but being declared bankrupt can happen to anyone with some form of debt.
A sudden loss of employment or the only source of income will put you in financial distress, and if you are unable to make debt repayment, you will face legal action.
Here’s what you need to know about the bankruptcy processes in Malaysia.
1. Bankruptcy defined
The bankruptcy law in Malaysia is made up of Bankruptcy Act 1967 and the Bankruptcy (Amendment) Act 2020.
Bankrupt is the legal status of a person or organisation unable to pay the debts owed to creditors. The court of law makes such a declaration.
If you are unable to pay your debt, you are insolvent but not bankrupt yet. It’s best you negotiate a deal with your creditors while insolvent. You may propose an instalment plan to settle the debt.
Only the court of law can declare you bankrupt in a bankruptcy proceeding.
A bankruptcy proceeding can only take place if the owed amount is at least RM100,000 or if you have committed an act of bankruptcy. This amount was raised from the previous RM50,000 in the Bankruptcy (Amendment) Act 2017.
2. What happens if you are declared bankrupt?
Your spending power will be severely restricted, your financial position controlled, assets handed over, and there will be limitations of rights and holding of certain positions such as:
a) Your assets
You need to declare the assets owned by you. These assets will be under the strict supervision of the director-general of insolvency (DGI). The DGI will sell them and the income will be distributed among the creditors.
However, certain assets that cannot be sold include:
- Any property you hold on trust.
- The instruments of your trade, garments, bedding, and other necessities you or your family need, with the total value not exceeding RM5,000.
Part of your monthly earnings can be used to pay your debt.
As for housing loans, the bank (a secured creditor) can foreclose the house to be auctioned off without taking the bankruptcy proceeding if you default on payments.
b) Your rights
- You are not allowed to travel overseas with a surrendered passport unless with specific approval from DGI.
- You are not allowed to hold a management position in any organisation.
- You have limited legal action (except for personal injury) subject to approval from DGI.
- You can only maintain one bank account.
- You are only allowed one credit card with a limit of RM1,000.
- You will need to submit an income and expenditure report every six months.
3. The bankruptcy process
A bankruptcy action can be brought against you if you have carried out an act of bankruptcy, with the most common one being failure to reply to a judgment debt or bankruptcy notice.
When you fail to pay your debt, the creditor will begin legal action and obtain a judgment sum.
If you fail to respond to the judgment, the creditor will start a bankruptcy action against you by issuing a bankruptcy notice.
Failure to comply with the bankruptcy notice would be deemed an act of bankruptcy.
Once you are declared bankrupt, you need to declare all your assets, which will then be distributed among your creditors. Your creditors need to file proof of debts to the court for a claim of the assets.
A bankruptcy proceeding can also be brought against a minor (those below 18 years old) with no maximum age limit.
4. Can you unknowingly be bankrupt?
You may not realise that you are bankrupt. How is this possible?
It can happen if you move a lot and fail to inform your creditors. A bankruptcy notice must be served by hand personally, and if you cannot be found, by publication in the newspaper (substituted service) or sent to the last known address.
If you are a guarantor for somebody or want to find out if you are bankrupt or not, you can use a service like MyEG to verify your status.
Each bankruptcy search will cost RM12 per identity. In the meantime, you can also request your credit score report from Malaysia’s Credit Bureau or CCRIS.
5. Becoming “unbankrupt”
You either pay-off your debts or wait three years for an automatic discharge from bankruptcy.
Once discharged, you will also be released from your unpaid balance debt.
However, this excludes debts owed to the government or anything obtained through illegal activity.
There are two different ways to become “unbankrupt”:
- Annulment: Your bankruptcy records are expunged after paying off your debts in full.
- Discharged: You are no longer bankrupt after negotiations with creditors on repayments. However, your records remain in CCRIS, CTOS, and other credit rating agencies.
You can immediately apply for a passport and bank account again.
6. Avoiding bankruptcy
The best way is to start and commit to a household budget that allows you to live within your means.
On top of that, remember to incorporate good personal finance principles such as:
- Expenses < Income
- Delayed gratification
- Invest, invest, invest
- Needs vs wants
- Seek the services of an advisor
Below are other tips to avoid going bankrupt:
- Do not be a guarantor in a loan agreement to anyone, including your family members, if you cannot afford the monthly instalment in case the borrower defaults.
- Do not take on big-ticket item purchases with a bank loan if you cannot afford it. Don’t succumb to peer pressure or try to keep up with the Joneses.
- If you currently hold a debt where repayment is doubtful, please seek a loan restructuring arrangement with the bank. Alternatively, you may seek help from Agensi Kaunseling dan Pengurusan Kredit (AKPK).
This article first appeared in MyPF. Follow MyPF to simplify and grow your personal finances on Facebook and Instagram.