What you Should Know About Bankruptcy
Facing money problems can be challenging, especially if it might end up in you being bankrupt. Read on to understand bankruptcy and how to navigate it if you are encountering financial difficulties.
Understanding Bankruptcy
Bankruptcy is a legal status that individuals enter when they owe a substantial amount of money they cannot repay. This status is typically initiated by a court order known as an Adjudication Order from the High Court.
Several criteria must be met to declare someone bankrupt:
In 2020, the Insolvency Act 1967 changed, raising the bankruptcy threshold from RM50,000 to RM100,000. This marked the second increase in the bankruptcy threshold in just a few years, following the adjustment from RM30,000 to RM50,000 in 2017.
What happens if you are declared bankrupt?
Being declared bankrupt results in several restrictions being placed on an individual. Below are the consequences that occur:
1. Assignment to the Director General of Insolvency (DGI)
Upon bankruptcy declaration, an individual will be allocated to the Director General of Insolvency (DGI). The DGI oversees the management of all the individual's assets to settle outstanding debts.
2. Restriction on Travel
A bankrupt individual must obtain written authorization from the DGI or a court-issued travel permit to leave the country.
3. Restricted Credit Access
Bank accounts of a bankrupt will be frozen, preventing any withdrawal. However, a person who has been declared a bankrupt can open a new bank account or use their existing one with permission from the DGI. Credit card usage is also capped at RM1,000, and obtaining credit exceeding RM1,000 from any creditor is prohibited.
4. Assets Managed by DGI
When someone is declared bankrupt, the DGI takes control of all their assets. This includes their house and cars, which the DGI may sell to pay off the person's outstanding debts.
5. Employment Restricted
A person declared bankrupt cannot work in certain professions with restrictions imposed by professional associations or licensing authorities. For example, a bankrupt cannot be employed as an accountant, lawyer, doctor, or quantity surveyor.
Additionally, once declared bankrupt, an individual is not allowed to own a business or be involved in its ownership and may not act as a company director.
Did you know that an individual can be declared bankrupt without their awareness? As per legal requirements, creditors must personally serve all legal documents to the debtor. They typically refer to the address on record for this purpose.
However, it's the debtor's responsibility to keep their information up to date, including their address. If a creditor cannot serve legal documents personally, the court may authorize substituted service, often announced in newspapers.
Therefore, an individual may be declared bankrupt without their knowledge due to legal documents being sent to an old address, the individual not attending court on the day that the bankruptcy case was mentioned, the individual refusing to accept or open any legal documents served to their address, or the individual not reading the local newspaper if the service is made through substituted service.
Bankruptcy Declaration
Bankruptcy can occur through two primary methods which are:
Creditor's Petition: A creditor, such as a bank, initiates legal action against an individual for debts exceeding RM100,000, the minimum bankruptcy threshold.
Debtor's Petition: Individuals voluntarily declare bankruptcy to protect themselves from overwhelming debt.
Personal loans were among the main factors leading individuals to be declared bankrupt. Malaysians tend to solve financial problems by taking out personal loans to get quick access to cash. Other common reasons include hire purchases, housing, and business loans.
Tips if you are facing financial challenges
Encountering the prospect of bankruptcy can be daunting, and it often requires significant effort to regain financial stability and prevent bankruptcy. Whether you're currently experiencing financial difficulties or are concerned about potential financial strain, the following suggestions can assist you in taking control of your financial situation:
1. Get Help from Free Professional Services
If you need help managing your debts and meeting loan repayments, consider reaching out to organizations like the Agensi Kaunseling dan Pengurusan Kredit (AKPK). Established by Bank Negara Malaysia, AKPK offers complimentary financial counseling, debt management programs, and educational resources to individuals in need.
2. Assess Your Financial Commitments and Assets
In addition to reducing your expenses, explore options such as utilizing your savings or liquidating investments to repay debts and prevent bankruptcy. Selling assets such as properties or vehicles may also be necessary to settle debts and prevent creditors from seizing them. It's important to ensure that your monthly debt repayments remain within 40% of your net income before taking on any new financial obligations.
3. Negotiate with Creditors
If you face challenges in meeting loan repayments, initiate discussions with your creditors to renegotiate loan terms. Many financial institutions are willing to restructure loans to prevent defaults and minimize non-performing loans. Collaborate with your bank to establish a feasible repayment plan that satisfies both parties. Consider seeking mediation through AKPK's debt management program if negotiations become difficult.
4. Consider Alternative Solutions to Avoid Bankruptcy
Explore alternatives, such as voluntary arrangements to settle debts outside bankruptcy proceedings. Under the amended Insolvency Act 1967, individuals at risk of bankruptcy can negotiate debt restructuring through voluntary arrangements. Ensure compliance with agreed-upon contribution amounts and regularly submit income and expense statements throughout the arrangement period.
