Understanding Bankruptcy in Malaysia

What you need to know about of bankruptcy processes in Malaysia. Being made a bankrupt is a major hassle and interruption to your life. Educate yourself about it and you will appreciate the importance being on top of your finances at all times.

Generally, the incident of bankruptcy happening to us never crosses our mind. If questioned what bankruptcy means, few things came to mind.  A bankrupt is a loser in managing finances. A person who is homeless and someone who’s never ashamed to borrow money.

Being taken for a bankruptcy action can happen to anyone of us if you have debts. A sudden loss of employment or loss of the only source of income will put you in financial distress.  As you’re unable to make debt repayment, you will face legal action. A financially literate person will make sure all his/her debts serviced and repaid. They know the inconveniences and hassles of being bankrupt.

This article spells out the bankruptcy processes in Malaysia.

1. Bankruptcy Defined

Bankruptcy Act 1967 and alongside the Bankruptcy (Amendment) Act 2017 made up the bankruptcy law in Malaysia. A bankrupt is the legal status of a person or organization who is unable to pay the debts owed to creditors.  The court of law makes such declaration.

If you are unable to pay your debt, you are insolvent but not a 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 a bankrupt in a bankruptcy proceeding. A bankruptcy proceeding can only be taken if the amount owing is at least RM50,000 or if you have committed an act of bankruptcy.

2. What if You are Declared Bankrupt?

Your spending power will be severely restricted. Your financial position is controlled, assets handed over and limitations of rights and holding of certain positions:

a) Your assets

You need to declare assets own 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 distributed among the creditors. However, certain assets cannot be sold i.e.

• Any property you hold on trust.
• The instruments of your trade, garments, bedding, and other necessities you or your family need where the total value not exceeding RM5,000.

Part of your monthly earnings can be used to pay your debt.

For housing loan, if you default on payment, the bank (a secured creditor) can foreclose the house to be auction off without taking the bankruptcy proceeding.

b) Your rights

• Not allowed to travel overseas with passport surrendered unless with specific approval from DGI.
• Not allowed to hold a management position in any organization.
• Limited legal action (except for personal injury) subject to approval from DGI.
• Can only maintain one bank account.
• One credit card with a limit at RM1,000.
• Every six months submit income and expenditure accounting report.

Its obvious nobody would want to be declared a bankrupt. It will create negative tension for a couple. The additional stress and the stigma of being labelled a bankrupt may just be the final push that causes the collapse of your marital relationship.

Nevertheless, in certain circumstances such as failure in a heavily-invested venture, bankruptcy is the best way to a start afresh and move forward.

3. Bankruptcy Processes

(Click to enlarge. Flowchart Credit: lawyerment.com)

Bankruptcy action can be brought against you if you have carried out an act of bankruptcy, the common one is a failure to reply to a judgment debt or bankruptcy notice.

When you fail to pay your debt, the creditor will begin legal action and obtained a judgment sum. If you further fail to respond to the judgment obtained, the creditor will start bankruptcy action against you by issuing a bankruptcy notice. Failure to comply with the bankruptcy notice would be deemed to be an act of bankruptcy.

Once you are declared a bankrupt, you need to declare all your assets. Your assets 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 (below 18 years old) with no maximum age limit.

4. Unknowingly Bankrupt?!

You may not realize you are bankrupt. How is this possible when there are various processes needed to be declared bankrupt?!

It can happen if you move a lot and did not inform your creditors. Bankruptcy notice must be served by hand personally and if you cannot be found by publication in the newspaper (substituted service) or send to last known address.

If you’ve been a guarantor for somebody or you want to discover about your bankruptcy standing, you can use a service like MyEG to verify which costs RM12 per identity per bankruptcy search. 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 3 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 of becoming “unbankrupt”

1. Annulment: Your bankruptcy records are expunged after paying off your debts in full.
2. Discharged: You are no longer bankrupt with negotiation with creditors on repayments. However, your records remain in CCRIS, CTOS, and other credit rating agencies.

You can immediately apply for passport and bank accounts again.

6. Avoiding Bankruptcy

The best way is to start and commit to a household financial budget living within your means and incorporating good personal finance principles including:-

• 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 a guarantor in a loan agreement to anybody includes family member if you could not afford the monthly instalment in the event the borrower default.
• Do not take on big ticket item purchase with a bank loan if you could not afford it. Don’t fall to peer pressure or trying 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 The Credit Counselling and Debt Management Agency, or Agensi Kaunseling dan Pengurusan Kredit (AKPK) an agency set up by Bank Negara Malaysia in April 2006.

Malaysia Bankruptcy Law Updates

Malaysia’s bankruptcy laws receive an update in March 2017. Here are the key updates.

• Minimum to be declared bankrupt is raised to RM50,000 (from RM30,000).
• Social guarantors can no longer be declared bankrupt. Social guarantors provide guarantees to loans such as educational loans, hire-purchase loans and housing loans which they are not beneficiaries of.
• Automatic discharge of bankruptcy after three years, subject to good behavior including making payments towards your debt and submitting a full accounting of your monies and properties (previously 5 years and subject to Director General of Insolvency’s approval).
• A debtor may propose a voluntary arrangement to his creditors any time before he is adjudged bankrupt.
• A bankruptcy notice need to be served personally to a debtor.

FAQ

Q: Can a Malaysian overseas be declared bankrupt?

A: Yes. For example a Malaysian acting as a guarantor may be declared bankrupt upon judgment if trying to run away. The person may have issues when trying to renew his/her passport. 

Share advice on getting out of bankruptcy and how to avoid bankruptcy.

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Eric Kiang

Writer at MyPF

Eric is a qualified chartered accountant since 1992 and a member of Malaysian Institute of Accountants (MIA). He received his Diploma in Financial Accounting from TAR College and subsequently professional accountancy from ACCA.

He has 25 years working experience in different finance-related jobs. He is now a consultant, and personal finance and business writer. His main goal is to help and educate non-finance professionals to understand and solve their personal finances problems. He believes everyone should be financially literate because everything we do has money implications!

Eric currently resides in Kuala Lumpur, Malaysia with his wife and two young children.

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