Bankruptcy—a legal situation where someone is unable to repay their creditors—is sadly surprisingly common in Malaysia and in other countries too. It isn’t only those who spend recklessly who find themselves bankrupt; it can affect anyone, regardless of their circumstances. It can be a frightening prospect, but if you know the law relating to bankruptcy and insolvency then you can give yourself the best chance of getting through it and recovering your financial health.
Insolvency is not the same thing as bankruptcy; insolvency means that you cannot pay off your debts. Bankruptcy, on the other hand, is a legal status declared on you by a court, meaning you are unable to repay your creditors. The law has evolved from the old Bankruptcy Act 1967 through to the Bankruptcy (Amendment) Act of 2017 (BAA 2017) which amended it, to its current form of the Insolvency Act 1967.
This article explains personal bankruptcy and answers some questions that arise.
Section 5 of the Insolvency Act sets out the conditions for when someone will be declared bankrupt by a court:
To qualify for bankruptcy, one of several acts needs to have been committed, under section 3 of the Insolvency Act 1967. The most common are as follows:
The most common way of going bankrupt in Malaysia is by failing to adhere to an order to pay a judgement debt.
If you cannot pay, the creditor will sue you for the money. If a court agrees with the creditor that you should pay, they’ll order you to pay the amount owed.
If you don’t pay, the creditor serves a bankruptcy notice on you requiring you to pay; if you do not, within 7 days, you have committed an act of bankruptcy.
A creditor can begin their proceedings against you for bankruptcy under section 6 of the Insolvency Act, by filing a creditors petition.
If the court judges that you have satisfied the section 5 criteria, they will declare you bankrupt.
Note that someone in debt can declare their own inability to repay creditors without having to wait for a creditor’s petition.
A debtor may declare their own inability to repay creditors by filing their own debtor’s petition for bankruptcy, under section 7 of the Insolvency Act. This is an act of bankruptcy, and the petition is not able to be withdrawn once filed, without the court’s permission.
There is no minimum amount that must be owed before a petition can be filed. However, before filing, you must deposit a certain amount of money (to cover administration costs) with the Director-General of Insolvency (DGI).
If you have been found to be bankrupt, you need to attend a meeting with your creditors. You must declare all your assets (including property) and list your creditors and debtors, according to what is due to them and from them. Proof of what is owed must be provided by your creditors.
The DGI will oversee the debt repayments, and your property will now vest in the DGI.
The DGI has the power to sell your property, but section 48 lists certain exceptions to this:
Once your assets have been sold and the proceeds distributed amongst your creditors, they can take no further action against you.
There are two types of creditors:
Your monthly income can also be used to help settle your debts, under section 57 of the Act.
The Insolvency Act sets out a bankrupt’s restrictions and disqualifications, in sections 36-38:
In the past, it was possible that you’d be made bankrupt without knowing it in Malaysia. Papers could be served via substituted service (i.e. not delivered personally and instead left at your workplace, published in a newspaper or mailed).
But since amendments were made to the law, the requirements for substituted service are stricter. Now, this method can only be used if a creditor can demonstrate that you have deliberately avoided or delayed being served. For example, you left your home or workplace or travelled outside of Malaysia. Apart from those people deliberately hiding or travelling abroad, it’s now very unlikely for someone to be declared bankrupt without their knowledge.
Any spouse, or other member of your family, who has information about your assets can be summoned by the Court. The Court can summon anyone who they suspect to have any of your assets in their possession. Anyone who refuses to attend Court may be arrested.
Another impact on your family is if your house is repossessed – you and your family will have to move.
Being declared bankrupt is not always inevitable. The new law in Malaysia allows you to negotiate a way through financial difficulties without becoming bankrupt.
As we learnt above, if you cannot repay your debts then you are insolvent, but you are not yet legally bankrupt. To avoid bankruptcy, section 2(c)(1) of the Insolvency Act 1967 gives you the chance to negotiate a voluntary arrangement with creditors and alter your existing repayment plans. In other words, you avoid bankruptcy by restructuring your debts and payment plans.
Anyone wishing to propose a voluntary agreement needs to choose a nominee and get a temporary order from the court for 90 days. Then the nominee must speak to your creditors and ensure they approve of the proposed voluntary arrangement.
Once that arrangement is in place, you must stick to the arranged creditor repayments, and every 6 months for 3 years you must file financial statements.
The benefits of doing this are that you’re not subjected to bankruptcy restrictions or disqualifications, and you can negotiate your own terms for your repayment plans.
Being discharged from bankruptcy means getting a fresh start. Nowadays, with the new law that is in place, getting discharged from bankruptcy is easier and takes less time than it did in the past.
You can be discharged from bankruptcy within 3 years, according to section 33 of the Insolvency Act, provided you satisfy the requirements. These are that you have made targeted payments to pay off your debt, and that you gave the DGI full accounts of both your assets and your liabilities.
(Previously, to be discharged from bankruptcy you needed a court order, once the DGI had given you a certificate of discharge).
Note that the new law states that a creditor is not allowed to object to a discharge if the bankrupt debtor is one of the following:
In the past, many Malaysians have gone bankrupt because they stood in as a guarantor. The recent legal amendments to the law have improved this situation, however.
The law makes a distinction between social guarantors and non-social guarantors.
A social guarantor is someone who doesn’t profit from loans, and gives guarantees for one of the following purposes:
Often, friends or family will become social guarantors.
Social guarantors used to risk bankruptcy in Malaysia because the debtors failed to pay; nowadays though, the amended law prevents social guarantors being declared bankrupt.
In addition, non-social guarantors also get legal protection. For example, in order to start bankruptcy proceedings against a non-social guarantor, a creditor must apply to the court. The court must be satisfied that the petitioning creditor has tried all other means of recovering the debt before it agrees to grant leave to start bankruptcy proceedings against a non-social guarantor.
To conclude, you can see that the law protects social guarantors from bankruptcy, and mandates that creditors can only file for bankruptcy against non-social guarantors if all other avenues have been exhausted.
Remember that good management of your finances is crucial, no matter your age or wealth. Bankruptcy should only happen as a last resort, but it is always a serious matter.
