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Understanding Bankruptcy in Malaysia

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.

All About Bankruptcy

I. INTRODUCTION

In 2016 alone, a whopping number of 294,000 Malaysians were involved in bankruptcy cases, which
is shocking to say the least.[1] To most people, the thought of being bankrupt is remote and only
occurs during a bad game of Monopoly. A bankrupt person is usually perceived as either a
spendthrift or someone who is horrendous at keeping tabs on his or her expenditures. Sadly, the
problem of bankruptcy is more prevalent than people realise and may affect anyone regardless of
their age or income. For the record, majority of bankrupts come from the age group of 25-44 years.
[2] Being declared bankrupt is bad enough, but worse is how most people are in the dark about what
comes after.

II. WHAT IS BANKRUPTCY?

Simply put, ‘bankruptcy’ is the legal status of a person or entity who is unable to repay their debts to
the creditors. This term is commonly confused with the term ‘insolvency’, though the difference is
quite stark. While the latter is just the inability to repay your creditors at a particular time, the
former is a legal status of a person who is given an Adjudication Order by the courts.[1] According to
the Insolvency Act 1967, to be declared bankrupt, a person must be unable to pay debts amounting
to at least RM50,000 and the debt involved must be ascertainable, that is, in a liquidated sum.[2] In
addition to that the individual  must have defaulted in payment for a period of six months and
resided in Malaysia for at least one year.[3] However, it should be noted that bankruptcy
proceedings can only take place if a person has committed an act of bankruptcy as provided in  S.3 of
the Insolvency Act 1967. Some of the more common acts of bankruptcy include the debtor declaring
his or her inability to repay their creditors and a failure to heed a bankruptcy notice or a judgement
debt.[4]

Be that as it may, it is not surprising to discover that there are people who have no clue as to
whether they have been declared bankrupt. Hence, some people would plea that they were
unaware of said fact. However, a bankruptcy notice need not be served personally by a creditor to a
debtor.[5] Creditors have the avenue of applying for a ‘substituted service’ which allows creditors to
serve notice of a person’s bankruptcy through alternative means, such as newspapers and
advertisements.[6] Hence, it is pointless to attempt to flee from ones creditors as the courts can still
declare a person as bankrupt.

III. WHAT IS NEXT?

The stigma attached to bankruptcy is that a person, once declared bankrupt, is reduced to having to
live on the streets with absolutely no belongings, as they have all been taken away by the banks.
Thankfully, this is far from the truth.

Pursuant to S.27(1) of the Insolvency Act,[7] every debtor shall attend a meeting with his or her
creditors and provide the required information. S.27(2) of the Insolvency Act further states that a
debtor shall provide a list of his or her inventory of property, a list of his or her creditors and debtors
as well as the debts due to and from them respectively.[8] After a debtor has declared their assets,
S.48 of the Insolvency Act 1967 provides that although various types of property can be taken by the
Director General of Insolvency (DGI), some property are off-limits, namely, property held by the
bankrupt on trust for any other person, the tools of his trade and other necessities for daily life not
exceeding RM5,000.[9] In a sense, a bankrupt will have most of his or her property taken away to be
sold to settle debts but should still be left with enough to live a normal life.

Nevertheless, a bankrupt would have lost certain rights. The individual will be assigned to a DGI who
is responsible for administering the bankrupt’s property.[10] Furthermore, all existing bank accounts
belonging to the bankrupt will be deactivated, and a bankrupt will not be able to withdraw money
from a bank account and only have a RM1,000 limit on any credit cards. Travelling overseas becomes
a hassle as a bankrupt is only allowed to travel overseas with the written permission of their
assigned DGI or a court order allowing the bankrupt to travel overseas.[11] On top of that, a
bankrupt is forbidden from acting as a director of a company, owning a business or being a part of a
business ownership.[12] A bankrupt’s family may also be affected as stated in S.31 of the Insolvency
Act 1967,  where the spouse of the bankrupt can be summoned by the court or even arrested if the
bankrupt fails to turn up.[13]

A. Guarantors

It is common to see close friends and family members becoming guarantors for the loans taken by
the debtor. Most people are usually less cautious when deciding to be a guarantor of a loan for
someone they know as they have a sense of trust and familiarity towards that person. However, it is
not rare to see that when a debtor defaults in the payment of his or her loan, the creditor will
commence proceedings against the guarantor and in some cases, guarantors have even been
declared bankrupt.[14] Under the pre-amended Bankruptcy Act 1967,[15] protection afforded to
social guarantors was minimal. [16] A social guarantor is  a person who provides a guarantee without
the purpose of making profit but for an education loan, hire-purchase transactions for personal or
non-business use, or a housing loan for personal dwellings.[17] So long as the creditor can prove that
all possible avenues of recovery against the principal debtor have been exhausted, the creditor may
then begin bankruptcy proceedings against the guarantor.[18]

Prior to the new Insolvency Act 1967, many social guarantors were declared bankrupt under the old
Act. A notable case being that of the late Tan Sri Ngan Ching Wen who was a director of Unico-Desa
Plantations. Moscow Narodny Bank hounded him for years to settle a debt for which he was the
guarantor.[19] The Federal Court allowed the appeal by the bank and declared him a bankrupt for
failing to settle an outstanding debt, reversing the lower court order which allowed a part payment
in full and final settlement of the debts.[20] 

Now, S.5(3) of the Insolvency Act 1967 provides that a petitioning creditor is not entitled to
commence any bankruptcy proceedings against any social guarantor.[21] For those other than a
social guarantor, a petitioner creditor can only do so after obtaining leave from the court, [22] which
will only be granted after the creditor has exhausted all means against the principal borrower.[23]
This is a step forward in protecting guarantors by ensuring that they are not penalised for the
inability of the debtor to repay his or her debts.

IV. DISCHARGE BY THE COURTS

In Malaysia, bankrupts must wait a long time before they are discharged by the courts. A discharge,
in essence, is the hitting of a reset button, the wiping clean of the debts and the allowance of a
bankrupt to start afresh. A discharge is important as otherwise a bankrupt will probably remain
liable for a large amount of debt for the rest of his or her life. Under the old Bankruptcy Act 1967, it
was difficult to get a bankrupt to be discharged; the individual would typically only be discharged
upon an application to the court after the bankrupt has been issued a certificate of discharge by the
Director General of Insolvency (DGI). This certificate of discharge was usually obtained after five
years from the date of the Adjudication Order and Receiving Order of a declared bankrupt. Indeed, a
discharge under the old Act was a tedious and troublesome process. Now, according to S.33 of the
Insolvency Act 1967,[24] a bankrupt is automatically discharged after three years from the date of
submission of his or her statement of affairs provided that the bankrupt also achieved the target
contribution for his or her debts and declared his or her assets to the Malaysia Department of
Insolvency.

Undoubtedly, being a bankrupt is troublesome not only for the bankrupt but also for their friends
and family members. However, a person is not as susceptible to being declared a bankrupt as it
seems and individuals who are on the verge of being bankrupt have many ways to tackle this
problem. One of the simplest ways is to consult the Credit Counselling and Debt Management
Agency (AKPK) to obtain free financial counselling as well as to join debt management programs.
Other than that, people should also discuss their debt with their creditors, most banks are open to
discussion as they would rather the repayment their loans in some manner instead of a complete
lack of performance. Unsurprisingly, the largest reason of bankruptcy is the obtaining of vehicle hire
purchase loans as Malaysians love splurging on their dream ride.

V. CONCLUSION

Thus, it is a must for Malaysians to practice sound financial management regardless of their age or
income. It is essential for a person to be an informed consumer and not to give in to consumerism.
[25] Even though advertisements on fruit-named phones and attractive looking houses are in
abundance, it is of the utmost importance to understand that we should never spend beyond our
means. Many Malaysians love to make impulsive purchases to satisfy their wants and to look good in
front of their friends and family. It is all too familiar to see some people getting new cars and phones
especially for festive occasions just to impress their relatives. Malaysians need to start looking at the
bigger picture and stop spending on their wants for the mere reason of impressing others. The
readers of this article should think about their future and start planning for their children and
retirement funds by spending prudently.

In a nutshell, bankruptcy may be an issue faced by many young people who are just beginning to
stand on their own two feet. Thus, it is necessary that people realise the importance of sound
financial management as well as practise delayed gratification. Hence, the next time you receive
your paycheck, do not fall victim to your cravings, instead, plan out your expenses and allocate your
money accordingly. Do not spend RM500 on a purse only to have nothing in it, instead, settle for a
RM100 purse with RM400 in it.

What You Need To Know About Bankruptcy in Malaysia

What is Bankruptcy?

It is a process where a debtor (a person who owes money to a creditor) is declared bankrupt
following a court order known as Adjudication Order from the High Court against him or her.
The following criteria applies when declaring a person bankrupt:

 Unable to pay debts which amount to at least RM30,000.

 Debt involved (which is at least RM30,000) must be ascertainable which means the debt
amount is in a liquidated sum.
 There have been a period of six months default for the debt before a person can be declared
bankrupt.
 The individual must have resided in Malaysia for at least one year.

However, do take note that government is considering of making amendments to the

Bankruptcy Act 1967. The proposed changes are to increase the maximum threshold of
RM30,000 to RM50,000 before a person is declared bankrupt. Aside from that, the
government is also looking to reduce the number of years before a person who have been
declared bankrupt can apply for a court discharged. Currently, a person declared bankrupt can
only do so after 5 years, but the proposed change is to reduce it to 3 years. But there are no
confirmation when the changes will take place.

Did you know that you can be declared bankrupt without your knowledge? A person can be
declared a bankrupt without their knowledge as per below:

 Legal documents sent to old address.

 Bankruptcy was served by a substituted service procedure.
 Does not turn up to court.
 Does not accept or open any legal documents sent.
Substituted service is bankruptcy served via an advertisement in local newspaper or posted on
the notice board in court. In such cases a bankrupt may not realize that a bankruptcy
proceeding has been initiated against them. A substituted service is done when an individual
cannot be located due to change of address. You can conduct a bankruptcy search to check
your status at Malaysia’s Department of Insolvency’s headquarters in Putrajaya for a fee of
RM10.

A person can be declared bankrupt through two methods:

By creditor’s petition: this method means a creditor will commence bankruptcy proceedings
against an individual by serving them with a bankruptcy notice for debts exceeding
RM30,000.

By debtor’s petition: an individual can voluntarily make himself a bankrupt to protect from
creditor’s claim which he knows he cannot fulfil. There are no required amount of debt for
debtor’s petition to be declared bankrupt. Once submitted, the petition cannot be withdrawn
without the permission of the court.

Do note that bankruptcy is a serious matter and should be the last resort for individuals who
are having problems with their financial commitments. Find out what happens once an
individual is declared a bankrupt below.

What Happens When A Person Is Declared Bankrupt?

Being declared a bankrupt means an individual will have plenty of restrictions imposed upon
them. Below are what will happen once a person is declared bankrupt:

Appointed A DGI
Once declared a bankrupt, a person will be assigned to the Director General of Insolvency
(DGI). The DGI will administer all of the individual’s assets and manage it to repay the
outstanding debts. So once declared bankrupt, a person’s assets will all be put under the
administration of the DGI.

Travel Ban
An individual who has been declared bankrupt will be unable to travel out of the country
without written permission from the DGI or before obtaining a court order which allows the
individual to travel overseas.

Limited Credit Line

Existing bank accounts will be deactivated and a bankrupt will be barred from withdrawing
any money from their existing account. Aside from that, a bankrupt is not allowed to spend
more than RM1,000 on their credit card or obtain credit more than RM1,000 from any
creditor.

Assets Taken Away

Once declared a bankrupt, all of the assets of the individual will be managed by the DGI. So
for example an individual’s house and cars will be taken over by the DGI who will then
manage it by reselling it to repay outstanding debts.
Employment Restricted
A bankrupt will not be able to work in certain professions which have restrictions imposed by
their professional associations or licensing authorities. Examples of the profession a bankrupt
cannot be employed as are:

 Lawyer
 Quantity Surveyor
 Accountant
 Doctor

Aside from that, once declared bankrupt an individual may not act as a director of a company.
A bankrupt is also not allowed to own a business or be part of a business ownership, so no
entrepreneurship is alloed once an individual has been declared a bankrupt.

What Are The Reasons Malaysians Are Declared Bankrupt?

Most of the Malaysians who have been declared bankrupt are within the age group of 35-44
years old (35.24%) while 25-34 year olds come second (22.52%). The majority of
bankruptcy cases in Malaysia are caused by vehicle purchase loans, resulting from their
outstanding car loans.  Aside from that, the other reasons given for Malaysian’s being
declared bankrupt is other outstanding loans which are housing loans, personal loans and
business loans.

A person can also be declared a bankrupt as the result of acting as a guarantor for another
party. Banks will approach the debtor first, however if they are unable to recover the amount
owed, banks will then approach the individual who acted as the guarantor for the debtor.
Where To Get Help If You Think You May Be Declared Bankrupt

Being declared a bankrupt is a hassle and it can take a long time to get your finances back in
order to remove yourself from the bankruptcy list. If you feel you may be going down the
path of being declared a bankrupt, follow the tips below to learn how you can get help to take
charge of your finances.

Get Free Professional Help

If you are having problems managing your debts and making repayments for your loans, you
can seek help from the Agensi Kaunseling dan Pengurusan Kredit (AKPK). AKPK was set
up by Bank Negara Malaysia and provides their services for free. The services they provide
are financial counselling and advice, debt management programme and financial education
programs.

See also: Manage Your Debts In Malaysia For Free With AKPK

Discuss With Your Creditors

If you are unable to make repayments for your loans, renegotiate with the bank. Most banks
are open to renegotiate the terms of loans as banks would also want to minimize the tendency
of a non performing loan.

Discuss with the bank and work out a repayment flow which you can afford and the banks are
agreeable upon. If you find problems negotiating with your bank, approach AKPK as they
can be a mediator through their debt management program.

Asses Your Financial Commitments and Assets

Aside from reducing your expenses, consider using your savings to pay off your debts. You
should also consider liquidating your investments so you can use the money to reduce your
debts and avoid getting yourself declared a bankrupt. If you have multiple assets, consider
liquidating that too as it will be better to clear yourself of debts than be declared a bankrupt
and have your assets such as your house and vehicles taken away from you.

Lastly, remember that the total monthly repayment on all of your loans and credit card debts
should not exceed more than 40% of your net monthly income. Before taking on any
financial commitments, make sure you make an informed decision by getting the best rates
on any credit lines you take on.

Update on bankruptcy laws in Malaysia

Following the proposed changes to the bankruptcy laws that was made in 2016, it has since
come to force since 6 October 2017. Below are the changes to bankruptcy laws in Malaysia
which you should know about.

Increase Threshold
Previously, if an individual had debt of RM30,000 or more that person can then be declared
bankrupt. However, the threshold has been increased to RM50,000.
Automatic discharge
Before this, a bankrupt individual may only be discharged from bankruptcy status upon
making an application to court after that person has been issued a certificate of discharge by
the Director General of Insolvency (DGI) after 5 years from the date of the Adjudication
Order and Receiving Order of declared a bankrupt.

However, under the amendment, automatic discharge has been introduced. This means a
bankrupt individual can get automatic discharge after 3 years from the date of submitting his
or her statement of affairs.

“The enforcement of the newly amended bankruptcy law began this year. If they meet our
criteria, qualified borrowers will be automatically discharged as bankrupts three years from
the date of filing of the Statement of Affairs (Penyata Hal Ehwal” –Datuk Abdul Rahman
Putra Taha, Director-general, Malaysia Department of Insolvency

How it works is that, after 3 years from the date of submission of the bankruptcy, a bankrupt
person will be automatically discharged provided that the debtor:

• achieves the target contribution for their debts

• declare their liabilities to Malaysia Department of Insolvency

Aside from that, from now on creditors can no longer object to the discharge of certain
bankrupts as below:

• a social guarantor
• a bankrupt with a disability under the Persons with Disabilities Act 2008
• a deceased bankrupt
• a bankrupt suffering from serious illness

Avoid Being a Bankrupt with the Voluntary Arrangement

Under the amended laws, someone at risk of being declared a bankrupt can settle his debt
without bankruptcy proceedings with a voluntary agreement under the Insolvency Act 1967.

“As long as they fulfil the payment within the period, we will release their names,” – Datuk
Abdul Rahman Putra Taha

With the voluntary arrangement, debtors can negotiate to get their debts restructured to avoid
bankruptcy. Debtors must adhere to the agreed sum of contribution paid to the creditors and
they must also file their pay and expenses slip statement every six months throughout the
three-year period.

Exemption of Social Guarantors from Bankruptcy Proceedings

Unfortunately, among the reasons why Malaysians are declared bankrupt is by being a
guarantor. With the amendments made, that can no longer happen. This means creditors (for
example banks) will no longer be able to commence any bankruptcy action against social
guarantors, i.e. persons who provide, not for profit guarantees for:

• a loan, scholarship, or grant for educational or research purposes;

• a hire-purchase transaction of a vehicle for non-business use; and
• a housing loan transaction solely for personal dwelling.