With unemployment and pay cuts in the news a lot lately, you’ve probably heard that bankruptcy may be on the rise as some people find it difficult to pay back their loans. But what really is bankruptcy and how does it work?

What is bankruptcy?
Bankruptcy is a legal process where a person is declared bankrupt through the court for being unable to pay a debt. A creditor (someone you’ve borrowed money from formally and legally, like banks or licensed moneylenders) can file for your bankruptcy with the court if you owe them RM100,000 and above. The law says a person can only be declared a bankrupt when all these conditions have been met:

• The debt amount is at least RM100,000
• The debt has not been paid for six months
• You have been residing in Malaysia for at least one year

How can you avoid bankruptcy?
Bankruptcy can be avoided if we take steps early. If you realise you’ve started to miss your repayments or you’re not going to meet your repayments in the coming months, a good start would be to reduce your spending. By reducing your spending, you will be able to free up money to make some repayments towards your debts, even if it’s not the full payment.

If you still find that it is difficult to meet your repayments, here are some other options:

• Speak to AKPK
  AKPK provides financial counselling on how to manage your bank debts. You should join one of their debt management programmes where they can help you renegotiate your loans with your banks.
• Speak to your banks/other lenders directly
  Usually, banks are willing to discuss restructuring your repayments, which could mean lower payments for a much longer period.
• Sell off your assets
  If you have a few assets, you could try selling it off to pay back your loans.

But what do you do if you receive a notice of bankruptcy?
You’d usually be given time (which can be as short as 14 days) to reply to the notice from the courts. Here’s what you can do:

• Within the period
  You can get a lawyer to file for any corrections. For example, if the amount of debt is wrong or if they have wrongfully filed it.
• After the period
  There’s not much you can do. At best, you can make an agreement with your creditor on when the repayment of the debt will have to be made.

 What happens if you’re declared bankrupt?

 Assets
The Malaysian Department of Insolvency (MDI) will take over all your assets to be sold to repay your debts.
Employment
Legally, you can’t work in certain professions if you’re declared bankrupt. So if you’re a doctor, lawyer or accountant you will lose your job. Also, if you’re bankrupt, you will not be able to be a director of a company, which means, if you own a business, you’ll have to give that up too until you are no longer declared bankrupt.
Financially
You’ll have to close all your bank accounts, and all the money in it will be managed by the Department of Insolvency. You will only be allowed to have one credit card with a limit of RM1,000.
Travel
You will not be allowed to travel out of the country unless it has been approved by the Department of Insolvency.

How do you get out of bankruptcy?
There are three ways to get out of bankruptcy:

• Pay off your debts in full
  If you pay off your debts, the records of you ever being bankrupt will be completely removed.

• Discharge from bankruptcy by court
  You could apply to the court to be discharged from bankruptcy. However, the Department of Insolvency would need to send in a report of your cooperation and good conduct with the department.

• Discharge from bankruptcy by the MDI
   After three years, you could apply to be discharged by the MDI. But this would also depend on your cooperation with the department. In some cases, you may need to provide a written agreement with your creditor stating that you have come to an agreement on the terms of repayment of your debt.

Credit rating agencies will still carry your records of bankruptcy for two years from the date of your full settlement of your debt. After you’ve been cleared from bankruptcy, you can start travelling and using bank accounts again.

What do you need to look out for?

You could become unknowingly bankrupt!
The bankruptcy notice from your creditors is usually served to you by hand. But if you can’t be found, they could use other ways like sending it to your last known address or by publishing it in the classifieds section of the newspaper. Unless you’re checking the mail at your old address or reading the classifieds, you could become unknowingly bankrupt! A good way to avoid this is to always ensure your address is updated with your creditors whenever you move.

 You can check your bankruptcy status with MyEG or you could get a credit report from credit rating agencies.

Bankruptcy is a painful process to go through, not just for the individual but their families, too. It can be prevented with good spending and borrowing habits. You could start with having a budget to ensure your expenses are always lower than your income. You can read our Planning a Budget Guide to understand more.