Personal Loans And Bankruptcy, A Malaysian Tale Of Caution
The Malaysian Insolvency Department (MID) revealed that 5,695 individuals went bankrupt in 2022, which translates to about 16 people each day. Although this number is lower than in 2021, where 6,554 people fell into bankruptcy, it is still very high and a worrying number.
No matter what emotional response this number elicits from you, the fact is that this shows that while the number of bankruptcies has gone down compared to previous years such as 2021 and 2020, there is still a long way to go in providing Malaysians with the necessary information to help them achieve financial security and management.
But how does this happen? How does someone fall into bankruptcy? What’s life after bankruptcy like? What are the steps that need to be taken if you ever find yourself bankrupt?
To answer all of these questions, we’ve spoken to three Malaysians with their own bankruptcy tales. But first, before we can hear these people’s tale, first we have to understand the definition of bankruptcy in Malaysia.
When are you declared bankrupt?
According to Perbadanan Insurans Deposit Malaysia (PIDM), Malaysians can be declared bankrupt if he/she has debts of more than RM100,000 and has failed to pay the debt installments for six consecutive months. However, this does not mean that once you meet the requirements you are automatically bankrupt. There is a legal process that you will need to go through, which includes being served with a court notice, and a court hearing. Other criteria include having a proven cash (RM) value for the debt you owe and having resided in Malaysia for over one year.
Once you’re bankrupt, there are several restrictions that are placed on you;
- Will be assigned a Director General of Insolvency. A Director General of Insolvency (DGI) will be assigned to a bankrupt individual. The DGI will administer all of the individual’s assets and use it to repay the individual’s debts.
- A travel ban. A bankrupt individual is not allowed to travel out of the country without written permission from their DGI or a court order which allows travel overseas.
- Limited credit. A bankrupt individual will have all their existing bank accounts frozen, and will be barred from withdrawing any money from their bank account. Aside from that, they are also not allowed to spend more than RM1000 on their credit card.
- Limited employment opportunities. A bankrupt individual will find it difficult to gain employment, and there are some professions which outright bans bankrupt people from working there due to restrictions placed on them by their professional associations or licensing authorities, such as lawyers, quantity surveyors, accountants and doctors. Aside from that, a bankrupt individual are also not allowed to act as a director of a company, or own a business or be a part of a business ownership.
- Assets will be seized. Once a person is declared bankrupt, all their assets will be managed by the DGI. The DGI then will have full control over the assets, such as selling a house owned by a bankrupt person to help repay outstanding debts.
And according to Minister in the Prime Minister’s Department (Law and Institutional Reform) Datuk Seri Azalina Othman Said, personal loans are the chief contributor to the bankruptcy cases in Malaysia with 49.22 percent of bankruptcies happening due to it.
Which is what happened with the first person we spoke to.
“Personal loans ruined my finances” – Ika
The first person we spoke to is Ika, a civil servant working for the government. A bankrupt at age 36, and saddled with more than RM140,000 in debt.
So what exactly happened? Here’s what she told us.
“It started after a few years of working, and my husband suggested that we should start a small business on the side. Due to several circumstances that don’t qualify us for a small business loan, I decided to use my privilege as a civil servant to apply for a personal loan,” said Ika.
From there, it was all downhill, Ika continued.
“During the pandemic, we saw that our business was not doing well, so I decided to take out another personal loan to help sustain my business for another few months. Unfortunately, the business folded, leaving me with nothing but debts,” concluded Ika.
Ika then said that due to several personal issues that caused her spending to skyrocket, she was no longer able to make repayments on her loans, which is made worse by the high interest rates of her personal loans.
“Then one thing led to another, and I was served with a bankruptcy notice last year,” concluded Ika.
Ika’s case shows that although personal loans can be a very good tool to help you manage your finances, it needs to be used prudently. It can wreak havoc on your finances if you’re not careful and capable of paying it back.
But sometimes, bankruptcy can happen without any fault of your own, as the case with the second person we spoke to.
For most people, it’s easier to stomach when you fall bankrupt due to your own mistakes. But how about people who fell bankrupt without any fault of their own?
“Never agree to being the guarantor for anyone” – Rahman
That’s what happened with Rahman, a 47-year-old restaurant owner.
According to Rahman, his troubles started when his brother came to him with a request.
“My brother wanted to get a new car for his family, but couldn’t secure a loan due to his past as a former inmate. So he came to me with a request; be his guarantor. I wasn’t too enthusiastic about it, but due to him being family, I relented and agreed,” said Rahman.
Rahman said that it didn’t take long for his brother to start acting up, and after six months, Rahman was already being called by the bank about his brother’s unpaid car loan.
“From there, it was a downward spiral. I got the call from the bank to warn me about the impending repossession of the car, and after the car was repossessed, I kept getting hounded by the bank and debt collectors to repay the loan of the car,” Rahman continued.
Rahman explained that in cases like this, where a car has been repossessed over consecutive failure to repay the bank, the car will be auctioned off.
“However, you’d be lucky if you manage to get even half of the original value of the car. In my case, the car was auctioned off for only one-third of the original value. So now the rest of the loan has to be paid by me,” said Rahman.
Rahman said that this incident has caused an unhealable rift in his family between his brother and him, and if there’s one advice he can give people, it’d be to never be the guarantor for anyone, not even family members.
“My advice to everyone is to always protect your boundaries, and never agree to being the guarantor for anyone, not even your family members. It’s just not worth it,” concluded Rahman.
So now we know just how people get bankrupt, the next question we need answers to is what’s next? What should bankrupt people do to help get their finances back on track?
To answer that, we talked to an ‘expert’ in bankruptcy.
“Face your mistakes” – Zul
The last person we talked to was Zul, a 53-year-old business owner, who is currently experiencing his second bankruptcy.
“Due to some issues with the subcontractors for a job that my company secured, I am currently bankrupt with a debt of RM3.7 million,” said Zul.
However, Zul said that for him, being bankrupt is more of a minor inconvenience rather than a huge issue.
“Yes, there are aspects where being bankrupt is an issue for me, such as if I need to go overseas and stuff, but overall, it’s more of a minor inconvenience. This is my second time being bankrupt, so I have experience in navigating these waters,” said Zul.
Having undergone the process twice, Zul shared his thoughts about handling the situation.
“First of all, you need to understand that there is a lengthy process before anyone can be declared bankrupt. First the bank will send you a notice, then the court will send you a summons, where you will be subjected to a hearing regarding your debts.
“In that hearing, you will be asked to present your case, your financial status and obligations, and various other things to explain why you can no longer make payments on your loan. After all this, the court will declare you bankrupt, and the Malaysian Insolvency Department will help you arrange a suitable payment term for you to settle your debts,” Zul explained.
However, he continued that this is where the problem lies for most people.
“Unfortunately, a lot of people think that being declared bankrupt is like being given the death sentence, so they try to run from it. They don’t adhere to the court summons, they ignore the notice sent, so in this case, they are declared bankrupt without their own knowledge,” said Zul.
Zul said that due to the demonisation of the word ‘bankrupt’, a lot of Malaysians are too scared to face their problems, which leads to bigger problems.
“If these people would just have shown up to their court date, they could have presented their case to the judge, where the judge will then set them up with a suitable payment term, according to their capabilities. But due to them being scared of the bankrupt status, these people prefer to run, only to face other issues such as a blocked bank account,” Zul continued.
So what should bankrupt people do? According to Zul, the easiest way to start climbing out of the bankruptcy hole is to do exactly what the MID asks you to.
“Just show up for your court date, present your financial status and obligations, make a case for yourself, and try to keep to the payment schedule set by the court. If you have trouble with making payments, contact Agensi Kaunseling & Pengurusan Kredit, as they will help you with your financial management,” he explained.
When asked what his advice is for people who are facing financial difficulties and might be facing bankruptcy in the near future, Zul only had two things to say.
“Number one, face your mistakes. Although the term bankruptcy might scare you, running from it is not going to do any good. Face up to your mistakes, and start taking steps to rectify them. The second one is, learn to live within your means. I’ve seen too many people who dug themselves into a hole financially trying to live large,” he concluded.
So there you have it. Although bankruptcy can be a harrowing experience, it’s not a death sentence, and you can get yourself out of it. Yes it might take years of hard work and persistence, but help is always available. If you find yourself facing a wall or stuck in any way, don’t hesitate to contact professional bodies such as MID and AKPK for help.