YOU have probably read in the news about the rising number
of bankruptcy cases in Malaysia, with 2013 seeing a spike in the numbers.

Recently, it was reported by the Minister in the Prime
Minister’s Department Nancy Shukri that there were nearly 22,000 cases of young
Malaysians who were declared bankrupt last year compared to 13,200 young
Malaysians in 2007.

Citing statistics obtained from the Department of
Insolvency, she said that 12,300 young Malaysians have been declared bankrupt
within the first six months of this year, of which 3,680 were women.

In Malaysia, the increasing numbers are pretty
disheartening, with most incidents arising from defaulting on instalment
payments on car, housing and personal loans. Indeed, being declared bankrupt
carries a heavy stigma.

It is said to be one of the worst life-altering experiences
a person can have aside from disability, divorce and the loss of a loved one.
Statistics from the Department of Insolvency show that those between the ages
of 35 and 44 have the highest bankruptcy incidences.

In this article, we explore the effects of bankruptcy in
general and that on your property. So, should the unfortunate circumstance
arise, you can take the necessary steps to minimise the damage or even avoid
it.

What is bankruptcy?

In the context of an individual, bankruptcy is, simply put,
a legal process corresponding to one’s inability to settle one’s debts.

This can stem from credit card bills, car loans, property
mortgage repayments or business loans – basically any scenario that involves
borrowing money on paper.

When this debt reaches a threshold of RM30,000 and is not
paid within a period of six months, the bankruptcy threat becomes very real as
one is then eligible to be filed for bankruptcy.

Once declared bankrupt, the director general of Insolvency
(DGI) comes into play, taking possession of all documents and assets of the
bankrupt individual, including bank accounts and properties besides
subsequently administering and investigating all affairs related to the
bankruptcy.

The DGI then has the right to sell all assets, from which
the proceeds would be distributed among the creditors, which basically means
liquidating everything that one owns would now fall into the hands of the DGI.

Life after bankruptcy

So, what does bankruptcy entail? For many, the perception is
that bankruptcy may signify the end of the road for their circumstances.
Although it may not be as dramatic as that, bankruptcy does impose significant
restrictions on a person.

A bankrupt cannot leave the country or open a bank account
without special permission from the DGI. He or she is also disallowed from
working in companies that belong to a spouse or relative and has to declare the
bankrupt status to any potential employer.

Additionally, a bankrupt is not allowed to do business or
become part of any company’s management.

Sounds pretty heavy, doesn’t it? To top it off, for one to
be discharged of this status is not easy as one has to settle all debts in full
or get the involved creditors to accept a repayment scheme.

One can also apply to the court for an order of discharge,
in which the DGI’s report will be referred to in the court’s decision.

So, if you transfer an apartment unit to your relative in
the face of impending bankruptcy, the DGI can make it void and subsequently,
seize and liquidate that piece of property through an auction.

However, if you sell the property at a fair market value, it
may not be seized as it could be viewed “in good faith”, meaning you did not
sell the property with the intention of “protecting” it from the bankruptcy.

How to avoid bankruptcy

By now, you must be wondering what you can do should
bankruptcy come knocking on your door. Let’s take a hypothetical scenario: Mike
has overstretched his property investments a little too much.

He owns three properties with three mortgages to pay off –
all of which he has been defaulting on payments since the past few months. As
it is, he has his hands full with his children’s college tuition fees and two
car loans with an increasing credit card debt.

Here’s what Mike can do:

Mortgage restructuring

As his debts stem from property mortgage loans, Mike’s
creditors are the banks from which he obtained the loans.

Instead of awaiting impending financial disaster, Mike can
take a pre-emptive step by negotiating with the banks to restructure his
mortgage loans.

If the banks are agreeable, then Mike would have a new
payment plan with ideally, a lower adjustable interest rate and longer
refinancing period.

If he can obtain such an outcome for all his loans, the
repayments would be much easier on him.

Debt consolidation

By taking a debt consolidation loan, Mike can basically
throw all his current debts into one basket. Should a bank take on all of
Mike’s collective debts, he would no longer owe separate creditors but just one
bank. Having obtained a longer loan period, this would mean he has less to pay
per month.

If Mike were to pay off a big amount of those debts, this
will enable him to take a smaller mortgage as his loan would now be based on a
collectively smaller amount than when the loans were first taken.

In some cases, banks would even offer an initial “interest
only” period so that Mike would have time to reorganise his finances before
taking on his debts again.

Sell the property

As disheartening as it may seem, Mike’s best option could be
to sell one or maybe even two of his property units, even if they have only
slightly appreciated in value. Moreover, Mike would have to bear an agent’s
commission, legal fees, taxes and other related costs of selling a property.

If this move can stave off Mike’s bankruptcy which would
result in his property being seized and auctioned off, this would be more
advisable.

Conclusion

Following the explanation above, what can be done now is to
take steps to avoid the causes leading to bankruptcy.

If all else fails, one may appeal to the DGI after five
years. The DGI has discretionary power to issue a certificate of discharge
which will take into account all necessary factors in the process such as the
person’s conduct, age and current financial status.

What happens to your property

Once declared bankrupt, all assets, including property, will
be seized by the DGI. If you think you can fool the system by transferring or
selling your property to relatives prior to the bankruptcy, think again.

After bankruptcy is declared, the DGI has the authority to
reverse any and all transfers backdating five years and two years if you have
sold any property.