While education initiatives tend to focus on the processes and benefits of wealth planning, less emphasis is given to the consequences of poor financial planning faced by young Malaysians every day, with those aged 25 to 44 years comprising nearly 60% of the 293,086 bankruptcy cases reported nationwide in 2017.
The spectre of bankruptcy can be dispelled, however, with some understanding of what it entails as well as its effects on a person’s financial future. This month, Smart Investor reaches out to the Malaysian Department of Insolvency (MDI) and other industry stakeholders to discuss bankruptcy, insolvency and what follows.
Breaking Bankruptcy Down
“A high number of bankruptcy cases show lack of diligent financial management and spending, which contributed to the failure to settle debts, thereafter leading to civil and bankruptcy proceedings. Hence, those with high levels of debt must practice affordable lifestyles so as not to be burdened by excessive financial commitments,” said the government agency in an email interview.
“The underlying factors behind these point towards exorbitant spending and the practice of lavish lifestyles far beyond affordable income, as well as influence from friends and lack of knowledge on prudent financial management, and commercial and bankruptcy laws. MDI would like to advise that individuals (not applicable to bankrupts) who have problems in managing their personal finances should seek assistance from the Credit Counselling and Debt Management Agency (AKPK).”
AKPK CEO Azaddin Ngah Tasir echoes MDI’s caveats regarding lifestyle spending and poor financial habits, noting that only 55% of Malaysians pay their bills on time – a figure 25% below the global average. In addition, 70% of those with credit card debt tend to pay just the minimum monthly required, while 45% of Gen Y card holders failed to pay their debts at some point.
Based on MDI statistics, the primary causes of domestic bankruptcy cases relate to defaults in personal, hire purchase, housing and business loans, as well as credit card repayments. From 2014 to September 2018, those aged 35-44 comprised 34.59% of bankruptcy cases, with those aged 45-54 and 25-34 as the next most affected groups.
“We have a client, a young lady who earns RM2.9k monthly. Within three years, she travelled to six countries such as USA, Australia and New Zealand, and used personal loans and credit cards to finance her hobby. Her debt service ratio (DSR) was 100%. This is a classic case of lack of awareness, judgement and discipline,” says Azaddin.
In general, bankruptcy requires a default period of at least six months on a certain threshold of liquidated debt, along with residence in Malaysia for at least a year. However, guidelines relating to bankruptcy proceedings, as well as the legal definition of bankruptcy itself in Malaysia, were revised on 6 October 2017, when the Bankruptcy Act 1967 was amended as the Insolvency Act (IA) 1967. The newly established Insolvency Act introduced:
- A single bankruptcy order in place of the previous two-tier order system, ie receiving and adjudication orders
- Voluntary arrangements as an alternative to bankruptcy
- Stricter requirements for service of bankruptcy notices and petitions
- A higher bankruptcy threshold – the amount of outstanding debt required to declare bankruptcy – of RM50,000, up from RM30,000
- Bankruptcy protection for social guarantors
- Automatic discharge within three years from the date of filing of the statement of affairs, provided that a certain amount of provable debt is paid, and
- The Insolvency Assistance Fund to enhance efficiency of bankrupt case administration.
In addition, creditors are disallowed from objections to discharges from four categories of bankruptcy. These amendments have streamlined bankruptcy proceedings in general, while minimising perceived areas of unfair treatment, towards allowing bankrupts to recover within a shorter time frame so as to contribute more to the economy.
“We would like to clarify that MDI does not declare an individual bankrupt. Creditors initiate the majority of bankruptcy cases in Malaysia, with the DGI acting as the receiver, manager, administrator and trustee of bankrupts’ estate. Bankrupts are required to file their statement of affairs with MDI, but the number of bankrupts who attend MDI’s office is low,” said the government agency.
“We urge all bankrupts to come forward to cooperate in the administration of their bankruptcy cases, as the DGI will take into consideration many factors such as the level of the bankrupt’s cooperation in deciding whether to issue a certificate of discharge. Bankrupts can contact MDI’s nearest branch for advice and further information.”