The No. 1 cause of bankruptcy in Malaysia is a debtor’s inability to repay a loan (photo credit: Pulpolux !!!, flickr)
By San Peng
At 45, Imran (not his real name) is in the prime of life. He is good looking, drives an Audi, loves photography and is surrounded by a large circle of friends. His life can be described as ‘rosy’, except for one thing – Imran is a bankrupt.
Ten years ago, Imran bought a medium-cost flat for RM225,000, partly financed with a RM205,000 loan over 15 years. He was working in the financial industry then. But about five years into the loan period, his firm offered a voluntary separation scheme (VSS) and Imran was let go. A few months after the VSS and just as he was finding his feet, Imran began facing problems paying the RM1,500 monthly instalment. He started skipping the repayments for close to 20 months.
In 2008, the bank started to pursue its loan in earnest. After a lengthy legal process, Imran was declared a bankrupt early this year.
Imran is the first to acknowledge that he made a mistake. He did not communicate with the bank about his difficulties in servicing the loan. He was paying RM1,700 a month for the loan while the flat could only be rented out for RM1,500 plus he had to absorb the RM400 maintenance fee.
Malaysia has one of the most stringent bankruptcy laws in the world. As of last year, there were more than 19,500 bankruptcy cases and it takes as little as RM30,000 to trigger a creditor’s petition. What is even more alarming is that the bulk (more than 7,100) involves debtors between the ages of 35 and 44. This group represents those who should be, by right, at their peak earning powers. Instead, these individuals find that their lives have been ‘handed over’ to the Insolvency Department.
Imran understands the irony. “As a bankrupt, I am not allowed to have a bank account, have no right to run a business, nor permitted to accumulate any assets.”
About two years ago, Imran’s business started to pick up. But from a professional point of view, he could not receive payments despite the increasing number of clients. Cheques had to be made in the name of proxies and there were some creative accounting and transfer of assets.
”The system encourages you to cheat. You hide as much assets as possible and if you earn anything, you don’t pay any taxes,” says Imran.
Imran describes Malaysia’s bankruptcy law as ’archaic’ because it denies individual bankrupts a second chance to redeem themselves. Under the Bankruptcy Act, there is no automatic discharge. A bankrupt may pay off his debts consistently over a number of years and would still have to apply to the courts or director-general of Insolvency to annul his bankruptcy status or seek a discharge. The process can be onerous. In the words of the Insolvency Department “only bankrupts with good conduct can be considered for a discharge”. This covers, among others, cooperative behaviour, regular payments, submission of income and expenditure statements every six months, and compliance with restrictions outlined under section 38 of Bankruptcy Act 1967. The discretionary power of the director-general is absolute.
Compared with other countries, Malaysia’s bankruptcy law appears punitive. For example, in Australia, bankruptcies can be annulled prior within a three-year period if all debts are paid out in full. A bankrupt may also make an offer of composition to creditors to pay off some of the money they are owed. If creditors accept the offer, the bankruptcy can be annulled after the funds have been received.
In Canada, a debtor can file a consumer proposal as an alternative to bankruptcy. This is a negotiated settlement between a debtor and his creditors. Debtors may make monthly payments for a maximum of five years to their creditors.
In England, a bankruptcy usually does not last longer than 12 months once an official receiver files in court a certificate that his investigations are complete. At the end of that period, a bankrupt is discharged and he ceases to be liable for his debts.
In Imran’s case, he opted for an Islamic banking loan. “As a Muslim, you feel obligated to choose the syariah option but I ended up being penalised.” Imran was referring to the fact that the bank sold off his property for RM175,000 (this was before the real estate market in the Klang Valley went into stratosphere). The forced sale resulted in a loss of RM50,000 and despite repaying more than RM70,000 prior to the bankruptcy proceedings, the creditor has a right to demand repayment for the 10 years of outstanding interest.
In July, Minister in the Prime Minister’s Department Nancy Shukri said the Bankruptcy Act 1967 would be amended to allow individual bankrupts to obtain a release. The act is in the draft stage but if passed, the law might allow for an automatic release after the case has been administered over a number of years. This is just a tiny glimmer of hope for bankrupts in this country.