The state of bankruptcy can often be very challenging to manage. It is confusing and emotionally devastating to an individual as well as an organization. Filing for bankruptcy is a very serious decision, and once it has been made, there is no turning back.
Bankruptcy in Malaysia is often considered a taboo subject, although it is perfectly formulated to help people to clear off their debts and start all over again. Not to mention, it is an indirect support to free you of your immediate accountability to the creditors.
Although the mere act of filing for bankruptcy is considered a disgraceful deed in the eyes of society, the stigma is just temporary. It nurtures an excellent environment to make better and improved financial conditions in the future.
Effects of bankruptcy
Bankruptcy in Malaysia comes with serious repercussions, and it’s essential for debtors to grasp the consequences before choosing to file for bankruptcy voluntarily.
On the other hand, creditors can utilise bankruptcy proceedings as a means to recover unpaid debts. Here are some key points regarding bankruptcy in Malaysia:
- Travel restrictions: Once declared bankrupt, individuals face restrictions on travel.
- Holding public office: Bankrupt individuals are barred from holding any public office.
- Business management limitations: They are also restricted from managing businesses.
- Control of assets: All assets, including any income earned during the bankruptcy period, are transferred to an official assignee who manages them to settle the debts.
- Publication of bankruptcy status: The bankruptcy status is published in the government gazette, which in turn adversely affects the individual’s credit score.
When you decide to file for it, the overwhelming feeling of a black mark on your credit report (for up to ten years) is definitely hard to deal with. But as you regain your creditworthiness over a period of time, your overall credit score will eventually improve, which is a good sign!
The economic performance of Malaysia is one of Asia’s best. However, in an official announcement made by Liew Vui Keong, then Minister in the Prime Minister’s Department, a total of 80,625 Malaysians have been declared bankrupt from 2015 up to August 2019. Surprisingly, 60% of them belong to the age group of 35 to 54 years.
What is Bankruptcy?
Bankruptcy is a legal process where individuals or businesses are declared unable to repay their outstanding debts. It involves the appointment of a bankruptcy trustee to administer the bankrupt’s assets and distribute proceeds to creditors.
In simple sense, it is a court proceeding initiated by you or your creditor (after obtaining judgment against you) where you inform the judge that you are financially incapable of paying your debts.
Bankruptcy proceedings begin with a court petition, filed by either a creditor or the debtor. Upon declaration of bankruptcy, an official assignee takes control of the debtor’s assets to settle debts and certain civil rights are restricted.
The phrase “certain civil rights are restricted” varies depending on the type of bankruptcy and the jurisdiction in which the case is filed. It may include:
- The right to file or maintain a lawsuit without the permission of the bankruptcy court.
- The right to transfer or sell property without the permission of the bankruptcy court.
- The right to obtain new credit without disclosing the bankruptcy to potential creditors.
- The right to travel outside of the country without the permission of the bankruptcy court.
What does it mean to be bankrupt in Malaysia?
In Malaysia, the governing law is the Insolvency Act 1967.
In legal language, it is the process where a debtor is declared bankrupt following an Adjudication Order from the High Court. In Malaysia a debtor will be declared bankrupt under the following conditions:
- The individual should be domiciled or have resided in or carried on business in Malaysia within one year before the date of presentation of the petition for bankruptcy.
- The individual is unable to pay debts, which amount to a minimum of RM 50,000.
- 6 months have lapsed since the debtor committed an act of bankruptcy. An act of bankruptcy could include a declaration from the Court at the behest of the debtor that he is unable to pay his debts, or a judgement obtained against him which remains unsatisfied.
The Official Assignee will be appointed by the court to examine your assets and liabilities, and if the court finds out that you have committed an act of bankruptcy and do not have any financial means to pay back to your creditors, you will be officially declared bankrupt.How does bankruptcy work in Malaysia?
What is the difference between Insolvency and Bankruptcy?
Both “Bankruptcy” and “Insolvency” deal with excessive debts. Although the terms sound similar, in reality, they are not.
Insolvency is a term used for the particular state which prompts one to eventually file for bankruptcy. In layman’s term, insolvency occurs when the debtor is unable to pay back the creditor on time.
The debtor can be an individual or a company.
For an individual debtor, this happens when the income levels are too low to pay off the debts.
For large companies and SMBs (Small and medium businesses), this condition occurs when the cash flow to the business along with its assets, are too low in comparison to the payables and liabilities.
In May 2023, Malaysia saw the enactment of the Insolvency Amendment) Bill 2023, designed to refine the country’s system for handling bankruptcy.
The revisions expand the scope for discharging individuals from bankruptcy, empower the Director General of Insolvency with the authority to pause the automatic discharge process, and introduce virtual technology for conducting creditor assemblies.
The insolvency situation does not automatically lead to bankruptcy as it can be tackled by other means such as:
- Taking a debt consolidation loan
- Compounding the debt or making an arrangement with the creditors to their satisfaction.
Bankruptcy is a legal declaration that a person is unable to pay off his/her debts. Once a person is made bankrupt, the Insolvency Department assumes control of the person’s assets to seek to pay off as much that is owed as possible.
In summary, the main differences between bankruptcy and insolvency are :
- Insolvency is a financial state while the latter is a legal status.
If you are insolvent, you are simply not in a financial state to pay off your debts. On the other hand, if you are declared bankrupt, you lose control over your own assets whilst the Insolvency Department steps in to manage your affairs. This is either by selling off the assets or by a repayment plan.
- A bankrupt is surely insolvent, but not all insolvencies need to lead to the declaration of bankruptcy.
How do I apply for bankruptcy?
In Malaysia, as per the Insolvency Act 1967, if an individual is unable to pay back her/his debts, s/he can voluntarily declare herself/himself bankrupt by submitting a petition to the court.
Typically, bankruptcy starts with a creditor filing a petition against the debtor in court. Debtors can also file voluntary petitions to declare themselves bankrupt.
A debtor’s petition cannot be withdrawn without the permission of the Court.
Unlike a creditor’s petition, there is no requirement here that the debtor should owe a minimum amount of money to the creditor.
- The applicant has to deposit a sum as prescribed fee to cover the necessary costs of the Insolvency Department.
- The petitioner has to file the petition in the state of his residence or business.
- A copy of the sealed petition must be sent to the Director-General of Insolvency.
During the hearing, if all the necessary details are promptly submitted, the court will make and Adjudication Order of bankruptcy as well as a Receiving Order vesting all the assets of the bankrupt to the Insolvency Department.
Can a debt collector make you bankrupt?
Yes, certainly, he can. As per the law, bankruptcy proceedings can be initiated if the debtor owes you RM 100,000.00 and above, you can initiate bankruptcy proceedings by filing a petition.
However, prior to commencing bankruptcy proceedings, a creditor would first have to obtain a judgement from a Court adjudicating the said debt. If the judgement remains unsatisfied, then the creditor can apply to render the debtor a bankrupt. Once a person is declared bankrupt, then it would be up to the Insolvency Department to handle the rest.
In accordance with the law, all your personal assets including company shares can be liquidated and sold off to repay the debt.
How to apply for discharge from bankruptcy?
The Malaysian law provides several provisions for one to get discharged from this state.
This includes a discharge by the order of the court, by annulment of bankruptcy, discharge by the certificate of Director General of Insolvency (“DGI”), and automatic discharge.
1. Annulment of Bankruptcy
Under this provision, the adjudged bankrupt applies to the court of law for an order to annul.
This is applicable under two conditions.
- If the adjudged person can prove that he should not have been declared bankrupt in the first place.
- If he is successful in paying back his debts to his creditor.
Once the annulment order is granted by the court, the effect will be similar as if no order had been made against him.
2. Discharge by Order of Court (Sec 33)
This provision allows adjudged bankrupt to apply to the court to grant him an order of discharge.
Once his application has been accepted, the court will review a report submitted by the DGI (Director General of Insolvency).
The report mainly deals with the conduct and affairs of the person who is declared bankrupt. If the court is satisfied with the report, an order of discharge may be granted by the court, removing the tag of bankrupt from the applicant.
If the results are not satisfactory, the court could:
- Refuse the order.
- Temporarily suspend the operation for a specified period of time.
- Grant a conditional discharge order.
- Suspend the operation of the order until the debtor has paid back 50% of the owed money to the creditor.
3. Discharge by Certificate of DGI (Sec 33 A)
The Director-General of Insolvency holds sufficient power to provide a certificate of discharge to the adjudged bankrupt person to relieve him of bankruptcy.
This will be done only after the completion of five years from the date of the order.
Before the issuance of the certificate of discharge, the law imposes an obligation to the DGI to serve a notice to each and every creditor who has filed a proof of debt.
The notice should clearly mention the intention of relieving the debtor of the bankruptcy status. If the creditor wishes to object, he should file a notice of objection within 21 days from the date of issuing the notice.
It should be noted that objections are not acceptable against:
- A person who was declared bankrupt for the reason of being a social guarantor.
- A person who is registered as a disabled person under the Disabilities Act 2008;
- A deceased person.
- A person who is suffering from a serious health condition, certified by a Government Medical Officer.
If the DGI rejects the notice issued by the creditors, they can directly apply to the court for an order prohibiting the DGI from issuing a certificate of discharge.
3. Automatic discharge (Sec 33 D)
An adjudged bankrupt may be discharged upon the completion of 3 years from the date of the submission of the statement of affairs, under the following conditions:
- If the bankrupt has achieved the amount of targeted contribution previously set by the DGI and
- if the bankrupt has fulfilled the requirement laid down by the DGI to surrender money and property to compensate for the debt.
FAQ
What happens if I declare bankruptcy?
Declaring bankruptcy leads to an Official Assignee taking control of your assets to pay off creditors. Restrictions are placed on travel, holding public office, and managing companies.
What does filing for bankruptcy mean?
Filing for bankruptcy means initiating legal proceedings to declare your inability to pay debts, leading to asset management by an Official Assignee to pay off creditors.
Can bankrupts have a bank account in Malaysia?
Bankrupt individuals may face restrictions with banking services. It’s advisable to consult with legal counsel for precise information.
How long does bankruptcy last in Malaysia?
Bankruptcy lasts until all debts are fully paid. It can be discharged after 3 years if debts are settled, or 5 years otherwise.
How to avoid bankruptcy?
Avoid bankruptcy by managing finances wisely, negotiating with creditors, or considering debt restructuring or consolidation options.
How to clear bankruptcy in Malaysia?
Clearing bankruptcy involves settling all debts or obtaining a court order. After 3-5 years, with debts settled, you can be discharged from bankruptcy.
How to solve bankruptcy in Malaysia?
Solving bankruptcy involves repaying debts, negotiating with creditors, or obtaining a court order for discharge.
How to check bankruptcy discharge status in Malaysia?
Check bankruptcy discharge status through the Malaysia Department of Insolvency (MDI) or consult with a legal advisor.
What are company bankruptcies in Malaysia?
Company bankruptcies, referred to as liquidation or winding up, involve selling off assets to pay debts. This process is governed by different laws and regulations compared to personal bankruptcy.
Final thoughts
For anyone who is struggling with a debt, being bankrupt is the last option on their mind.
However, in various cases, bankruptcy can be a great opportunity to re-organize your life free from the shackles of debt. In situations like these, it is vital to have a lawyer that you can trust to guide you through the steps to manage these fortuitous & financially arduous circumstances.
