Avoiding bankruptcy

EVER wondered what goes on in the mind of a person who has been served a bankruptcy notice or even declared bankrupt?

The likelihood of the mind being enveloped with fear, lack of information and misplaced pessimism of losing a family home, car, life savings and the inability to restart afresh is high. It can be a traumatic experience.

If for some reason you are declared bankrupt, you lose your assets as that will be sold off to pay your debts by your lender. Your credit ratings plunge and that limits your capacity to seek new funding in the future for your big-ticket purchases.

“Bankruptcy proceedings are taken by creditors against individuals who have failed to ‘pay up’ their debts. These creditors are usually banks, finance companies and money lenders, ’’ said senior lawyer Shaharudin Ali.

In essence, bankruptcy proceedings are part of the creditors’ armoury to recover monies lent to individuals. It could be money lent to buy houses or vehicles, overdraft or credit card balances, he added.

Shaharudin said in Malaysia a creditor is not allowed to commence bankruptcy proceedings against an individual unless he has first sued that person and obtained a judgment from the court of law.

The threshold amount when a creditor can start bankruptcy proceedings is RM100, 000. “If the debt is less than RM100, 000, the creditor cannot use bankruptcy proceedings against a debtor. But the creditor has other options under the law, ’’ he added.

What leads to bankruptcy is the failure to pay a debt and failure to comply with a court judgement order, said Shaharudin.

“The lack of financial planning and budgeting knowledge and limited understanding of the importance of paying loans on time or not missing payments, ’’ said Shobana Sivanendran, senior programme manager at Creador Foundation’s Multiply.org.my.

She added that “this might lead to some people taking on loans they can’t afford. So, some borrowers might choose to skip their loan repayments as a way to manage their cash flow. If those missed repayments pile up, you could then eventually face bankruptcy”.

To avoid it, Shobana suggested that you cap your loans so that your loan repayments are below 40% of your monthly salary rather than 60%. Lenders often offer a loan facility so long the loan repayment is below 60% of your monthly salary. You have to ask yourself if 40% of your monthly salary is enough for your desired lifestyle.

To avoid it, you could raise cash by trimming your expenses, selling some of your valuables, taking on a second job, borrowing from family and seeking help from a credit counsellor to manage your debts.

If for some reason your loan repayments do not fit your budget, then think of delaying purchases until you can raise sufficient deposit. Avoid taking on too much loan that leads to too big monthly repayments.

“If you took a loan that may bloat to RM100, 000 or more, you are in a danger zone. Compounded interest charges are almost always the culprit here, ’’ said Shaharudin.

If you are served with a bankruptcy notice, Shaharudin said the most basic thing for an individual to do is to ensure that he turns up in court and contest the claim rather than do nothing about it.

It is this failure, and the failure to pay debts in a timely manner that leads a debtor into trouble with bankruptcy proceedings, he added.

If you have been adjudged bankrupt by the court with or without your knowledge, what can you do?

You need to appoint a lawyer and apply to court for the bankruptcy order to be annulled on the grounds that the debt has actually been paid in full, or that you ought not to be made bankrupt for some valid reason, said Shaharudin.

You can also make an application to court to discharge yourself from that status, though there are strict requirements to successfully do this, he said.

Shobana believes in reaching out to your creditors to negotiate a repayment plan. If they agree, apply to be discharged from bankruptcy if you have fulfilled the requirements.

“It might seem daunting, but with careful planning and good financial discipline, you could eventually get your life back to normal, ’’ she added.

Shaharudin said after five years from the date of the bankruptcy order, you can make an application to the Director General of Insolvency (DGI) for a discharge, though there is a criteria that must be satisfied.

“Among the factors that the DGI will take into consideration are the conduct of the bankrupt, the extent of his cooperation with the department, the amount involved, the cause of bankruptcy, age factor, illness etc, ’’ he added.

His advice is to keep records of all emails, proof of payments, emails and conversations with your creditors. “Needless to say, you must ensure that you keep a copy of any agreement or the letter of offer sent by the lender to you. This might save you later, ’’ he added.

However, if you are thinking of declaring yourself bankrupt as a way out of your debt woes, then think again, it may not be the best solution, experts said. Whatever your financial situation, when accumulating wealth, be aware of the implications of taking on too much debt and missing repayments.