Saving your only home

“Life really isn’t quite the same anymore when one is declared a bankrupt in this country,’’ Soffskills Network founder and licenced professional counselor Heeran Kaur (pic) said

WOULD you rather lose your only home that provides shelter to you and your loved ones or find ways to safeguard it.

The ongoing Covid-19 pandemic is certainly not helping as it has led many to lose jobs and take pay cuts, leading to financial instability.

With that, repaying loans and mortgages may not be a priority for some. Even though the moratorium is a huge relief, a loan or mortgage needs to be repaid sooner or later with accrued interest.

Defaulting and refusing to repay loans and mortgages can lead to severe consequences if you are declared bankrupt.

Then the assets under your name will be acquired by the Official Assignee and sold or converted to cash.

The payment is then made on a prorated basis to the creditor. Normally, for houses which are charged, the chargee bank takes priority.

Avoid getting into such situations. Not only does it affect your credit worthiness, it also leaves a stigma and can be a traumatic experience emotionally.

“Life really isn’t quite the same anymore when one is declared a bankrupt in this country,’’ Soffskills Network founder and licenced professional counselor Heeran Kaur said.

“Being declared a bankrupt can bring on tremendous emotional and psychological stress. Our self-worth and security are often closely related to our financial health,’’ she said.

When a person is unable to pay his debt, he is deemed insolvent but not bankrupt yet. Before being adjudged bankrupt, it is best for the debtor to negotiate a deal with his creditors which does not involve the sale of his house, said lawyer Bhavanash Sharma.

“Propose an installment plan to settle the debt or propose a voluntary arrangement in accordance with the Insolvency Act 1967 with the creditors at any time before being declared adjudged bankrupt to avoid losing your home,’’ he said.

Heeran warns about “unverified debt settlement and debt relief companies that may “promise’’ to negotiate with creditors, but in turn a debtor may get stuck with more fees or additional interest payments.

A creditor can only start bankruptcy proceedings if the amount is RM100,000 and above. However, for lower amounts, the creditor has other options under the law.

The sad part is that once you are declared bankrupt in Malaysia you cannot even save your only home.

“The general rule is that once a person has been declared bankrupt, if the house is under his sole ownership, then he cannot save his house.

The law is clear in that once declared a bankrupt, the bankrupt person’s assets would be under the strict supervision of the Director General of Insolvency (DGI),’’ Bhavan said.

Can you transfer the property quickly if you know bankruptcy proceedings are being initiated?

Bhavan said it is not possible. Any steps taken after bankruptcy proceedings have been initiated against a person will be seen as a way to “defeat, hinder or delay creditors.’’ It would be considered a void transaction if you do so.

To avoid seizure and eventual disposal of your property by the creditors via the DGI, Bhavan suggests two ways to safeguard yourself.

First, set up a living trust on your house in your lifetime. That means transferring your house to a nominee trust way before any bankruptcy proceedings have begun. The property can remain in trust during your lifetime to protect your assets.

This relates to Section 48 (1)(a)(i) of the Insolvency Act 1967. However, there is a trust administration fee involved.

Secondly, one can voluntarily arrange for a scheme of repayment with the creditors prior to the adjudged bankruptcy.

To do that, you need to appoint a qualified nominee – either a chartered accountant or a solicitor – to see through your repayment plan. This is provided for in Section 2A-2Q of the Insolvency Act 1967, Bhavan said.

Once declared a bankrupt, all your bank accounts will be frozen and transactions debarred.

The exception is that you can use one bank account for valid reasons such as crediting your salary into the account but you need permission from the DGI too.

“A bankrupt person is allowed to have a credit card with a limit of RM1,000,’’ he said.

If the house is in the name of your spouse, then the creditors cannot seize that property.

However, in cases of joint ownership of the house, Bhavan said “the position of law is vague, unclear and somewhat tricky, especially where the other owner of the property, in this instance the spouse, is not in debt to the creditor.”

“Each case will depend on its facts. However, based on some previous cases, where there was no fraudulent transfer of ownership and/or the purchase of the home was done bona fide, the debtor may be able to save his jointly owned home against enforcement by judgement creditors,’’ he said.

Apart from the legalities, Heeran believes it is important to accept reality and avoid being in denial.

Acknowledge the unpleasant feelings such as regret, guilt, sadness and anger and move away from the blame game.

“Foremost is adjusting to new practical realities post bankruptcy and that means dealing with things in the here and now. The sooner you do that, the better it is for you.

“It means financial control is regained faster and a greater sense of stability will follow,’’ Heeran said.

No matter how difficult, save your home at all costs.