The unwary youth, in pursuit of easy riches, have neglected to arm themselves with the adequate financial knowledge that is necessary for independence in living, despite their already overwhelming set of responsibility. On October 8th, 2016, Malaysian Financial Planning Council (MFPC) Deputy President Michael Kok Fook On announced that up to 22,663 Malaysians under the age of 35 have declared themselves bankrupt somewhere between the timeframe of 2011 and September 2015; he attributes this to a widespread failure to manage financial resources, and to a severe lack of understanding on the importance of proper financial planning. But this youth insolvency (which means the inability to pay off debts) endemic has its roots in a couple more causes. Malaysian Department of Insolvency (MDI) director-general Abdul Rahman Putra Taha, credits this to an inability to settle hire purchase, credit card, personal and housing loans, and unreliable social guarantors. For a youth in the midst of transition to adulthood, settling debts certainly can seem daunting, especially when coupled with stress and anxiety. This article aims to promote a better understanding of the rescue mechanism available and legal landscape affecting an individual’s debt position.
INSOLVENCY VS BANKRUPTCY
For now, let us distinguish between two terms so often interchangeably misused—insolvency and bankruptcy.
An insufficiency of funds required to pay off debts at a certain point of time does not equate to bankruptcy—it means that they are insolvent. This can stem from either poor cash management, a reduction in cash inflow forecasts, or an increase in expense. In these situations, the insolvent individual is welcome to approach any authorised financial institution (the most common would be a bank) to get their loan plan restructured. One does not need to be declared bankrupt to follow this set of procedures, and is thus able to steadily plod out of the insolvency mire.
Bankruptcy, on the other hand, is a legal status. It stipulates the fact that one is unable to settle his/her debts. When a judge declares one bankrupt, they will have all their assets liquidised. Liquidation is the process where assets and businesses are sold, and the gathered proceeds are distributed to its claimants (the bankrupt’s debtors).
Here’s an interesting statistic we derived from a news report: 60% of all bankruptcy cases within Malaysia involve the youth. That’s six of our peers in a line of ten bankrupt Malaysians—what a distressing image! Fortunately, our government have made several interesting amendments in the Bankruptcy Act 1967 (BA 1967); here are some of the major revisions.
Firstly, the minimum sum of money that you have to owe to be eligible for bankruptcy status is now RM50K, rather than RM30K as in previous years. This amendment, at first glance, could potentially reduce the bankruptcy rate by targeting the credit threshold; but could this be also be indirectly fueling our tendency to spurge? Also relevant to this increment are the effects of current inflation constantly taking place.
Secondly, the Bankruptcy Rules 1969 dictates that every potential bankrupt will now receive a personal bankruptcy notice or petition notice. In the past, you would not be informed of your status except for certain situations: passing through immigration, or when (unsuccessfully) attempting to take on loans from a bank. Such a convenient measure gives the you added foresight and financial awareness, and added time to plan the next course of action.
Aside from that, an individual who has declared bankruptcy stands a chance to be automatically discharged from this status after 3 years, rather than the previously enforced 5 years. This particular amendment could perhaps be an indication that our government has been putting in effort toward adopting a more constructive method of helping individuals with financial difficulties, rather than a utilising a punishment-based approach that centres around penalising the bankrupts.
Also worth mentioning, is the fact that creditors now have much less influence in preventing a bankrupt from being discharged from his/her status if the bankrupt is recognised as (1) a social guarantor, (2) disabled, (3) deceased, or (4) a terminal stage patient. A social guarantor refers to a person who does not profit and provides a guarantee for another person’s: (1) educational loans and scholarship contracts, (2) hire-purchase (meaning installment based) transactions of a vehicle for personal or non-business use, or (3) real-estate transaction solely for personal dwelling intentions—as long as it’s not for business purposes. Within this constraints, you are free to discharge your status without much creditor interference. However, creditors or the court can opt to object to the discharge if you have committed crimes, or if the administration of the bankrupt’s estate is somehow affected.
We now choose to highlight (and illustrate) a particularly interesting amendment: the introduction of the Voluntary Agreement (VA), a bankruptcy rescue mechanism. Say you currently owe Bank X about RM 55K, and you are well aware of your inability to pay your debt debt. You then to turn to VA for help in avoiding bankruptcy; Through this programme, you can negotiate repayment amount, loan tenure and interest rate charges through a licensed nominee. This implies that you possess the rights to fix the terms of these loans (though under careful supervision of licensed nominees). Of course, you are required to abide to the drafted agreement until you have settled your debts.
For these proceedings, a percentage charge will be imposed, and these proceedings will be put into the insolvency assistance fund. This fund is setup to cover up administration, payments and other expense on behalf of the bankrupt’s estate.
AKPK & VOLUNTARY ARRANGEMENTS
Agensi Kaunseling dan Pengurusan Kredit (AKPK) is an agency initiated by Bank Negara Malaysia. Its’ role is to offer financial education and counselling to the general public, as well as facilitating its’ renowned Debt Management Programme (DMP), a rescue mechanism that restructures a debtor’s loans with their creditors so that financial obligations are made easier to fulfill.
Owing to the new amendments to the Bankruptcy Act 1967, AKPK is also recognised as a licensed nominee and can now offer services in Voluntary Agreements. Although both VA and DMP programmes centralize on restructuring your debts, they differ from each other in several ways: DMP is a program initiated by AKPK and is not legally binding; VA, through BA 1967, is legally binding. For those under the VA programme, failure to follow up with scheduled or agreed payments is met with swift, legal implications.
Another noteworthy distinction revolves around the debt threshold necessary for one to be eligible for a particular rescue mechanism. VA has not set any prerequisite on the sum of debt needed to qualify for its programme; DMP, on the other hand, only accepts individuals with debt equal or less than RM5 Million to facilitate a more affordable debt restructure.
AKPK remains positive that the Voluntary Agreement entails a win-win solution for both debtors and creditors. Not only would a successful agreement help debtor avoid the negative implications of bankruptcy, it also ensures a cost-effective method for creditors to collect repayments (less money goes into resolving legal issues).
Our youth, with their limited financial knowledge, are more than liable to succumb to insolvency. Maybe we can take solace in the fact that these amendments and changes have vastly improved on the situation, but the fact still remains—sound financial education among the youth is the most powerful means to bring forth change.
For more information on the newly implemented Voluntary Agreements and amendments of the Bankruptcy Act 1967, the public is encouraged to contact AKPK by visiting the nearest AKPK branch or their website at www.akpk.org.my .
Written by: Koh Su Yen, Silam
Edited by: Samuel