Bankruptcy And Owning Property

You have probably read in the news about the rising number of bankruptcy cases in Malaysia, with 2013 seeing a spike in the numbers. Minister in the Prime Minister’s Department reported nearly 22,000 cases of young Malaysians who were declared bankrupt last year compared to 13,200 young Malaysians in 2007.

Citing statistics obtained from the Department of Insolvency, she said that 12,300 young Malaysians have been declared bankrupt within the first six months of this year, of which 3,680 were women.

In Malaysia, the increasing numbers are pretty disheartening, with most incidents arising from defaulting on instalment payments on car, housing and personal loans. Indeed, being declared bankrupt carries a heavy stigma.

It is said to be one of the worst life-altering experiences a person can have aside from disability, divorce and the loss of a loved one. Statistics from the Department of Insolvency show that those between the ages of 35 and 44 have the highest bankruptcy incidences.

In this article, we explore the effects of bankruptcy in general and that on your property. So, should the unfortunate circumstance arise, you can take the necessary steps to minimise the damage or even avoid it.

What is bankruptcy? - In the context of an individual, bankruptcy is, simply put, a legal process corresponding to one’s inability to settle one’s debts.

This can stem from credit card bills, car loans, property mortgage repayments or business loans – basically any scenario that involves borrowing money on paper.

When this debt reaches a threshold of RM30,000 and is not paid within a period of six months, the bankruptcy threat becomes very real as one is then eligible to be filed for bankruptcy.

Once declared bankrupt, the director general of Insolvency (DGI) comes into play, taking possession of all documents and assets of the bankrupt individual, including bank accounts and properties besides subsequently administering and investigating all affairs related to the bankruptcy.

The DGI then has the right to sell all assets, from which the proceeds would be distributed among the creditors, which basically means liquidating everything that one owns would now fall into the hands of the DGI.

Life after bankruptcy - So, what does bankruptcy entail? For many, the perception is that bankruptcy may signify the end of the road for their circumstances. Although it may not be as dramatic as that, bankruptcy does impose significant restrictions on a person.

A bankrupt cannot leave the country or open a bank account without special permission from the DGI. He or she is also disallowed from working in companies that belong to a spouse or relative and has to declare the bankrupt status to any potential employer.

Additionally, a bankrupt is not allowed to do business or become part of any company’s management.

Sounds pretty heavy, doesn’t it? To top it off, for one to be discharged of this status is not easy as one has to settle all debts in full or get the involved creditors to accept a repayment scheme.

One can also apply to the court for an order of discharge, in which the DGI’s report will be referred to in the court’s decision.

If all else fails, one may appeal to the DGI after five years. The DGI has discretionary power to issue a certificate of discharge which will take into account all necessary factors in the process such as the person’s conduct, age and current financial status.

What happens to your property? - Once declared bankrupt, all assets, including property, will be seized by the DGI. If you think you can fool the system by transferring or selling your property to relatives prior to the bankruptcy, think again.

After bankruptcy is declared, the DGI has the authority to reverse any and all transfers backdating five years and two years if you have sold any property.

So, if you transfer an apartment unit to your relative in the face of impending bankruptcy, the DGI can make it void and subsequently, seize and liquidate that piece of property through an auction.

However, if you sell the property at a fair market value, it may not be seized as it could be viewed “in good faith”, meaning you did not sell the property with the intention of “protecting” it from the bankruptcy.

How to avoid bankruptcy - By now, you must be wondering what you can do should bankruptcy come knocking on your door. Let’s take a hypothetical scenario: Mike has overstretched his property investments a little too much.

He owns three properties with three mortgages to pay off – all of which he has been defaulting on payments since the past few months. As it is, he has his hands full with his children’s college tuition fees and two car loans with an increasing credit card debt.

Here’s what You can do:

• Mortgage restructuring

As his debts stem from property mortgage loans, Mike’s creditors are the banks from which he obtained the loans.

Instead of awaiting impending financial disaster, Mike can take a pre-emptive step by negotiating with the banks to restructure his mortgage loans.

If the banks are agreeable, then Mike would have a new payment plan with ideally, a lower adjustable interest rate and longer refinancing period.

If he can obtain such an outcome for all his loans, the repayments would be much easier on him.

• Debt consolidation

By taking a debt consolidation loan, Mike can basically throw all his current debts into one basket. Should a bank take on all of Mike’s collective debts, he would no longer owe separate creditors but just one bank. Having obtained a longer loan period, this would mean he has less to pay per month.

If Mike were to pay off a big amount of those debts, this will enable him to take a smaller mortgage as his loan would now be based on a collectively smaller amount than when the loans were first taken.

In some cases, banks would even offer an initial “interest only” period so that Mike would have time to reorganise his finances before taking on his debts again.

• Sell the property

As disheartening as it may seem, Mike’s best option could be to sell one or maybe even two of his property units, even if they have only slightly appreciated in value. Moreover, Mike would have to bear an agent’s commission, legal fees, taxes and other related costs of selling a property.

If this move can stave off Mike’s bankruptcy which would result in his property being seized and auctioned off, this would be more advisable.

Conclusion - Following the explanation above, what can be done now is to take steps to avoid the causes leading to bankruptcy.

This, however, is easier said than done. Do not overstretch your investments unless you have the financial capacity to sustain them. Ultimately, it is wise to consult a financial advisor regarding your investment portfolio to avoid being declared a bankrupt in the event of failing to pay at the end of it. If you are caught in the bankruptcy cycle and are looking for help, do drop us a line.