Bankruptcy and property ownership

Updated 23 Aug 2017 – By Loanstreet


You’ve probably read in the news about the rising number of bankruptcy cases in Malaysia, with 2013 seeing a spike in the numbers – just below 22,000 cases. Indeed, being declared bankrupt carries a heavy stigma with it, and is said to be one of the worst life-altering experiences a person can have aside from disability, divorce and loss of a loved one.

In Malaysia, the worsening numbers are pretty disheartening, with most incidents arising from the sale and purchase of vehicles, followed by housing loans as the second biggest cause.

Statistics from the department of solvency shows that those between the ages of 35-44 years have the highest bankruptcy incidences. In this article, we explore the effects of bankruptcy in general, and then on your property, so that should the event arise for you, 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 in the case of inability to settle one’s debts. It can be from credit card bills, car loans, property mortgage repayments, business loans; basically any scenario that involves you borrowing money in black and white.

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 – you are then eligible to be filed for bankruptcy. Once bankrupt, the Director-General of Insolvency, or DGI, comes into play, taking possession of all documents and assets of the bankrupt individual, including bank accounts and properties, and subsequently administers and investigates all affairs related to the bankruptcy.

The DGI then has the right to sell all assets, from which the proceeds would be distributed among creditors. Basically, liquidating everything that you own would now be in the hands of this one person.

Life after bankruptcy

So, what does bankruptcy entail?

For many, the perception may be that bankruptcy signifies the end-all for their world. Although it may not be as dramatic as that, it 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. One has to, obviously, 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 plead to the DGI after five years, who has discretionary power to issue a certificate of discharge. Of course, the DGI 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?

All assets, and yes, including your 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 the bankruptcy is declared, the DGI has authority to reverse any and all transfers backdating five years – two years if you sold any.

Basically, 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. If you sell the property, however, at fair market value, it may not be seized, as it could be viewed ‘in good faith’, meaning that you did not sell the property to with intentions to protect it from the bankruptcy.

How can you 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 had over-reached a little too much in his property investments. He has three pieces of property, with three mortgages to pay off, all of which he had been defaulting in the past few months. As it is, he has his hands full with his children’s college tuition and two car loans with an increasing credit card debt. Here’s what Mike can do:

  • Mortgage restructuring

As the debts stem from property loan mortgages, Mike’s creditors are the banks from which he took out the loans from. Instead of awaiting impending financial disaster, Mike can take a pre-emptive step of negotiating with the banks for a restructuring of his mortgage loans. If the banks are agreeable, then Mike would have a new payment plan with, ideally, a lower adjustable interest rate and a longer refinancing period. If Mike can successfully 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 debt 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, and with a longer loan period, which means less to pay per month. Additionally, should Mike have paid off a significant amount of those debts, this enables him to take out a smaller mortgage, as it would be based, collectively, on a smaller amount than when the loans were taken out. In some cases, banks would even offer an initial interest-only period, meaning that Mike would have time to reorganise his finances before taking on his debts again.

  • Sell the property

As disheartening as it may be, Mike’s best option could be to sell off one or maybe even two pieces of his property, even if they had only appreciated slightly in value. Moreover, Mike would have to bear an agent’s commission, legal fees, taxes and other related costs to selling a property. Then again, if this move can stave off being bankrupt, which would result in your property being seized and auctioned off anyway, this would be a much more advisable step.

Conclusion

After having said all of the above, what you can do now, obviously, is to take steps to avoid the factors leading up to bankruptcy. This, however, is easier said then done. Do not over-reach with your investments unless you have the financial capacity to sustain them. Also, always assess the risk levels of your investments before you take them on – the conventional wisdom “high risk high returns” is timeless. Strike a balance by consulting with a financial advisor on your investment portfolio, and ultimately, avoid the deep bankruptcy hole.

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