BANKRUPTCY

How much do you know about Bankruptcy?

NAZRUL was a young, hot-shot executive. Used to life in the fast lane, nothing seemed to be beyond his reach. He was the proud owner of countless trendy gadgets plus a spanking new four-wheeler and an apartment in a `happening' neighbourhood.
Until his spending spree screeched to a painful halt.
Reason? Nazrul had got carried away by the spending power of credit cards. Owning more than eight cards, his penchant for luxury items finally caught up with him. So had the creditors.
Nazrul had accumulated RM30,000 in debts over just two years. With no means of repaying them, he was declared a bankrupt at the age of 27.
Nazrul is not the only one in such a spot. In 2004, 1,397 Malaysians were declared bankrupt due to their excessive consumption habits, especially via credit cards.
`All this is because of easy access to credit cards,' says Marimuthu Nadason, president of the Federation of Malaysian Consumer Associations (Fomca) and Era Konsumer.
According to Bank Negara Malaysia figures, in 2004 there were 6.6 million credit card holders in Malaysia, of which, 5.37 million were principal card holders and 1.21 million supplementary card holders. By July 2005, the number of card holders had increased by 10% to 5.91 million principal holders and 1.35 million supplementary holders.
For the first seven months of 2005, Malaysians took cash advances of RM1.519 billion, an increase of 13% over the RM1.34 billion taken in the same period in 2004. As of July 31, Malaysians owed a total of RM13.1 billion, and more than RM2.05 billion in outstanding balances.
The increase in credit card bankruptcies has changed the traditional view of a bankrupt. Previously, a bankrupt was often viewed as a wealthy person who had become poor due to bad fortune.
Deputy Finance Minister Datuk Dr Ng Yen Yen says the growing trend of people being declared bankrupt is not good and must be stopped. `Financial planning is very important. The answer is discipline through education and awareness,' she says.
She believes the rising trend of bankruptcies among individuals below 30 is due to spiralling credit card debts as a result of failure to manage expenses. Ng believes in public education campaigns to discourage overspending.
Which may be easier said than done. `It is very easy to overspend with credit cards,' says Marimuthu. `With easy access to credit facilities of up to RM20,000-RM30,000 per month, it is easy for a young executive earning a monthly income of RM3,000-RM5,000 to overspend.'
He says young executives tend to overspend especially when purchasing a new car or apartment. This ties up their income. As a result, they start to rely more on credit cards for their other needs.
A study conducted by Professor Dr Fatimah Daud of the University of Malaya's Department of Anthropology finds that 10.5% of bankruptcies are due to credit card abuse.
She says it is common for individuals to hold more than three, sometimes as many as 10, credit cards. `These cards are sometimes used for cash advances and personal loans. With banks withholding personal loans, card holders use cash advances as a source of easy credit,' she says.
Fatimah also finds that defaulters are not doing enough to repay their debts. `Credit card cash advances may be better than borrowing from the loan sharks, but one should also control one's expenditure,' she says.
`Much more needs to be done. This is not just about commercial bank expanding their credit card business. They also have a social responsibility here.'
The increasing trend of commercial banks providing free credit cards, free transfer of credit balances and upping credit limits are pushing Malaysians further into debts. In this regard, Fatimah calls on the Insolvency Department to investigate further the financial standing of bankrupts in Malaysia.
Department director-general Halijah Abbas declined to reply to queries by Malaysian Business on the issue.
Marimuthu says only strong measures can curb credit card bankruptcies in Malaysia. The first step should be to restrict credit card holding by increasing the minimum monthly salary requirement from the present RM1,500 to RM5,000.
Fatimah says each holder should be limited to three or five cards each while Marimuthu recommends that card applicants have a working record of at least two years and be prompt in his income tax payments.
Stressing on the importance of public education to promote wise spending, both Fatimah and Marimuthi agree that credit card providers must take the lead in sponsoring such campaigns.
The last revision to the Bankruptcy Act 1967 was in October 2003, when the minimum debt was raised from RM10,000 to RM30,000 for a person to be declared bankrupt. Should there be another review?
Marimuthu does not believe an increase in the minimum debt would help much. Indeed, when the threshold was last changed in 2003, the number of new bankruptcies decreased temporarily in the coming two months but reverted to almost earlier levels within the next few months.
Being a bankrupt in Malaysia is not a pleasant thing. Until a person is able to repay his creditors, his passport is seized, he cannot hold office in any political or non-governmental organisation, and all his assets are put under the care of the Insolvency Department. Besides, a bankruptcy declaration also affects one emotionally and psychologically.
Could consumers be taught to exercise self-control in their spending habits? Fatimah is not too confident. `You need tight industry regulations and constant education on the spending culture. It is hard to resist spending when credit comes so easily.'
Besides credit card-linked bankruptcies, other bankruptcies in Malaysia are caused by defaulting on car loans (23%); failing to pay personal or business loans (29%); and bankruptcies due to standing as a guarantor (21%).

For now, it may seem that at 10.5%, credit card bankruptcies are on the low side, but Fatimah warns that it is the fastest growing cause of bankruptcies in Malaysia.
It is unfortunate that Nazrul had to find it out the hard way.