How To Rebuild Your Credit After Bankruptcy

Everyone knows that going bankrupt is bad. As such, you will often hear plenty of advice on how to avoid going bankrupt in the first place. But what if you actually do go bankrupt? Are you now in complete financial ruin? Can you ever come back from such a state? Is your life over? 

In Malaysia, it is a rather taboo subject that tends to be avoided. However, bankruptcy as a system is actually designed to try and help individuals or businesses to clear off their debt in an efficient manner and help them to gain a fresh start.

What is bankruptcy

By definition, bankruptcy is simply a legal process where individuals or businesses are declared unable to repay their outstanding debts. It involves the appointment of a bankruptcy trustee to administer the bankrupt’s assets and distribute proceeds to creditors.

In Malaysia a debtor must meet several conditions before being declared bankrupt:

1. The individual should be domiciled or have resided in or carried on business in Malaysia within one year before the date of presentation of the petition for bankruptcy.
2. The individual is unable to pay debts, which amount to a minimum of RM 50,000.
3. Six months have lapsed since the debtor committed an act of bankruptcy. An act of bankruptcy could include a declaration from the Court at the behest of the debtor that he is unable to pay his debts, or a judgement obtained against him which remains unsatisfied.

How do you get out of bankruptcy

There are only three ways to get yourself out of bankruptcy.

Pay off your debts in full

If you pay off your debts, the records of you ever being bankrupt will be completely removed.

Discharge from bankruptcy by court

It is possible to apply to the court to be discharged from bankruptcy. However, the Malaysian Department of Insolvency (MDI) would need to send in a report of your cooperation and good conduct with the department.

Discharge from bankruptcy by the MDI

After three years, you can apply to be discharged by the MDI . But this would also depend on your cooperation with the department. Under certain circumstances, you may need to provide a written agreement with your creditor stating that you have come to an agreement on the terms of repayment of your debt.

Benefits of bankruptcy

Bankruptcy is often viewed as being an overwhelmingly negative state. However, there are some benefits to declaring bankruptcy. These include:

• It can stop the continued collection efforts of creditors. If you are constantly being called to repay debts, or you’ve been sued for payment, filing for bankruptcy will stop all of these activities.
• It can give you the relief you need. If you’ve exhausted all other alternatives, bankruptcy may be the only way to get the financial relief you’re seeking. In certain situations, it can give you a fresh financial start, though with the added challenge of having to rebuild your credit.
• You can get a repayment plan that works for you. If you’ve been unsuccessful in negotiating a restructured repayment plan with your creditors, bankruptcy may help you get a plan that works for your budget.

How to rebuild credit after bankruptcy

Fortunately, going bankrupt does not mean that your credit is now a lost cause. If you are currently going through or have recently gone through bankruptcy, there are a few things you can do to help get your credit back on track.

Don’t slack on existing loan and credit card payments

Don’t try to secure a new line of financing straight away. While bankruptcy clears many kinds of debt, it does not necessarily absolve you of all debt – so research upfront which kinds are eligible to be erased. 

Instead, turn your attention towards making timely payments on existing loans or credit cards on a monthly basis. No minimum payments either, you should be paying back your statements in full each month to help reestablish your credit. This can help improve your financial habits and your credit score.

Build an emergency fund

Bankruptcy will often eliminate a lot, but not all of your debt. However, you will have to work to clear the rest by yourself. Fortunately, with the majority of debt gone, it is the perfect time to start preparing your savings. By putting a portion of your income into a savings account and cutting back on non-essential costs you can avoid applying for more credit. To effectively build an emergency fund make sure to create a budget based on your income and remaining expenses.

Stick to a realistic budget

For both individuals and businesses, you will need to keep your spending in check following a bankruptcy. A realistic budget needs to be established and stuck to. Overspending leads to more debt than can reasonably be handled when it happens too frequently.

Money management is mostly about financial discipline, so sticking to a budget and seeing where your money is going versus  how much is coming in can help you stay under budget. In turn, you can avoid accruing too much debt.

Get assistance from AKPK

The Agensi Kaunselling dan Pengurusan Kredit (AKPK) or the Credit Counselling and Debt Management Agency, was established by Bank Negara Malaysia (BNM) for the express purpose of helping individuals take control of their financial situation and gain peace of mind that comes from the wise use of credit. As such, they are well-equipped to assist you in your journey to rebuild credit.

The three main services that the AKPK provides include:

• Financial education on the responsible use of money and credit management skills.
• Counselling and advice on financial management.
• Debt management programme to assist consumers to regain financial control.

The AKPK also has a programme to assist SMEs with their finances as well. In order to be eligible, SMEs must meet the following requirements:

• Malaysian-owned companies (at least 51%) in all economic sectors.
• Meet the SME definition criteria:
  • Number of full-time employees not exceeding 200; or
  • Annual sales turnover, not more than RM50 million
• SME facing financial difficulties with financing from financial institutions.
• Applicable for business-related financing only.

With this, you should have all the information you need to help get you started on your journey to rebuild your credit after bankruptcy. If you are worried about bankruptcy, but have not actually declared it, you can try looking at this article regarding several warning signs that you might be heading for bankruptcy.