There are many reasons behind why a debtor may find himself on the path to bankruptcy; from reduced income to job loss, to credit debt which may have accumulated because of illness and disability, emergency expenses, failed business ventures to plain, and simple bad budgeting and overspending.

This being the case, the only recourse that may be left to most debtors would be to declare himself a bankrupt and start afresh. This would be in line with the purpose of 'self-bankruptcy'; which has always been "to relieve the honest debtor from the weight of oppressive indebtedness, and permit him to start afresh free from the obligations and responsibilities consequent upon ... misfortunes"

Under Malaysian law, pursuant to Section 7 of the Bankruptcy Act 1967, a debtor can make an application to court to declare himself a bankrupt. The purpose behind this section is to enable a debtor to make himself a bankrupt in order to protect himself from his creditors’ claims that he knows he cannot satisfy.

However, when a debtor does declare himself a bankrupt, he is then faced with many restrictions which literally cripples and stifles him, thus ensuring that an honest debtor is never relieved from the weight of oppressive indebtedness, but instead doomed to forever carry the burden of this pre-existing debt.

Some of the restrictions imposed on a bankrupt are, for example, the restriction on overseas travel (subject to special conditions), disqualification from engaging in the management of any business or trade, the restriction on banking accounts, part payment of any income or wage to the Director General of Insolvency, and many others. These restrictions ensure that a debtor can never make peace with his bankruptcy and move forward.

Furthermore, creditors whose claims have gone unsatisfied by the debtor would also be ensured of the fact that their claims would, by and large, remain unsatisfied.

Therefore, is the Malaysian law that is currently in place in relation to 'self-bankruptcy' fulfilling its purpose? Does a debtor who declares himself a bankrupt guarantee himself a fresh start, free from the hindrances of his previous choices? The answer would be NO.

What then can be changed to ensure that the purpose of 'self-bankruptcy' is met?

One only has to look to the United States of America, where a provision known as the Chapter 11 bankruptcy (a bankruptcy filed under Chapter 11 of the United States Bankruptcy Code) or the 'reorganization' bankruptcy exists. For a bankruptcy filed under Chapter 11, a debtor will be allowed to propose a 'plan of reorganization' that will help make debt payments more realistic and affordable. This would include, for example, refinancing existing loans, decreasing the interest rate if interest rates have declined since the loan was entered into, debt consolidation, etc.

In essence, a Chapter 11 bankruptcy would ensure that a debtor receives credit counseling, creates a plan of reorganization of the debtor’s debts that would satisfy his creditors and in the meantime, guarantee that the debtor keeps his assets (wherever possible) so as to enable the debtor to move on and start afresh.

The recent amendments made to the Bankruptcy Act 1967, especially in relation to its voluntary arrangement mechanism, do indicate that Malaysia is open to progressive change in relation to its bankruptcy laws, to assist rather than shackle debtors. However, it is still too early to state with surety that this voluntary arrangement mechanism would meet the purpose and intention of its Chapter 11 counterpart.

In any event, Malaysia’s bankruptcy laws are still extremely creditor-friendly. Therefore, a Chapter 11-type bankruptcy in Malaysia may just be the next step towards fulfilling the very epitome of bankruptcy which is to give a fresh start to the honest but unfortunate debtor.