Published by:

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Agensi Kaunseling dan Pengurusan KreditAras 8, Maju Junction Mall1001, Jalan Sultan Ismail50250 Kuala LumpurFax : 03-2616 7601 E-mail: enquiry@akpk.org.my

© AKPKFirst Edition 2011

The copyright of this book belongs to Agensi Kaunseling dan Pengurusan Kredit (AKPK). This book or parts thereof, may be reproduced, translated, or transmitted in any form with prior written permission from AKPK only for the sole purpose of education. No monetary gain in any form should be made or derived, whether direct or indirect from such reproduction.

ISBN 978-983-44004-2-2

Disclaimer:

The information contained in this book is solely for educational purpose. It is not intended as a substitute for any advice you may receive from a professional financial advisor.

Agensi Kaunseling dan Pengurusan Kredit (AKPK) disclaims all and any liability to any person using the information in this book as a basis for making or taking an action.

While all efforts have been made to make the information contained in this book accurate, AKPK seeks your understanding for any errors or omission.

The names and details of individuals in the real life cases have been changed to protect their identities.

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Chapter

6Managing yOUR DEBts

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Debt plays an important role in our lives. As most of us cannot afford to purchase everything in cash, we use debt to buy things such as a house and car to fulfil our desired goals.

If used wisely, debt is a useful tool to help you achieve your financial goals. As such, debt by itself is not a bad thing as it helps you get the things you want faster with more convenience.

However, if you take on excessive debts, you may face difficulties meet ing repayments which would ultimately get you into financial problems. This is why it is important to manage debt wisely and live with manageable debts.

Having manageable debts simply means living within your means and never overcommit t ing yourself financially. Keep in mind that good debt management helps you reach your financial goals faster while poor debt management negatively impacts your life.

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Why shOULD yOU ManagE yOUR DEBt WisELy?It just takes discipline and motivation to manage your debt wisely. Some benefits to managing your debts effectively are as follows:

If you are able to keep your debts at manageable levels, you should have more money left over for savings and thus have a positive cash flow

Having a positive cash flow is always desirable as you have extra funds available each month to help you build an emergency account, pay down debts and capitalize on good investment opportunities

A positive cash flow can be achieved when you have a budget and follow it closely

A big part of building wealth is making wise choices about debt. Through managing your debts wisely, you will be reducing your liabilities and at the same time enhancing your net worth position. All these effectively lead to better wealth management

1 Improved cash flow management

2 Better wealth management

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Be a good paymaster! The better you are at managing your debts, the more savings you will achieve in the form of various charges

Take the first step by paying your debts on time

You can pay off your debt faster by managing your debt wisely and constantly monitoring your progress. The faster you pay off all your debts, the more you will save on interest charges

If you can manage your debts well, you are creating a better track record for your future borrowings. This is because all your payment history is tracked by BNM under its Credit Bureau division (more details at the end of the chapter)

Whenever you borrow from any LFIs, your debts and repayment records are recorded. Due to this, if you have ever been behind on your payments or defaulted on your loans, it would be more difficult for you to get a loan in the future

5 Improve your credit standing

3 Avoid late payment and penalty charges

4 reduced borrowing cost

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To avoid legal action or harassment by your financiers, ensure you always pay your installments on time. It is crucial to note that skipping or paying your installments late will also affect your credit standing

If you think that nobody remembers you or is thinking about you, try skipping a loan installment

The better you are at managing your debts, the better your relationship would be with family members. Very often, families argue or have misunderstandings over money

With better debt management, your re lat ionship wi th your family not only improves but it also extends to your friends and co-workers

This leads to a more harmonious environment at home and better productivity at work

6

7

Avoiding harassments or legal action

Better relationship with family

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Marriage and debtIf you will be getting married soon, it is advisable for you and your partner to be open and honest about your existing debts. Both of you have to decide on how you are going to pay for these debts – whether jointly or separately. It is best to be clear and upfront about your financial commitments

before getting married to avoid future misunderstandings.

It is also important to discuss the budget of your wedding together. Many couples desire grand weddings and tend to go overboard in their spending, taking on more debt than they can handle. It is advisable that you plan your wedding according to your budget to avoid accumulating debts.

Debts accumulated from weddings can put unnecessary strain on your marriage and often lead to arguments. It is more prudent instead to use the money you plan on spending for a grand wedding towards the down payment of a new house.

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Financial check

It is a healthy practice for a couple to prepare a monthly budget with a spending plan and track their spending using a cash flow statement. The family’s net worth should also be reviewed at least once a year.

You and your spouse must review the household financial commitments regularly. Make this review a fun exercise to do together. Talk about positive ways to improve the household financial commitments. Find creative ideas and reasons to grow more money for each other and your family.

What LEaDs tO OVER-inDEBtEDnEss?You are said to be over-indebted if your debt has become a major burden for you to bear. Here, your income may not be sufficient and you may have to resort to utilizing your savings and investments to pay your debts.

greed

One of the main reasons of over-indebtedness is greed. In the words of Mahatma Gandhi, “Earth provides enough to satisfy every man’s need, but not every man’s greed!”

Some individuals become a little too greedy and are lured by get-rich-quick schemes only to lose their money. Even worse are those who use loans to finance such scams only to get themselves deeper into debt.

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Lifestyle

There are also those who live a luxurious lifestyle by buying expensive things they cannot afford. These people usually feel that they have to maintain an image to live up to other people’s expectations. People in this category usually charge everything to their credit cards but only make the minimum monthly payments. They are over-indebted simply because they live beyond their means.

Circumstances

Some people are forced into over-indebtedness due to unavoidable circumstances. Although you may have taken all the necessary precautions to borrow within your means, your ability to repay your debts can be affected by events beyond your control. These events include losing your job, being disabled, suffering from critical illness or other unforeseen emergencies. It becomes more critical if you do not have enough savings.

Unfortunately, there are people who do not realize that they are in financial trouble and continue to live in denial, making their situation worse by the day.

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always be preparedAge : 29 years oldOccupation : Sales ManagerMarital status : Married

Allen led a comfortable life working as a sales manager earning a 4-figure salary. He had a good lifestyle and was prudent with his spending. The recent economic crisis, however, forced his foreign employer to shut down its operations in the country, forcing Allen out of a job.

It was difficult for Allen to get a new job despite trying hard to look for one. To make matters worse, he had to support his ailing mother who had medical complications and a wife who did not work, as she had to take care of his mother. As Allen did not have anyone to turn to, he had to single-handedly support his mother and wife.

Pressed for cash, Allen turned to personal loans and credit cards to continue funding his lifestyle as well as ensuring that his mother and wife had everything they needed. Their standard of living funded by borrowed money did not at first bother Allen until he began defaulting on payments and barely making the minimum payments on his 3 credit cards.

In no time, Allen accumulated a total of RM150,000 on credit cards and personal loans. Soon, creditors began sending legal letters to Allen demanding payments and threatening bankruptcy. The thought of being bankrupt frightened Allen so he started working odd jobs to repay his debts.

Due to the insufficient income against his commitments, Allen had to even skip meals to ensure his mother had money for her medication. It was when his situation worsened that he decided to seek AKPK’s help.

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sOME signs OF POtEntiaL FinanCiaL DiFFiCULtiEs

Credit cards

• Paying only the minimum amount each month

• Increasing the outstanding balance every month

• Going over your credit limit

• Taking frequent cash advances

• Missing payments and paying late

• Having your credit card cancelled by the bank

Loans

• Using the overdraft or automatic loan feature on your current account frequently

• Receiving notices from banks or creditors for non-payment of debts

• Being denied credit because of a negative credit report

• Borrowing money from family or friends to pay your debts

• Getting calls from debt collectors regularly

savings

• Using up your savings at an alarming rate

• Having little or no savings to handle unexpected expenses or emergencies

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Expenses

• Living from paycheck to paycheck

• Depending on part-time jobs, overtime, commissions or bonuses to pay for your living expenses

• Not knowing how much money you owe until the statements arrive

• Arguing with your spouse regularly about money

What are the consequences?

Defaulting on loan payments and failing to pay your credit card debts can have terrible consequences. When you default on your loan, the financial institution will take legal proceedings against you.

If the loan is a car loan, the financial institution will act by repossessing and selling the car. If it is a housing loan, the financial institution will foreclose your property and sell it by public auction. If there is still a shortfall after the collateral is sold, the financiers will then take action against you (and/or guarantors, if any) to recover the balance.

For unsecured loans, the financial institution has a number of options to execute the legal judgement it has obtained to recover its debts. These include writ of seizure and sale, garnishee proceedings, judgement debtor summons, and bankruptcy proceedings on the borrower (and/or guarantors, if any). Currently bankruptcy proceedings can only be initiated if the debt amount is RM30,000 and above.

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if you are made a bankrupt, there are many things you are legally restricted from doing, some of which are as follows:

• Hold any public office without the approval of the Director-General (DG) of the Insolvency Department of Malaysia

• Pursue any court action without the DG’s permission

• Leave the country without the court’s or DG’s approval

• Be a company director or carry out your own business or be involved in the management of a company without the court’s or the DG’s approval

• Be an employee of a company that is owned by your spouse or close relatives and their spouses

• Be a committee member of any registered body

• Obtain a credit of RM1,000 or more from a creditor without informing him your bankruptcy status

If you are defaulting on your loans, get advice immediately! Do not wait until the problem gets out of control. The earlier you seek assistance, the easier it is for you to get out of the situation.

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1

2

Acknowledge that you have unmanageable debts

What tO DO WhEn yOU haVE UnManagEaBLE DEBts?

acknowledge. analyze. act.

The following are the 3 steps that you can adopt in overcoming your unmanageable debts.

• Do not be in denial. Admit that you have a problem, especially if you are experiencing some of the signs discussed earlier in this chapter

• Stop incurring any new debts. This includes paying for goods and services with your credit card

• Organize your loan statements to gauge exactly how much you owe

• Compare your tota l debt repayments to your income

• Prioritize the repayments of your debts. Pay off overdue loans and debts with higher interest rates first

Analyze your situation to assess your financial standing

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• Develop a budget if you have not done one yet. Your budget needs to include monthly loan repayments, which should be the first item on your list of expenses

• Consider using your savings or liquidating investment assets to reduce your debt

• Reduce your expenses

• Find ways to increase your income, for example, through a part-time job

• Renegot iate the terms of your loans with your financial institutions and work out a repayment plan to suit your cash flow

• Seek the help of the Credit C o u n s e l l i n g a n d D e b t Management Agency (Agensi Kaunseling dan Pengurusan Kredit or AKPK) if your financiers are unable to assist you

3 Act by taking immediate corrective actions

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These are some of the organizations that you may go to if you need assistance or advice. However, remember that you have to take proactive steps as discussed above to resolve your problems, including talking to your banker.

agEnsi KaUnsELing Dan PEngURUsan KREDit (aKPK)Set up by BNM, AKPK’s vision is to “make prudent financial management a way of life”. Its role is to equip Malaysians to live their lives with good money management skills and manageable debts.

AKPK provides 3 main services free-of-charge to members of the public to help them better manage their finances:

• Financial education programmes and materials on the proper use of credit and basic money management skills as well as tips on how to use credit responsibly

• Financial counselling and advice, providing and assisting individuals with an in-depth evaluation of their problems and how these may be resolved

• Debt Management Programme (DMP), through which AKPK works with individuals in developing personalized debt repayment plans and consults with their financial service providers to restructure/reschedule their loans in line with their cash flows

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To be eligible for DMP, individuals must meet the following criteria:

• Unable to manage their own debts

• Have loans taken from institutions regulated by BNM

• Have loan exposure of less than RM2 million

• Have positive net income after meeting their basic expenses

• Not under any advanced legal action

• Not bankrupts

Browse the website of AKPK www.akpk.org.my for more information

BnMLinK This is BNM’s important point of contact with the general public. It acts as a centralized point of contact to facilitate a rapid and effective response for members of the public, small and medium enterprises (SMEs) in matters related to the financial sector.

Browse the website of BNMLINK www.bnm.gov.my/bnmlink/index.htmfor more information

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FinanCiaL MEDiatiOn BUREaU (FMB)This is an independent body with a role to settle disputes, complaints or claims between you and your financial service providers. However, matters that will not be considered by FMB are as follows:

• Pricing

• Product policies and services

• Credit decisions

• Cases over 6 years

• Cases under litigation

Browse the website of FMBwww.fmb.org.my for more information

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CREDit BUREaUThe Credit Bureau of BNM collects credit information on borrowers, including private individuals, businesses (sole proprietors and partnerships), companies and government entities, and supplies the information back to lenders.

Each time you make a new application for a loan, the financial institution will check your payment history with the Credit Bureau. They will use the information to decide whether to give you a loan through the Central Credit Reference Information System (CCRIS).

Keep a copy of your CCRIS report to check if you have a healthy repayment schedule, defaults or late payments appearing in your report. It pays to be a good paymaster because this will be reflected in your credit report.

Browse the website of CREDIT BUREAU http://creditbureau.bnm.gov.myfor more information

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takeaways• Discuss your debt obligations with

your partner before getting married

• Always have manageable debts and never overcommit yourself financially

• Take immediate corrective action when you have unmanageable debts

• Over-indebtedness may be caused by greed, lifestyle or circumstances

• Defaulting on your loans will affect your CCRIS which will jeopardize your eligibility for future borrowings

• Defaulting on your loans can cause terrible consequences including bankruptcy

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Checklist

Do you know all your current loans outstanding?

Are you able to comfortably pay all your monthly repayments on time?

Have you skipped or missed paying any of your bills?

Have you discussed your financial posit ion with your spouse or family?

Do you have a copy of your latest CCRIS report?

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sELF assEssMEnt

1. By managing your debt well, you will be able to________

a. improve your cash flow positionb. reduce your borrowing costsc. avoid harassment or legal actiond. all of the above

2. Which of the following will affect your credit standing?

a. Not paying your installments on scheduleb. Paying your bills in full by the due datesc. Making the minimum payments on your credit cards

promptlyd. Having 3 credit cards

3. All the following are signs of potential financial difficulties, EXCEPT:

a. Having little or no savings b. Taking frequent cash advancesc. Living within your meansd. Living from paycheck to paycheck

4 Some of the corrective actions you can take to control your financial difficulties are:

a. Renegotiate the terms of your loans with your financial institutions and work out a repayment plan to suit your cash flow

b. Consider using your savings or liquidating investment assets to reduce debt

c. Find ways to increase incomed. All of the above

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5. Which of the following is FALSE with regards to a bankrupt:

a. Cannot be a company directorb. Cannot be in any employmentc. Cannot leave the country without the Director General’s

approvald. None of the above

6. Agensi Kaunseling dan Pengurusan Kredit provides all of the following services, EXCEPT:

a. provide loans to those facing financial difficultiesb. provide financial counselling and advicec. provide financial education on how to better manage

your moneyd. provide debt management programme

7. The acronym CCRIS stands for:

a. Corporate Credit Reference Inquiry Systemb. Current Corporate Reference Inquiry Systemc. Central Credit Reference Information Systemd. Central Corporate Reference Information System

Check your answers at the end of this book

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