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Abstract

Lenders increasingly used risk-based pricing of interest rates in consumer loan. It tests three
resulting predictions: First, the premium paid per unit of risk should have increased over this
period. Second, debt levels should have reacted accordingly. Third, fewer high-risk
households should have been denied credit, further contributing to the interest rate spread
between the highest- and lowest-risk borrowers. For people obtaining loans, the premium
paid per unit of risk did indeed become significantly larger. For example, for a 0.01 increase
in the probability of bankruptcy, the corresponding interest-rate increase tripled for first
mortgages, doubled for automobile loans and rose nearly six-fold for second mortgages.
Additionally, changes in borrowing levels and debt access reflected these new pricing
practices, particularly for secured debt. Borrowing increased most for the low-risk
households who saw their relative borrowing costs fall. Furthermore, while very high-risk
households gained expanded access to credit, the increases in their risk premiums implied
that their borrowing as a whole either rose less or, sometimes, fell.
The Malaysia Department of Insolvency (MDI) statistical releases that total bankruptcy cases
as at September 2013 is 251,209 bankrupt filed (The Star, 2013) and recent bankruptcy
record shows that the declared bankrupt cases are quite concerning compare to past years
record which worries by Bank Negara. The increase in personal bankruptcy case reflects
erosion in credit evaluation process and this has lead the banks to be cautious and to tighten
their lending process and loan approval. However, if you are a shareholder of a corporation, a
general partner, or an owner of a Limited Liability Companies (LLC), and you have waived
your limited liability such as personally guaranteeing a loan for business), having your own
business go through a bankruptcy proceeding will not protect you. This is because you have
waived your limited liability and have become personally liable for some, if not all, of the
business debts of your company. Advantages of bankruptcy is that person have more time to
figure out what to do. In general, bankruptcy can wipe out unsecured debt such as property,
credit card bills. However, secured debts such as home mortgages or car loans might be
considered separately. By putting property as security for the loan, the creditor is still
probably entitled to take it even though that person has already file for bankruptcy. Filing for
bankruptcy might mean that you do not have to pay back what you owe on the loan, but you
will still probably have to give back the property.

Introduction
Question 1
An amount of money lent to an individual (usually on a non-secured basis) for personal such
as small business, family, or household purposes. Consumer loans are monitored by
government regulatory agencies for their compliance with consumer protection regulations
such as the Truth in Lending Act.
Based on reports from the National Consumer Complaints Centre (NCCC) and a focus group
on consumer banking issues conducted by the Consumer Research and Resource Centre 52
(CRRC), the complaints and issues faced by consumers in the relationship with the financial
sector are complex products, bank charges, rejection for use of banking facilities, standard
procedures for auction; and outsourcing of collection by banks.
Malaysians often have easy access to credit. This has resulted in substantial household debts.
Household debt to GDP stands at 83%, which is considered to be one of the highest in Asia.
Most of the household debt comprises housing, car and personal loans. According to a Bank
Negara report in March 2013, the household debt composition of the financial system is
allocated as follows: 45% for purchase of residential properties; 18% for vehicle purchase;
17% for personal use; and 4% for credit cards. There is a debate on what is the cause of this
dire situation. One view says that many, especially young workers, are living beyond their
means. Others disagree, saying that the cause is high asset prices and relatively low incomes.
1) Consumer Credit
When you buy something on credit, you take possession of your purchase now and pay for it
in the future. Credit is based on trust the lender trusts your ability and intent to pay. Your
credit history shows how youve handled credit in the past, and suggests how well lenders
can trust your ability and intent to pay in the future. Credit allows you to buy something, such
as a new washer, a car, or even a house, while promising to pay for it from future earnings.
Credit can also give you access to cash in an emergency, and enable you to consolidate debt
to better manage your finances.

2) Closed - End Credit


A closed-end credit is a loan or extension of credit in which the proceeds are dispersed in full
when the loan closes and must be repaid, including any interest and finance charges, by a
specified date. The loan may require periodic principal and interest payments, or may require
the entire payment of principal at maturity. Types of closed end credit are mortgages and
automobile loans. Both are loans taken out for a specific period when the consumer is
required to make regular payments. The issuing bank retains some ownership rights over the
asset in question as a means of guaranteeing repayment. If a customer fails to repay an auto
loan, the bank may seize the vehicle as compensation for the default (Claire Boyte -White,
2015).
3) Open - End Credit
Open-end credit is a pre-approved loan between a financial institution and borrower that may
be used repeatedly up to a certain limit and can subsequently be paid back prior to payments
coming due. The pre-approved amount will be set out in the agreement between the lender
and the borrower. Open end credit also referred as line of credit or revolving line of
credit.
Open-end credit is not restricted to a specific use or duration. Credit card accounts, home
equity lines of credit and debit cards are all common examples of open-end credit. The
issuing bank allows the consumer to utilize borrowed funds in exchange for the promise to
repay any debt in a timely manner.
Unlike closed-end credit, there is no set date when the consumer must repay all of his debts.
Instead, these debt instruments have a maximum amount that can be borrowed though this
is often revisable and require monthly payments based on the amount of credit used (Claire
Boyte -White, 2015).
4) Line of Credit
Under a line of credit agreement, the consumer takes out a loan that allows him to pay for
expenses using special checks. The issuing bank agrees to pay on any checks issued on the
account, up to a certain amount.

This type of credit is often used by businesses, which can use company assets to back the
loan. Secured lines of credit often have lower interest rates than unsecured credit, such as
credit cards, which have no such backing (Claire Boyte -White, 2015).
5) Factors to consider when deciding whether buying an item on credit:

Do you need the item now or can you save for it?
Do you have savings or cash you might use instead?
How much will the interest and other charges be?
Do these payments and costs fit into your budget?
Will the interest be tax deductible?
How much will this purchase increase your total debt?

6) Paying Cash VS Using Credit


Saving your money and paying cash for an item is less expensive than using credit. But credit
gets you goods and services now. Both require that you regularly set aside money from
current income. In other words, if you cannot afford to save for it, you cannot afford to buy it
on credit. Savings earn money; credit costs money. The difference can be substantial. Lets
assume that you face a choice between buying a RM2,000 item now on credit, or saving
RM2,000 over the next year and then buying it. If you buy the item with a credit card, you
might pay RM200 in interest over the next year. Instead, if you save RM2,000 you might earn
RM50 in interest. Thats a difference of RM250. And thats money in your pocket.
7) Pros and Cons of Using Credit

Pros

Immediate use of

Get it now, pay later. This is especially helpful for big-

goods and services

ticket items such as a piece of furniture, a car, or a

Shopping

house.
Credit cards and charge cards allow you to shop and

convenience

travel without carrying large amounts of cash. They also

Reservations and

provide monthly records of your spending.


Credit cards and charge cards make it possible to

purchases by phone reserve rental cars and hotel rooms, or buy tickets or
or Internet
Emergency cash

other merchandise over the phone or Internet.


Credit can provide a temporary solution to unexpected
financial difficulties.

Credit costs money

Purchases paid for over time cost more, often much


more, than cash. That irresistible bargain may not be a

Cons

It tempts

good deal when you add in the cost of credit.


Credit makes impulse buying easy. Some consumers go

overspending

deeply into debt buying items they dont really need and

It ties up future

cant really afford.


Credit purchases mean you will have to pay for the item,

income

plus interest, in the future. This means less available

It may result in

cash in the future.


If you fail to make payments on time, you may lose the

losses

merchandise. For loans that require collateral, you could


lose valuable property or even your home.

Question 2
Bankruptcy is a word that immediately brings a negative vision to our minds. It happens
everywhere in the world and is not partial to a certain country, race or nationality. In
Malaysia, the total number of bankruptcy cases nationwide has risen from 70,009 in 1999 to
106,000 in 2003 and latest on 2008 the figure stands at 160,000 cases.
Bankruptcy is a legal proceeding that involve either a person or business entity that is unable
to pay their outstanding debts. The process of bankruptcy started when the debtor charged an
appeal on behalf of the creditors. The debtors assets will be measured and evaluated so that
the assets can be used to repay the outstanding debts. The debtor will be relieved from debt
obligations. Then he can charge for bankruptcy upon the success on completion of
bankruptcy proceedings.
1) Personal Bankruptcy
Bankruptcy have two types which is personal bankruptcy and corporate bankruptcy. For a
corporate bankruptcy, it is described as a legal proceeding involving a person or business that
is unable to repay outstanding debts. Virtually every country with a modern legal system
features some form of debt relief for individuals. Personal bankruptcy is distinguished from
corporate bankruptcy. Personal bankruptcy is a legal procedure for people whose
circumstances are unlikely to change and who have no hope of paying off their debts within a
reasonable time.

On 28 October 2014, Malaysian Digest stated that, Back in February 2014, Malaysian
Digest did a write-up on the rise of bankruptcy among young Malaysians, which took a closer
look at the reasons such as failure to repay loans and credit cards debts due to poor financial
planning and spending habits. Recently a News Straits Times report stated that a total of
1,940 youth below 25 years old had been declared bankrupt since 2007 until June this year,
but what was more shocking was that 579 out of that total were declared bankrupt in the first
six months of 2014, according to a Bernama report.
This represents an increase of 208 individuals from the previous year, with another 2,491
individuals between the ages of 25 to 34 were also declared bankrupt, said Minister in the
Prime Ministers Department Nancy Shukri.
Based on the numbers, we can say that young Malaysians are not well prepared on how to
deal with the consequences of having financial debts. Once they reach on legal age of 18,
bankruptcy at young age can cause serious effects especially in terms of psychology such
stress, family pressure and social expectations. Besides the usual views from financial
planners and credit agencies, perhaps we should also understand this issue from the
psychological perspective as the root causes of increasing youth bankruptcy could be found
there.
Generally, personal bankruptcy is considered a last resort for people inundated with loans or
bills. Although going bankrupt is an effective way to wipe out most or all debt obligations,
there are long-lasting consequences. Moreover, we can see there are a lot of factors that can
be consider as bankruptcy such as job loss, poor financial planning, student loans,
uncontrolled spending such as credit card, unexpected disaster such as floods, and medical
expenses. Bankruptcy will negatively affect your credit and future ability to use money. It
may prevent or delay foreclosure on a home and repossession of a car. It can also stop wage
garnishment and other legal actions of creditors attempting to collect debts. In addition, filing
for bankruptcy can be a complex and costly process. Experts suggest investigating other
options seriously before considering bankruptcy.

2) Corporate Bankruptcy
For a corporate bankruptcy, it is described as a legal proceeding involving a person or
business that is unable to repay outstanding debts.
Small businesses usually provide variation of products and services. But still big companies
have to make sales and bring revenue or return for the companies to survive. If the companies
are not profitable enough for quite long period, they will be forced to go into bankruptcy to
exit the market or reorganize back their business. Even though most of the main reason a
companies may go bankrupt is cause by lack of profitability, there are actually other
underlying factors that could hinder a companies in making profit then lead to bankruptcy
such as market conditions, financing and poor decision making.
It is pretty common that poor conditions in overall economy and specific market where the
business operates can cause bankruptcy. It is because the economy tends to follow a boom
and bust cycle of rapid expansion followed by lulls or recessions. During bust periods,
consumer confidence and spending tend to decline, which can lead to low revenue.
Companies involved in specific niche markets can also be susceptible to shifts in consumer
preferences. For example, when Johor Sultan, Sultan Ibrahim Ismail has banned electronic
cigarette on 1st January 2016 at Johor state. This may have cause small business that sold
electronic cigarette gone bankrupt or if possible they will have to open other kind of products
or services business.
Financing is one of the primary challenges that small businesses face. Many business owners
take out loans to help finance their operations. If a business struggles, his lender may not be
willing to grant additional funding, which could lead to bankruptcy. Even if an owner can
secure more financing to keep his company afloat in the short-term, high debt makes it more
difficult for a company to be profitable because it has to pay interest on the debt.
Lack of planning and level-heading thinking can lead to hasty decisions and business failure.
For example, a business owner might spend time and money developing a product that she
believes in without surveying customers and studying production costs to gauge whether the
product could be profitable. Even if the product is useful, it might not be financially viable
from a business standpoint. Lack of education and experience in finance and management can
increase the likelihood of poor decisions, but no company is immune to making mistakes.

There are some other factors besides mention above that can contribute to bankruptcy include
poor business location, loss of key employees, lawsuits raised by competitors and personal
issues like illness or divorce. Unforeseen disasters and criminal activity like floods, storms,
fires, theft and fraud can also cause hardships that lead to bankruptcy.
3) Bankruptcy Law
Bankruptcy refers to a process where a debtor will be declared a bankrupt pursuant to a court
order. All property belonging to the bankrupt will vest on the Director General of Insolvency
(DGI) and the DGI has the responsibility to sell all such assets. Once this is completed, the
proceeds of the sale will be distributed among creditors who have filed their proof of debts
with the DGI's office (Malaysia Department of Insolvency 2013).
Bankruptcy law exists to help both the bankrupt and the creditor. It will stop the creditor from
harassing the debtor and it safeguards the rights of both parties.
For personal debtor, that person will be subjected to the bankruptcy jurisdiction of the court
within the definition of section 3(3) of the Bankruptcy Act 1967 and at the time the act of
bankruptcy is committed:

Was personally present in Malaysia; or

Ordinarily resided or had a place of residence in Malaysia; or

Was carrying on business in Malaysia either personally or by means of an agent; or

Was a member of a firm of partnership which was carrying on business in Malaysia.


A creditors petition may be presented only upon the commission of an act of bankruptcy
(section 3(1) of the Bankruptcy Act 1967) by the debtor which must have taken place within
six months prior to the presentation. No creditor can present a bankruptcy petition against
him unless the debtor:

Is domiciled in Malaysia; or

Within one year before the date of the presentation of the petition has:

Ordinarily resided in Malaysia; or

Had a dwelling house in Malaysia; or

Had a place of business in Malaysia; or

Carried on business in Malaysia personally or by means of an agent; or

Is, or has been within one year before the date of the presentation of
the petition, a member of a firm or partnership which has carried on business in Malaysia by
means of a partner or partners or an agent or manager.
When a company is placed into administration or liquidation it requires different handling
process according to the different cases, thus the need for specialization in the department to
manage and administer the cases accordingly.
The Liquidation Division is divided into two main Sections, which are; Operational section
and Policy and Administration Section. These two Sections serves the Liquidation Division
according to the needs of Corporate Insolvency.
However, an undischarged bankrupt is disqualified from acting as a director of a company
pursuant to the Companies Act 1965. If a bankrupt wish to act as a director of a company,
he/she must seek the approval of the Director General of Insolvency (DGI) or grant of leave
from the Court. It is also important to note that except with the permission of the Director
General of Insolvency (DGI) or Court, a bankrupt is not allowed to work in the business of a
spouse, children or relative; and enter or carry on any business either alone or partnership.
*Bankruptcy Law are quoted from Official Portal Malaysia Department of Insolvency AND
Bankruptcy Act 1967 Malaysia Statutes in International Insolvency Institute Website.
Conclusion
When shopping for credit you should also consider whether or not you have adequate
insurance coverage should the unexpected occur, like a death, disability or job loss. Many
employers provide group life or group disability insurance coverage to their employees. You
may also have other types of personal insurance coverage such as term life, whole or
universal life or disability income insurance policies that should also be considered when
determining your need for additional coverage at the time you decide to shop for credit. If
you determine that you need that additional insurance coverage, there are many products that

provide it. How much coverage you need may dictate which type of insurance product is right
for you. If you need a large amount of coverage for an indefinite period of time, you may
want to consider a separate individual life or disability income policy. Most life insurance
products provide a fixed amount of coverage while the policy is in effect. If you need
coverage specifically tailored to pay the balance or the monthly instalment on a loan or credit
card account, you may want to consider a credit insurance product. Credit life insurance
generally provides a benefit equal to the loan or account balance during the term of coverage.
Credit disability or involuntary unemployment insurance generally pays the monthly
instalment on the loan or credit card account at the time of disability or job loss.
A straightforward answer to avoid becoming bankrupt is simply to take responsibility for
ones financial affair or well-being. It means not to take huge loans to purchase something if
you do not have the ability to pay back the monthly instalments. It also means being incontrol of ones spending habits and not to over-commit on too many loans including hire
purchase.
For corporate bankruptcy, from an investors point of view, theres not much can be say about
bankruptcy. No matter what kind of investment you made in a company, if it goes bankrupt
that means you going to get lower return than what you expected. Therefore, if anyone intend
to open a business, do research work properly and thoroughly. Ensure that you have enough
financial resources and stamina for the start-up and for the first few years. Most businesses do
not make money initially and may take a few years to show a profit. Imagine the worst
scenario happening and whether you can survive financially. Having just the start-up capital
is not enough, you need to have back-up plans and support available.

References

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