You’ve already been warned many times not to overstretch yourself when buying a home, and to be careful to not get into credit card debt.
But why exactly is it bad to spend more than you can afford to? Is it because an evil witch from the land of Credit Scores will swoop down and spirit you away? Not exactly. For most folks who find themselves defaulting on their debt one too many times, the worst thing that can happen is bankruptcy.
So, what exactly does it mean to be bankrupt? We know Jacelyn Tay went bankrupt, but so what? Here’s what you can expect if (choy!) you are one day forced to file for bankruptcy.
Why do people file for bankruptcy?
You can voluntarily file for bankruptcy, or be compelled to do so by your creditors.
Being an undischarged bankrupt is very disruptive to your lifestyle, which is going to be very spartan for the next few years. Still, some people opt to file for bankruptcy because being bankrupt can make your debts easier to repay.
Interest stops running on your existing debt once you’re declared bankrupt, which can be a relief for anyone who’s ever looked at their credit card debt spiral over a span of months.
The amount you need to pay back each month will also be calibrated according to your income, and if you don’t manage to pay back all of it within a certain number of years (7 years for first-timers), you still get discharged.
You can file for bankruptcy if you owe at least $15,000 that you can show that you have no way to pay back.
Once you’re declared bankrupt, somebody called the Official Assignee will be appointed by the court to handle your affairs to make sure you manage to pay off the debts.
Here’s what you can expect as a bankrupt.
Your assets will be sold
If you think the Official Assignee will be like a credit counseller, take off your rose tinted glasses. While you will certainly get “help” to pay off your debts, this will begin by your assets being unceremoniously seized and liquidated in order to pay your creditors back.
Almost everything you own which is considered valuable can be taken from you, so say byebye to your Mitsubishi Lancer, your Hermès Birkin bag, your investment properties and all the cash you’ve stashed in your bank accounts. Heck, you might even lose your iPhone.
Only assets that are deemed absolutely necessary for your and your family’s survival will remain untouched. This includes your HDB flat, your CPF savings and things you need in your line of work. If you’re holding something in trust for someone else, that won’t be touched since it doesn’t actually belong to you.
No more overseas holidays
Bankrupts are supposed to live a bare bones lifestyle, channeling any money they don’t need for survival into paying off their debts. That means you’re not allowed to go on overseas holidays.
If you have a good reason for leaving the country, such as work, you must make an application 14 days before your trip, and it will probably be rejected if it’s not viewed as necessary. Forget about getting approval for that de-stressing Bintan getaway, though.
A portion of your salary will be paid to creditors
Before becoming a bankrupt, you might have thought it was hard to save a portion of your salary every month. Well, as an undischarged bankrupt a portion of your salary will be automatically paid to creditors, and a small amount will then be passed on to you as living expenses.
Your lifestyle will be scrutinised
Once your bankruptcy case has been handed over to the Official Assignee, you’ll be made to submit a Statement of Affairs in which you’ll have to divulge details about your financial situation that even your closest friends wouldn’t know, such as a breakdown of how much you spend on yourself and your family every month, the main cause of your bankruptcy and all the cash and other assets you have to your name.
The Official Assignee will work out how much you can afford to pay to your creditors each month, and how much you’re entitled to keep for yourself. Just because you think you deserve a $1,000 entertainment allowance to relieve stress doesn’t mean the Official Assignee is going to agree. Expect to be left with little more than what you need to eke out a sunless existence.
And if you thought that having to account to your mum how much you spent in the canteen during recess ended after you took the PSLE, be prepared to be checked on regularly by an officer who’ll make sure you’re not spending your money on “luxuries” like taxi rides and movie tickets.
Be prepared to really downsize your lifestyle. Some of the things that will be deemed too luxurious for you as an undischarged bankrupt may a mobile data plan, subscribing to cable TV or Netflix and even certain types of insurance policies.
You can’t start a business
Just in case you’re thinking that now’s the time to throw yourself into starting a new business that will make it big and help you to pay off all your debts in one shot, you should know that as a bankrupt you won’t be allowed to engage in any trade or business under any name other than your own.
And if you do try to do business under your own name, you need to inform everybody with whom you’re dealing that you’re bankrupt, which in effect means you can forget about it.
You’re also prohibited from acting as a director or manager of any company without the Official Assignee’s permission.
Your name will be on public records
Your status as an undischarged bankrupt will be on public records that can be accessed by anyone running a simple online search.
Your employer will also be informed that you’re bankrupt, so there goes your chance at that promotion you were hoping for. Even worse, some people lose their jobs when they go bankrupt, and it’s harder to find a new one when you’ve got that stain on your record.
You can’t take out loans
Been waiting to tick off that milestone of upgrading to a condo or owning your first car? Kiss those dreams goodbye because, as a bankrupt, you’re not allowed to take out any loans of more than $1,000 without declaring your bankruptcy status.
What’s more, your credit score is likely to be in shreds even after you’re discharged from bankruptcy, so it’s going to be much harder to get approved for any sort of loan even when the whole ordeal is over.
7 long years
First-time bankrupts can be discharged after 7 years, even if they don’t manage to pay off the full sum they’ve been directed to pay off during the period of bankruptcy.
However, the downside is that if you don’t manage to pay off your target contribution after 7 years, your name will remain on public records forever. Those who do manage to pay up will have their names removed 5 years after being discharged.
Has anyone you know ever been declared bankrupt? Share your stories in the comments.