9 Tips to Spare Yourself from Bankruptcy
According to a 2016 news report, 11 Malaysian youth go bankrupt each day! While it may seem like a small number, it really isn’t. Don’t fall into the same debt trap like your peers, here are nine things you can do to steer clear of bankruptcy:
1. Start a Savings Account
You’ll hear it time and again, but yes, you absolutely need to start saving – if you haven’t already! With healthy reserves for emergencies, you can buy yourself time when having money troubles, rather than be forced to take out costly loans.
If you have a grizzly stash set aside, you might even be able to use the money to get yourself out of bankruptcy. On the other hand, if you have nothing to fall back on, your desperation for funds may cause you to seek financing that could prove difficult to pay off. This might then set you down a path that leads to bankruptcy.
Action plan: Start small and put aside at least 10% of your monthly earnings. If you aren’t the disciplined type, set up a standing instruction or other deduction plan that’ll automatically credit your savings account every month.
Put your money to good use and allow it to grow. Much like building a savings account, investing your earnings can hedge against the threat of bankruptcy. This is because you’ll have something to lean on if a financial emergency arises.
Consider the flipside, if you were to consistently blow your cash on unnecessary gadgets or other frivolous spending, you’ll have nothing to show for it. Worse still, if you are in a financial bind, like an impending loan default, you won’t be able to pull out your investment and save yourself from bankruptcy.
Action plan: Consider growing your money in a very low-risk fund like a Fixed Deposit account to get started.
3. Choose Credit Cards and Loans Carefully
The path to bankruptcy, especially among the youth in Malaysia has roots in credit cards, car and personal loans. However, rather than completely forgoing the financing that you need, it’s better to practice good habits from the get-go.
There is much to consider when it comes to choosing loans and credit cards such as the fees, interest rates, repayments, penalties and others. By no means should you opt for the first credit card or loan offer that comes your way. Before you settle for a credit card, personal loan or any other type of financing; you must put in the time to learn about its features and only then, proceed to shop around for the best one.
While we are on the subject of being careful with loans, remember that you can find yourself in a bankruptcy bind even if you aren’t the one doing the borrowing. If you co-sign or guarantee a loan that ends up in default, where you are unable to cover the loan, you are financially liable, same as the borrower. Thus, you’ll need to be very careful when assuring a loan for someone else, especially if you aren’t financially able to pay it off should the applicant default.
Action Plan: If you don’t fully understand the product, terms or features, get in touch with the bank’s customer service and ask everything you want to know. You can also check out our blog articles that contain a wealth of information for credit cards, personal loans and insurance. Do also use our comparison tool to research products and compare to find the best one for your needs.
4. Go for Low Interests
No matter the type of financing you consider, the interest rate remains one of the most important factors of all. True, there are fees and terms to think about, but the interest rate has long lasting effects on the total cost of your loan.
With higher interest rates, expect a greater overall cost to borrow, especially when taking out a long-term loan. Thus, it is in your best interest to seek out the lowest possible rate, when all else is considered.
Action Plan: Apart from the long-term plan of being a good candidate that shows steady earnings and good credit, you should do two more things to get better rates. Firstly, do shop around. As mentioned, the GoBear comparison page is the easiest way to do it. Second, you might want to attempt to negotiate for lower interests. If you’ve applied to more than one institution, bring the lowest offer you receive to the bank you are interested in and ask them if they would be willing to lower their rate. Do note that banks will not go lower than their lowest advertised rate and this tactic of negotiation may not always work. Still, it doesn’t hurt to ask!
5. Plan Your Expenses
The road to bankruptcy often stems from low financial literacy as well as poor money management skills that include overspending. To help yourself stay clear of mounting debt, it’s best to thoroughly plan your expenses.
It may appear a painstaking process in the beginning but once you learn to plot your expenses, you can look forward to fewer unplanned purchases and money-wasting buys.
Action Plan: Start by listing out all your expenses, tally it up and compare with your monthly income. If you are spending more than you are earning, be sure to eliminate unnecessary expenses and cut back where possible. You should allocate funds for important spending like savings, utilities, food and other necessities. Develop your budget so that you’ll see at least 20% of your income left at the end of each month or try to work up to this goal.
6. Restructure if Necessary
If you are having trouble covering your loan payments, you might want to look into restructuring your loan. You can do this by requesting for your loan tenure to be extended so the monthly sum payable becomes smaller.
Stretching out the repayment period would make the instalments more affordable, however do note that overall interest costs would rise. Still, this might be a better option if you are staring down mounting debt and potential bankruptcy.
Action Plan: Call or write in to your bank and explain that you are having trouble with repayments. If you have a good reason to support your request such as losing a source of income, etc. the bank might be more open to helping you out. Note that the bank does not have to comply and if they don’t, you can then try enrolling in the Debt Management Programme with the Credit Counselling and Debt Management Agency. If eligible, the agency can help speak to the bank on your behalf.
7. Prioritise Debts
One sure-fire way to actively combat mounting debt and to avoid potential bankruptcy is to focus all your attention on clearing up financial dues. No doubt, this will be a serious commitment. Exercising discipline and self-restraint to put most of the money you earn towards paying down what you owe is no small feat, but certainly a worthy challenge.
During this time, it’s a good idea to avoid seeking out new loans until you have cleared all other balances. This should go hand in hand with a budgeting goal to spend as less as possible for a specified period of time.
Action Plan: List down all debt and set a plan to pay off what you owe. Prioritise repayments by interest rate, sum owed or severity (e.g. looming legal action, etc.). Set up an automatic payment with your bank to pay your creditors at the beginning of the month or as soon as your salary is in. Your goal should be to bring down balances, make full credit card payments at the end of each month and to promptly settle loan instalments by respective due dates.
8. Find a Second Source of Income
If you are thinking, “this is easier said than done”, you are not wrong. Still, in order to avoid bankruptcy, you need to be making more money than you are spending. Unfortunately for most, our primary income isn’t enough to contend with our lifestyle goals. For some, it is barely enough to make ends meet.
Thus, it’s a good idea to focus some of your energy in 2018 on an outside project that can garner you a second income. It can be a simple as selling stuff online to setting up shop at a weekend bazaar, or even driving for Uber!
Action Plan: Set aside some time this weekend to think about what you can do to make more money, in a way that is fun for you. This is a chance to monetise the things you are good at, especially if you don’t get to explore these skills at your day job.
9. Get Help!
This is the most important tip of all – if you are overwhelmed by debt, act fast and get help. If you continue to borrow or accumulate debt without paying off your creditors, you could be headed for bankruptcy. Owing just RM50, 000 can prompt a creditor to initiate bankruptcy proceedings against you. If you think that RM50, 000 is a lot, think again. You could easily owe that much with a just a car loan plus interests, arrears and penalties.
The key here is being able to spot the signs that you are indeed headed for troubled waters. The three things to look out for are:
- Being late with payments every month
- You can’t afford basic necessities without using a credit card
- You are borrowing to cover your loans
If this is you, do seek help quickly. Your debt is likely to keep growing if you don't take action now..
Action plan: Head over to the Credit Counselling and Debt Management Agency and apply for possible enrolment to their Debt Management Programme. If eligible, counsellors can help you plan your finances and restructure debt with banks.