Navigating Malaysia’s Bankruptcy Law in 2025: Reforms, Second Chances, and Key Changes
Bankruptcy in Malaysia is no longer a life sentence of financial doom. Recent reforms have reshaped the legal landscape, making the process more humane for debtors while continuing to safeguard the interests of creditors. From increased debt thresholds to automatic discharge policies and new protections for guarantors, the law now reflects a shift from punishment to rehabilitation. These changes, introduced through legislative amendments and national policies across the years, benefit not just legal professionals but the wider public as well.
Before diving into the reforms, it helps to understand what bankruptcy means for individuals caught in its web.
The first question being, Why does Bankruptcy Matter?
Being adjudged a bankrupt in Malaysia carries serious consequences that can upend a person’s life. Some key restrictions on bankrupt individuals would include:
Loss of asset control: A bankrupt’s assets vest in the Director General of Insolvency (DGI), who will seize and manage the assets (house, car, savings, etc.) to repay creditors. Essentially, a bankrupt will lose control over how their property is handled.
Travel bans: Bankrupts cannot leave the country without written permission from the DGI or a court order. Their passport is typically impounded, which means no spur-of-the-moment overseas trips until they are discharged.
Financial and credit limitations: Existing bank accounts may be frozen or closed, and a bankrupt is limited to one bank account for essential expenses. Credit cards are cancelled, and a bankrupt cannot obtain new credit over RM1,000 without informing the lender of their status. This effectively caps access to credit and even normal financial services.
Career and business hurdles: Bankrupt individuals are barred from being company directors or running a business without court approval. They may also be disqualified from certain professions (lawyers, accountants, etc.) due to professional body rules. In practice, many employers are hesitant to hire undischarged bankrupts, limiting job opportunities.
These life-altering restrictions underscore why Malaysia’s recent legal reforms emphasize rehabilitation and early discharge. The goal is to prevent people from languishing in bankruptcy for minor debts or financial misfortune and instead offer a viable path back to financial solvency.
When Can Someone Be Made Bankrupt? The RM100,000 Rule and How It All Starts
To understand how bankruptcy works, we must first know when a person can actually be made bankrupt. Today, one of the most impactful reforms in Malaysia’s bankruptcy law is the increase in the minimum amount of debt required before a creditor can push someone into bankruptcy. Previously, that threshold stood at RM30,000. It was raised to RM50,000 in 2017, and later doubled to RM100,000 in 2020.
This shift was more than symbolic- it had real consequences. After the threshold was raised, there was a notable decline in new bankruptcy cases, especially among younger Malaysians who had often found themselves in financial trouble over smaller debts. The new rule ensures that bankruptcy is reserved for more serious financial defaults, not minor or manageable debts.
How the Bankruptcy Process Begins
The bankruptcy process starts with a Bankruptcy Notice. This formal document gives the debtor a final opportunity to settle the amount owed or make suitable repayment arrangements. If the debtor does not respond or resolve the matter within the time given, that failure becomes what is called an “act of bankruptcy.” That is when the creditor can file a Creditor’s Petition in court. If the court is satisfied that the debtor truly cannot or would not pay, it may issue a bankruptcy order. At this point, the individual is legally bankrupt, and all the accompanying restrictions—from travel bans to frozen bank accounts—kick in.
There are also protections in place for loan guarantors. If you are a “social guarantor” (someone who guarantees a loan for scholarship or grant for educational or research purposes, a house for personal dwelling purposes and hire-purchase transaction of a vehicle for personal or non-business use) you are legally protected. Bankruptcy action cannot be taken against you at all. If you’re a business guarantor, you can still be made bankrupt, but the creditor must first apply to court for permission to proceed. This extra step, reinforced in a 2024 Court of Appeal decision, adds a safeguard for individuals who took on financial risk to help someone else’s business. In short, Malaysian bankruptcy law now aims to weed out unnecessary cases, focus on more substantial debts, and give fair warning before bankruptcy orders are made. It’s a process; serious, but structured.
Escaping Bankruptcy Before It Starts: Voluntary Arrangements
Introduced in 2017, the Voluntary Arrangement (VA) is a smart legal option for individuals looking to resolve their debts before being declared bankrupt. Instead of waiting for court orders, a debtor can propose a repayment plan, often through instalments or partial settlements, with the help of a nominated insolvency practitioner. Once the court grants an interim order, creditors are temporarily barred from initiating legal or bankruptcy action. During this window (typically 90 days), the debtor and nominee work out a proposal. If 75% of creditors by value agree, the VA becomes binding. It’s a win-win situation: creditors get a structured recovery, and debtors avoid bankruptcy altogether.
Discharge from Bankruptcy & A Fresh Start: The 3-Year Rule and 2023 Amendments
Previously, getting out of bankruptcy in Malaysia could feel like a never-ending uphill climb. Discharge was possible, but only if you met certain repayment targets, which were often unrealistic for most debtors. That changed with the Insolvency (Amendment) Act 2023, which introduced fairer and more achievable rules. Now, a bankrupt can qualify for automatic discharge after 3 years, provided they have cooperated with the DGI and contributed what they reasonably can. No need to hit a rigid repayment percentage anymore—the DGI decides the amount based on the debtor’s actual capacity.
The DGI also has discretion to delay discharge by up to 2 more years if the debtor refuses to cooperate (e.g. hides assets or fails to update their financial details). So, compliant debtors are rewarded, while non-compliant ones face consequences.
The “Second Chance” Policy & Why it Matters
Alongside the 2023 amendments, the government launched the Second Chance policy, an initiative aimed at releasing deserving bankrupts from long-standing financial chains. In less than a year, over 142,000 individuals were discharged, far exceeding expectations. The policy especially targeted bankrupts under age 40 with debts below RM50,000. And it didn’t stop there. As of 2024, the government expanded the eligibility to those with debts up to RM200,000, opening the door for thousands more to return to normal life. The discharge process was also made easier for vulnerable groups—such as the elderly, people with mental illness, and those unable to manage their own affairs. In such cases, creditors cannot object to the DGI’s decision to grant a discharge. This “Second Chance” Policy has played an important part in giving these people an opportunity to rebuild their lives, and make better financial decisions in the future.
Conclusion
Malaysia’s bankruptcy framework is evolving. The focus has shifted from punishment to opportunity, from endless restriction to structured relief. The law now recognises that people deserve a second chance and that insolvency should not erase one’s future.
Whether you are advising clients, pursuing debt recovery, or simply looking to understand your rights, it is important to keep up with these changes. That way, we are able to understand the real impact on bankruptcy and how it does not need to be a dead end; but instead, a new beginning.
Article By
Nur Hidayah Binti Hushairi
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