Bankruptcy action: Bank costs may go up
Changes proposed for govt to step back in cases involving institutional creditors
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Changes proposed for govt to step back in cases involving institutional creditors
Jamie Lee
12 May 2015
Banks and other institutional creditors will have to bear a much higher cost when collecting debt from individuals by having them declared bankrupt - as the government steps back from this process, and shifts most of the burden to corporations.
This comes alongside another key amendment to the Bankruptcy Act introduced in Parliament on Monday that means those declared bankrupt in later years will come under a more rehabilitative regime.
“The Bill seeks to introduce reforms to the bankruptcy regime to create a more rehabilitative regime for bankrupts, ensure better utilisation of public resources and encourage creditors to exercise financial prudence when extending credit,” the Ministry of Law (MinLaw) said in a media statement on Monday.
MinLaw has proposed that institutional creditors such as banks and large businesses hire private trustees to administer bankruptcy cases. Such trustees would include accountants and lawyers. BT understands that this would have applied to more than half of the current bankruptcy cases that are under 25,000 in total.
Individuals who owe at least S$10,000 in debt now can be made bankrupt. MinLaw has sought to raise this threshold to S$15,000, which accounts for inflation since 2000.
Currently, most bankruptcies in Singapore are administered by the Official Assignee under the government’s Insolvency and Public Trustee’s Office, and at a low cost. Last year, there were 1,758 bankruptcy orders made, data from that office showed, down about 10 per cent from 2013.
Much of the feedback during the public consultation focused on the cost of trustees, which could run into hundreds of thousands for huge debt recovery proceedings. Responding, MinLaw noted that involving a public trustee would result in lower distribution to creditors, but that this would ensure all repayment options are exhausted before bankruptcy proceedings are considered.
MinLaw added that institutional creditors have sufficient expertise and resources to conduct credit assessments before extending credit, and have sufficient resources to bear the costs of debt recovery. “Government resources and taxpayer dollars should not be used to subsidise the costs for the recovery of such debts.”
There was also feedback that banks would raise borrowing costs across the board to factor in higher costs linked to bankruptcy. But MinLaw said it is possible that financial firms would absorb the costs to stay competitive.
MinLaw also proposed a timeline such that most first-time bankrupts should be eligible for discharge after five years, once they make, in full, a target contribution to creditors that is based on the individual’s earning potential during the bankruptcy period. They will continue being in bankruptcy after the third year if creditors object to their discharge. After the fifth year, creditors who object to the discharge must justify their objections in court. And after the seventh year, a first-time bankrupt should be discharged, even if he does not meet the target contribution.
MinLaw told BT that 95 per cent of the discharged bankrupts last year had been in bankruptcy for more than five years. As at April 30, less than 4 per cent of the 22,307 undischarged bankrupts are repeat bankrupts. By meeting similar conditions, most repeat bankrupts should be discharged after seven to nine years.
The change will give bankrupts clear timeframes, and the incentive to seek “gainful employment”, MinLaw said. Currently, no timeline is set for existing bankrupts and no target contribution is declared to creditors. A current bankrupt must be discharged by the High Court - which will take the individual’s conduct during the bankruptcy into account - or get a certificate of discharge from the Official Assignee if he owes less than S$500,000 to his creditors.
Those who pay in full will have their details removed from a register five years after they’ve been discharged - and this is unchanged from before. By contrast, in Australia - where the use of a trustee is common - a discharged bankrupt’s name will stay on a public record forever, according to the Australian Financial Security Authority.