All eyes on scheme that offers unchanged prospects to creditors, is easier on debtors
By SIOW LI SEN
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(SINGAPORE) Ever since a new scheme to deal with debtors kicked in on May 18, banks are believed to be filing fewer bankruptcy petitions.
That is because they are assessing how the debt repayment scheme (DRS) works - and what it can do for them - instead of taking the extreme legal route.
Before this, anyone who owed a debt of more than $10,000 faced the shadow of bankruptcy and the stigma that it carries. Now, another door has opened as anyone with a debt of up to $100,000 can be dealt with under DRS - in which he can be given a repayment plan of 3-5 years, without the bankrupt label.
This has immediately made banks step back and take stock. It has also resulted in a drop in bankruptcy petitions.
'From 18 May to 7 June 2009, the High Court received 90 bankruptcy applications, of which 43 (48 per cent) involved debts less than $100,000,' said an Insolvency & Public Trustee's Office (IPTO) spokeswoman.
This is a significant drop from the period before DRS kicked in. Between January and April this year, bankruptcy petitions have ranged between 243 to 296 a month.
Observers say that since DRS applies to debts of up to $100,000, it may effectively have raised the ceiling for bankruptcy applications from $10,000 to 10 times that amount.
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For those who owe up to $100,000, the High Court may adjourn a bankruptcy petition for up to six months and refer the case to the Official Assignee (OA) for the OA to assess the debtor's eligibility for DRS, the spokeswoman said.
As at June 7, some 14 cases have been referred to the OA for assessment.
'(Since May 18), I have noticed a distinct and noticeable drop for (bankruptcy) cases between $10,000 and $100,000,' said Tan Keh Whoo, director, Advent Law Corp.
Said Nanan Waluja, Citibank Singapore credit operations director: 'It is too early to assess or form conclusions on the impact of the debt repayment scheme, as it has been just three weeks since its implementation on 18 May.
'However, in principle, we fully support this move by the Ministry of Law, and will make any assessment on a case-by-case basis.'
All banks contacted by BT said that taking legal action was a last resort and that they support the DRS scheme. Others felt that banks would wait to see how DRS turned out.
'I think there may be some misunderstanding or misconception on the part of both creditors and debtors on the DRS,' said Leong Sze Hian, president of the Society of Financial Service Professionals.
'Creditors may be holding back because they want to wait and see what exactly happens to the first cases that come up.'
Under DRS, the debtor is given a repayment plan of between three and five years. The repayment plan is administered by the Official Assignee, similar to the existing bankruptcy regime.
The key difference is that under DRS, a debtor avoids the bankrupt label which has dire consequences. Many employers, for example, have a policy of sacking employees who have been made bankrupt. Bankrupts also need to seek permission before going abroad. A debtor who is dealt with under DRS does not suffer such inconvenience.
For creditors, on the other hand, there are not many changes under DRS - except for holding out the threat of bankrupting the debtor.
'Under the DRS, creditors would receive no less than what they would have otherwise received had the debtor been made a bankrupt,' said the IPTO spokeswoman.
Debts proved and included under DRS are paid in the same priority as debts under the Bankruptcy Act, she said.
For example, income tax and CPF monies are repaid first. Commercial entities rank lower in payment priority.
This means that some banks may be reconciled to getting back as little as 5-30 per cent of what they are owed.
Still, one lawyer said that one reason for banks suing recalcitrant debtors was that many paid up at the onset of legal action, simply to avoid being bankrupted.
That is why there are more bankruptcy petitions than bankruptcy orders. In 2008, the number of bankruptcy orders was 2,327, about 21 per cent lower than the petitions.
Some observers wonder if DRS, with its higher ceiling, will increase irresponsible financial behaviour.
At a radio talkshow on the issue last month, Mr Leong said that some of the feedback was that 'debtors may spend with less worry of being made bankrupt'.
He pointed out though that debtors can still be made bankrupt if they fail to pay their dues within the 3-5-year repayment period that DRS offers. So, creditors had little to lose.
'For debtors, for many, it may just be a delay in being made bankrupt eventually,' he said.
The government had said earlier that about 42 per cent of bankrupts had debts of less than $100,000 when they were made bankrupt. The average number of bankrupts per year has been about 3,200 over the past five years. Based on these numbers, the government expects up to 1,300 debtors to be considered for DRS every year.
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