Legal Action Procedures - Hire Purchase Loan (Motor Vehicle) - Part 1

Now we have reached a quite "popular" topic that is the legal procedures for car loan recovery. Why? Because most people have cars either brand new or used and most are bought through Bank loans. Out of necessity of course! A "new" car today will be classified as "used" immediately upon registration. Those with loan terms of 7 and 9 years are still paying through their noses or already starting new loans through refinancing (if the car still got some value) or buying a new car when the old loan has been settled in full. 
Before we proceed with the car loan recovery procedures, there are a few things that you need to know.

All car purchases made through Bank loans are governed by the provisions of the Hire Purchase Act 1967 (latest amendments 2010) which is under the purview of the Ministry of Domestic Trade, Co-operatives and Consumerism (MDTCC). The Act has undergone numerous amendments and adjustments to protect the rights of consumers or to be exact, the "Hirer" as well as the "Owner" that is the Bank giving the loan. There are at least 32 offences cited in this Act which covers the Owner giving blank Second Schedule (Part 1 and 2) and the  Hire Purchase Agreement to be signed by the Hirer, the agent or Owner not collecting the minimum deposit of 10%, fraudulent sale of the car by Hirer (usually through "Continue Payment" arrangement), failure in the part of the Owner to give the statutory Notices (Fourth and Fifth Schedule), non disclosure of facts and a host of other wrongdoings. Based on the examples given, you can judge for yourself that the Act has been abused with impunity all this while. 

The various penalties for anybody who is found guilty of committing offences under this Act are listed below: 

FALSE STATEMENT BY DEALERS, etc., IN PROPOSALS

Section 36. Where—

(a) a dealer, an agent or a person on behalf of an owner prepares or causes to be prepared a hire-purchase agreement or offer in writing that, if accepted, will constitute a hire-purchase agreement with the intention of bringing about a contractual relationship between an owner and a hirer; and 

(b) the agreement or offer contains to the knowledge of the dealer, agent or person acting on behalf of the owner, as the case may be, a false statement or representation that is false in any material particular, the dealer, agent or person acting on behalf of the owner shall be guilty of an offence under this Act and shall, on conviction, be liable to a fine not exceeding ten thousand ringgit or to imprisonment for a term not exceeding twelve months or to both.

FRAUDULENT SALE OR DISPOSAL OF GOODS BY HIRER

Section 38. Every person who, by the disposal or sale of any goods comprised in a hire-purchase agreement, or by the removal of the goods, or by any other means, defrauds or attempts to defraud the owner shall be guilty of an offence under this Act and shall, on conviction, be liable to a fine not exceeding thirty thousand ringgit or to imprisonment for a term not exceeding three years or to both.

PENALTY NOT EXPRESSLY PROVIDED FOR

Section 46. (1) Any person who is guilty of an offence under this Act or any regulations made thereunder for which no penalty is expressly provided shall, on conviction, be liable—

(a) if such person is a body corporate, to a fine not exceeding one hundred thousand ringgit, and for a second or subsequent offence, to a fine not exceeding two hundred and fifty thousand ringgit;

(b) if such person is not a body corporate, to a fine not exceeding twenty-five thousand ringgit or to imprisonment for a term not exceeding three years or to both, and for a second or subsequent offence, to a fine not exceeding fifty thousand ringgit or to imprisonment for a term not exceeding five years or to both.

(2) Where a person, being a director, manager or an officer concerned in the management of the body corporate or was purporting to act in such capacity, is guilty, by virtue of section 47, of an offence under this Act or any regulations made thereunder for which no penalty is expressly provided, he shall be liable to the penalty provided for under paragraph (1)(b).

Section 47. Where any offence under this Act has been committed by anybody corporate (whether or not the body corporate has been prosecuted) any person who at the time of the commission of the offence was a director, manager or an officer concerned in the management of the body corporate or was purporting to act in such capacity shall be deemed to be guilty of that offence unless he proves that the offence was committed without his consent or connivance and that he exercised all such diligence to prevent the commission of the offence as he ought to have exercised having regard to the nature of his functions in that capacity and to all the circumstances of the case.

PRINCIPAL CRIMINALLY LIABLE FOR ACTS OF SERVANT OR AGENT

Section 48. Where the agent or servant of a person commits an offence, or does anything or omits to do anything (which if done or omitted to be done by that person would constitute an offence under this Act) that person shall notwithstanding that he has no knowledge of the offence be deemed guilty of the offence and be liable to punishment for the offence unless he proves that—

(a) the act or omission complained of was not within the ordinary scope of the employment of the agent or servant; or

(b) the act or omission complained of was done or omitted to be done without his consent or connivance and that he exercised all such diligence to prevent the commission as he ought to have exercised having regard to all the circumstances of the case.

OBSTRUCTION OF OFFICERS

Section 51. (1) Any person who—

(a) wilfully obstructs any officer appointed under this Act acting in pursuance of this Act;

(b) wilfully fails to comply with any requirement properly made to him by such an officer under section 50; or

(c) without reasonable cause fails to give such an officer so acting any other assistance or information which he may reasonably require of him for the purpose of the performance of his functions under this Act, shall be guilty of an offence and shall, on conviction, be liable to a fine not exceeding thirty thousand ringgit or to imprisonment for a term not exceeding three years or to both.

(2) If any person, in giving any such information as is mentioned in the preceding subsection, makes any statement which he knows or has reason to believe to be false, he shall be guilty of an offence and shall, on conviction, be liable to the penalty mentioned in that subsection

As you can see, the penalties and fines are quite hefty. Like I said before, the main purpose of the Hire Purchase Act is to protect the Owner/Bank as well as the Hirers especially the ones who buy used cars in terms of protection against cars that do not meet specifications or cars with hidden defects, "chopped" or "frankenstein" cars and stolen cars. The Act also protects against improper procedures on loan processing, repossession and legal action. In 2010, some amendments even though excellent in its intention in added protection, is deemed to be too protective and in certain cases is impractical in its implementation, according to some quarters. As a result, the new provisions caused problems to consumers, the Banks and the car dealers to a point that car buying and loan processing has become so slow and frustrating.

For the consumers, it caused problems especially to those who want the car "yesterday" especially during festive season (very very important to some people) but at the same time, they also want full protection from the Act  when they got into trouble even though they (the Hirer) are also guilty of breaking the rules in one way or the other whether they realized it or not. I do not want to comment too much on this as the affected parties has already discussed this matter at length with the authorities and their grouses are easily searchable with the ever accommodating Mr Google.

I want to "talk" about the loan recovery process for car loan in accordance with the provisions of the Hire Purchase Act 1967 (latest amendment 2010) and some other related issues such as "Continue Payment", failure to state the current location of the car  and the like. As I have mentioned earlier, in a Hire Purchase Agreement, as long as the loan remain unpaid, the borrower is called the "Hirer" and the Bank is the real "Owner" of the car where the ownership claim is prominently displayed in the registration card.

Normally the interest/usury rate for a Hire Purchase agreement is of the "flat rate" type even though the "variable rate" type based on the Base Lending Rate (BLR) is also available as another option where a certain percentage point will be added to the BLR. The interest/usury rate structure is provided for under what is known as the "Sixth Schedule" as shown below:

The above calculation is closely related to the "rebate" or a discount that is given for the balance of total interest not yet due when the Hirer wants to make an early settlement for the loan. We shall take an example from the loan details below:

Assuming that the Hirer wants to settle the loan by the 36th month, the formula for rebate calculation is:

Based on the above calculation, the rebate or discount given is RM8036.70 and this amount is valid until the next due date. If the cutoff date has expired, the rebate for the next due date will be calculated for the following month which is for payment number 37 and so on.

During my younger days, the rebate is calculated manually and you can show it to the Hirer if he/she is not satisfied by just looking at the precalculated figure in the ledger. This is the main bone of contention between the Hirer and the Bank whenever there is a full settlement request. The usual dialogue is " I have paid a lot of money already, why is the balance so high? I'm a math teacher you know and I have done my own calculations! (based on a true story) The answer is "This is the math of usury. The name of this calculation is the"Rule of 78" or the "Sum of the Digits" (that is the sum of 1+2+3+4+5+6+...+12 = 78) that is a formula created in the 1920s before the existence of the calculator. The main purpose is to enable the creditors to maximize their profit where a large portion of interest/usury will be collected during the early stages of the loan. So the Bank will whack the interest/usury during the early years (approximately 75% of interest/usury up to the halfway mark of the loan) . Only towards the end  a larger portion of the principal will be collected. That is why dear math teacher, you will not find the answer in your "normal" textbook." 

Not too many people know about this as most of the computations are done with the computer. To have a bit of understanding, you can refer to the table shown below:

A Hire Purchase Agreement commences as soon as the Bank pays the car dealer or the previous owner of the car for the price of the car which includes the first year of insurance premium for a new car. If, for whatever reason the Hirer decides that he/she wants to return or sell the car and would like to make full settlement, even after a few hours, he/she will be charged interest/usury of RM330.28 and the "new" car he/she has bought, has already become a "second hand" car and shall lose a few thousand Ringgit more. That is the fact that has to be accepted.

You can also see for yourself, even up to the third year, a large portion is still "reserved" for interest/usury. That is the interest structure that has been molded into the Hire Purchase Act  which is the "Rule of 78" as what I have mentioned previously. However, it is not clearly stated in the Act as you can see here:

In your opinion, how many people can actually understand the "calculation method" given above? Yes, not many. There used to be a detailed formula but not anymore. Perhaps it is deemed unnecessary in the age of advanced technology we live in where everything is "at your fingertips". No more manual calculation in the "good old days" which is actually good in terms of understanding what the heck you are doing. You can bet your life's possession that not many "new age" Bankers actually know how to calculate the rebate manually. There are some Hirers who will insist on seeing and understanding how the formula works and I would love to see the look on their faces if confronted with such situation. Some will just say that if the computer prints it, it must be right and if the Hirer still insists, they will have to look for the "old timers" or the "old school" colleagues, that is if they still exist. Some have gone their own way after the massive "golden handshake" exercise during the financial crisis of 1997.

Whatever the case may be, that is the fact of the matter whether it is Hire Purchase Loan, Housing Loan, Personal loan, Credit Card Loan or whatever loan the Bank may call it, the interest/usury must be "cleared" first so that it will be easier to sue the borrowers (in the event of default) on the maximum amount of principal and maximize the late or penalty charges and upon obtaining Judgment, charge further interest on the maximized amount.

That shall be the introduction for the "interest-ing" topic on the Hire Purchase Act 1967 (latest amendment 2010). We can now proceed to the Loan Recovery Procedures for Hire Purchase Loan with special focus on motor vehicle in Part 2 of the series...

Legal Action Procedures: Personal Loan Part 3

EXECUTION OF JUDGMENT

In the last post we have learned about the process of obtaining Judgment from the Court. So we will show the previous info graphic to refresh your memory.

As you can see, there are a few options available for the Bank to "persuade" or "force" the borrower to pay through the execution of Judgment together with the estimated time frame for each action. We will examine each method one by one.

BANKRUPTCY 

If the Judgment sum together with the accumulated late charges (after Judgment) and cost added together comes up to at least RM30,000, the decision is straightforward that is the execution of Judgment by way of Bankruptcy action. This is the most feared action for most borrowers because their "freedom" will be taken away and "frozen" as detailed below:

1) All his/her financial matters will be administered by the Official Assignee (OA) appointed by the Jabatan Insolvensi Malaysia (Malaysian Insolvency Department)

2) His/her Bank account will be frozen until given the consent by the OA to be activated.

3) The Bankrupt would have to submit or reveal a detailed list of his/her assets and liabilities including monthly expenses. The OA will then decide (after discussion of course) how much from the monthly income to be deducted to service the outstanding loan.

4) A Bankrupt cannot hold any position (directorship, partnership, sole proprietorship) in a company meaning he or she will not be able to do any registered business

5) A Bankrupt cannot travel outside Malaysia without the written consent from the Director General of the Insolvency Department. For those who wants to perform the Haj, it is however allowed only once. A bankrupt is required to surrender his/her international passport to the Insolvency Department.

6) The OA will also conduct a check on the Bankrupt's loan status with other Banks and will include ALL of them in their records. That simply means that when other Banks find out about the Bankrupt's status, they will file a document called "Proof of Debt" where all liabilities of the Bankrupt will be grouped together and unless until all of the outstanding sum is settled, a discharge will not be given. Anybody can file this document. Imagine if during the younger days the Bankrupt used to bully the old ice cream man or the local "roti" seller by taking ice cream and bread without paying, they too can file the "Proof of Debt" if they are still alive and pissed enough to do so. That is an extreme example but it can happen. You never know...

Those are some of the "privileges" of being a Bankrupt but he/she may still work as usual but need to keep on paying the monthly commitment with the OA. We should be thankful that we have our independence. Some people told me that during the British rule, a Bankrupt is only allowed to wear a "singlet", short pants and slippers to reflect his "status" in the society. We have no idea if there is a female version of a Bankrupt during that time. Correct me if I'm wrong. This is only based on hearsay.

With a lot of "pain" and inconveniences of being a Bankrupt, this is the "best" and most potent weapon of the Banks (that is if the person is "worth" something to pay the debt). What if the outstanding amount is less than RM30,000 or almost RM30,000 with "so near yet so far" situation? If it is almost RM30,000, the Bank can wait for a little while until the interest gained reach the "magic" number. We shall discuss in length the Bankruptcy procedures in another posting (otherwise this post will be much longer and some of you are complaining about long articles. Too lazy to read they say...). In short, it will take approximately 6 (SIX) to 8 (EIGHT) months to "successfully" make a person a Bankrupt if everything goes "well".

WRIT OF SEIZURE AND SALE 

A problem will arise when the Judgment sum is too far from the magical figure of RM30,000 and if the Bank wants to wait for the interest to be enough to cover for it, it will take too long and the senior officers would have been retired by then. Therefore another alternative would have to be taken to "persuade" the borrower to make payment. We can see from the graphic below regarding a Judgment sum of RM14,000, with an interest rate of 6% and the time taken to reach the figure of more than RM30,000:

You can see for yourself that even at a compounded rate of interest, it would take a bit more than 13 (THIRTEEN) years or we can take a "ballpark figure" of  14 (FOURTEEN) years to reach RM30,000 while knowing the limit for Judgment execution is only 12 (TWELVE) years.  So the next course of action would probably be the execution of Judgment by way of "Writ of Seizure and Sale" that is loosely translated as an Order from the Court to seize the belongings in the borrower's place of residence or house and auctioning it to recover the outstanding sum. It is part of the "Writ of Execution" (If you want a detailed explanation, please ask your local Mr Lawyer. It is not the scope of this post and this is not a course in Law. In the context of this post, this is deemed sufficient to give a bit of general explanation)

In this case, the Bank can make an application to the Court for an Order to seize the property or belongings that is believed to be the borrower's and contained inside the borrower's house. The belongings shall not include the clothes the borrower wears at that point of time (Hard luck if you are clad in a towel after a shower), wife and kids and whatever that is deemed reasonable for the borrower's use including undergarments, handphone (so you won't miss your Facebook updates), cooking utensils and the "tools of the trade" that is the equipment that may be essential for the borrower to earn a living up to the value of RM200. I do not know whether this amount has been amended to "keep up with the times" but I won't waste my time checking because normally this is not followed strictly based on compassionate grounds since the main purpose is not so much on the auctioning off the belongings (not much can be gained anyway unless the belongings are indeed valuable) but to embarrass the borrower to make payment.

When the Order is obtained, the Bank officer, accompanied by the Court Bailiff will visit the borrower's house and will list all the belongings inside the house that is deemed valuable and give an estimation of their values (normally about 50% of actual value) and get a total sum. The borrower then will be given 14 (FOURTEEN) days to settle the Judgment sum or negotiate a payment proposal failing which the goods and belongings will be sold at a public auction. A security guard will be stationed at the house to make sure that no belongings are taken out of the house during the period and the borrower will also be required to pay for the guard's personalized security "services"

When doing this sort of action, always keep in mind that some items which may look "valuable" like the brand new 90 inch 3D LED TV and the state of the art Home Theatre System may not really "belongs" to the borrower. They may still belong to a creditor for example Courts Mammoth or Seng Heng and CANNOT be seized unless you can sell them more than their outstanding amount which is impossible. If those items were recently purchased during the Raya or Eid celebrations with the "pay three months later" promotion, then not even a single cent or "sen" has been paid. Another factor that needs to be considered is that the borrower may claim that the household items does not belong to him/her but his/her spouse, mother, father, grandfather, family friend or the cat or whatever entity he/she can think of. The Bank officer would have to be very cautious in assessing the situation.

In this kind of situation, there are bound to be commotions and tensions due to the "embarrassment" factor especially with the neighbours (the nosy ones, of course with their own local gossip Facebook Page and a smartphone in hand) not to mention the "price" given for the household items. However, as mentioned earlier, usually not much items that is of value can actually be gathered and recorded. The Bank may eventually has only a few useless and worn out items in the inventory and obviously it may not worth the effort. To get the Order is one thing as it may take a long time especially in major towns like Kuala Lumpur as well as the "difficulty" in "booking" the services of the Court Bailiff is another as there are not many of them around. The Bank can only hope that the borrower is embarrassed enough to find a way to make payment otherwise the Bank would have to proceed with the auction of "worthless" junks. This is where the role of the Bank's "CSI" team is very important in making preliminary assessment. 

This action (Writ of Seizure and Sale) is "best" used on a company's premises and a company that is still doing business. At least the items in the premises is more or less "confirmed" to be belonging to the company concerned and at the very least, the Bank can seal the entrance for 14 (FOURTEEN) days. If the company has a good reputation and is still doing business, it will definitely negotiate a payment settlement. A case in point happens to, ironically to a well known Bank where the Bank has been sued by one of its customers. The customer is a partner in a company which has substantial amount of money in an account with the Bank. His other partner passed away and the Bank refused to release the money to the other partner hence the suit was filed. The partner won and proceeded with the Writ of Seizure and Sale and the Bank's premises was sealed with the staffs and some customers still inside. Needless to say, the Bank settled the matter immediately. For an individual, based on the factors aforementioned , it is quite difficult with the risk of not getting anything except for incurring more costs.

GARNISHEE ORDER 

This is an "ambush" method where an Order will be served to anybody (usually a Bank) or a person who has money due to be paid to the borrower. In case of a Bank, the Order will be served when it is perceived that the money is already credited to the borrower's account. In case of a company or individual, if it is determined that there is payment is to be made to the borrower, the Order can be served to the company or individual BEFORE it has been paid to the borrower. Therefore, in either case, whatever amount available will have to be surrendered to the Bank initiating the action and if there is an excess, it will be refunded to the borrower. This method is risky because if the timing is not right or the amount is not "right", it may be just be an exercise of futility. On top of that, there are certain restrictions as to what can be garnished using this method as detailed below:

1) You cannot use this method against the Government

2) Monthly salary due to the borrower CANNOT be garnished as it will contradict Section 31 of the Employment Act 1955 which gives protection to employees in terms of their salaries.

3) Borrower is deceased

4) Under Section 11, Workmen's Compensation Act 1952, any compensation due to the borrower cannot be garnished. ("Save as provided by this Act, no lump sum or half-monthly payment payable under this Act shall in any way be capable of being assigned or charged or be liable to attachment or pass to any person other than the workman by operation of law nor shall any claim be set off against the same.")

5) Under Section 41 (2) Employees’ Social Security Act 1969  which states that "no cash benefit including invalidity grant or contributions payable under this Act shall be liable to attachment or sale in execution of any decree or order of any court."

As you can see for yourself, this method of execution may "fall flat in your face" due to the wrong timing of serving as the Bank cannot "force" the Court to come up with the Order to their liking and the time taken may well be after the money to be garnished has changed hands and spent by the borrower. The strategy must be well planned and highly accurate and again, the "CSI" department must have "top notch" information otherwise it will be a total waste of time and more cost incurred.

JUDGMENT DEBTOR SUMMONS (JDS)

This type of action is seldom used as it involves the possibility of putting the borrower in jail. What a "good" prospect as some might say especially for those borrowers who are a "pain in the ass" to deal with but it is not that simple. What the Bank wants is a "win win" situation and a "lose lose" or "in your face" situation for the borrower. That means for the clerk or officer handling the "pain in the ass" case, wouldn't it be good if they can get the payment and the borrower goes to jail? (As in the monopoly game, "Go directly to Jail, Do Not Pass GO, Do Not Collect $200)

Unfortunately, you cannot have the cake and eat it at the same time. The Court may send the borrower to jail but the Bank won't get the money because that is the reason the borrower went to jail in the first place! On top of that, all the "expenses" that is the "meal allowances" (at least three times a day) for the borrower will have to be paid by the Bank.

The Bank would have to think carefully before invoking this action because its reputation is at stake. While on the positive side it may be good to be seen as a "no nonsense" Bank, it could also bring negative side effects. The Bank may be perceived as a "cruel beast" imprisoning non paying borrowers (while it is okay for the same "cruel beast" creating money out of thin air and charging interest on top of that due to the capitalistic economic system of dependency) especially during these times of the "boycott" phenomenon. They would not risk the fate of a well known Bank recently being condemned for closing the account of a few Islamic charitable organizations that contribute to the cause of the Palestinians. Some has called for concerted withdrawal of their facilities with the Bank or a mini "Bank Run". What is odd however, is that this Bank's "Islamic" or "Syariah Compliance" department which has been certified "Halal" previously has been declared "Haram" or "Not Permissible in Islam" even though its so called Islamic "modus operandi" is EXACTLY the same with the other Banks... Hmm... So the Banks normally would have to be careful with its actions in order to avoid a similar fate or risk a boycott or even a total Bank run with the powerful social media at its mercy.

Ok. Sorry to digress a bit from the topic of Judgment Debtor Summons (JDS). We now go to the process of this particular action. It goes like this:

1) The borrower will be "summoned" to appear in Court to give a detailed information (with documentary evidence) of his/her monthly income and expenses and will be assessed on his/her capacity to pay the outstanding loan amount.

2) When the Court or rather the Judge is satisfied that the borrower has the capacity to pay a certain amount towards the outstanding sum, a "Consent Order" will be issued to the borrower if he/she consented to the arrangement. However, an "Order of the Court" can also be issued when there is no consent recorded requiring the borrower to settle the Judgment sum in full or by monthly instalments.

3) If the borrower fails to appear in Court after the service of JDS, a Warrant or Order of Arrest will be issued against him/her.

4) In the event the borrower fails to adhere to the Order of the Court or Consent Order, a notice called a "Judgment Notice" will be issued against him/her  requiring the borrower to explain the reason why he/she fails to comply with the Order of the Court and convince the Court why he/she should not be sent to jail for non compliance.

There you go. It sounds and looks "brutal" enough. But one has to remember one thing. The Magistrate or the Judge is, well, a normal human being after all and has feelings. There are some who will strictly "go by the book" but most of the time will sympathise with the borrower. Some will see it as "a big bully of a Bank" trying to squeeze the last drop of money from a "teeny weeny" borrower. Those borrowers who are well advised or with some sense of creativity will come with more documentary evidence of expenses than income especially those doing their own business coupled with a heart wrenching story akin to a "Bollywood" movie. The borrower may come with ragged clothes, unkempt hair, an unshaven look and to add some "flavour", may also do away with armpit deodorant to amplify the "hardship and suffering" effect. Coming with a wheelchair might have another "wow" effect. The Bank officer and Mr Lawyer may even cry and sob uncontrollably.

However, it is also advisable not to overdo it. The "Stinking Armpit Move" and other moves may backfire and turn out to be an "anti climax" if the Magistrate or the Judge could not stand the stench and may end the session abruptly thus depriving the borrower to deliver his/her "heart wrenching" story. Whatever the results may be, normally this mode of execution is less effective and even if there is payment decided by the Court, it may be too little from the perspective of the Bank. A potential waste of time and probably some wasted tears. 

So Ladies and Gentlemen, those are ("briefly") the procedures involved in the execution of Judgment against borrowers. With regards to Bankruptcy Proceedings, we shall discuss it in a specific post since this is the most common action taken by the Banks and it involves very specific rules and procedures. 

The next question would be, if the borrower has money, how do they make payment after Judgment has been obtained? Keep on reading.....

MAKING PAYMENT AFTER JUDGMENT

When talking about making payment after Judgment, there are a few things you need to know. There are some of you who only wants to pay only RM50.oo a month so that the Bank receives only a small amount. A sort of "in your face" kind of payment which is actually not a very smart move which we will see in a short while. Lets say the details of the Judgment obtained are as follows:

Judgment Date   :      15 Jun 2014

Judgment Sum   :    RM14,000.00

Interest Rate       :    6% a year until full settlement

Other Cost            :    RM600

Therefore if the borrower intends to pay RM50.00 (most probably under the Order of the Court, as the Bank would not accept this kind of proposal) as a "serve them right" or "in your face" kind of payment, we shall see what will happen and how the payment is treated and its calculation.

As you can see from the above example, the payment of RM50.00 is not even enough to cover the calculated monthly interest so the Judgment balance will increase and the interest will be calculated on the "new" Judgment balance. Please also note that the cost will remain the same until a substantial amount is paid to cover the whole sum. Some Banks will deduct the cost first so in this case, it will take 6 (SIX) months to cover for the cost and the Judgment interest will be calculated for six months and definitely the RM50.00 will not be able to cover the interest as well. Therefore the Judgment sum will never be settled and the interest will perpetually increase. So much for the "in your face" payment where it will instead fall flat on the face of the borrower.

For the Bank, it would not be too much trouble nowadays to treat such small payment unlike the "good old days" where things were done manually. Even so, it is not difficult to do as it only involves taking out a "dummy ledger" and recording the payment and interest and issuing a receipt. Therefore if the borrower is serious in settling the Judgment sum, he/she should negotiate a discount on the interest charged as the cost is usually non negotiable since the Bank has already paid for it. The Bank usually will ask for an upfront payment which would be able to cover at least 30% to 50% of the Judgment sum so the subsequent interest can be reduced. The proposed monthly instalment after the lump sum payment should be able to cover for the monthly interest and reduce the Judgment sum as well. If you want to win against the Bank you may win some of the time but the Bank will "win" most of the time.  Every time you take a loan, your name will be forever recorded in the Banks' computer system and some other third party information system as well as in the Central Bank's system. When you are being sued by the Bank, it will also be recorded in CTOS (Credit Tip Off Service - A Private company) for the Banks' future reference.

However, there exist some "backdoor" loans (besides loan shark "facilities") that can be obtained by "blacklisted" and Bankrupt borrowers as evident by the various advertisements for personal and car loans with the tagline "Blacklisted and Bankrupts" can also apply. How do they do it?  We shall discuss it in further detail in yet another post.

In conclusion, Ladies and Gentlemen, after going through the procedures of the execution of Judgment, you should understand by now that the best avenue for the Bank or rather the "easiest" course of action would be by way of Bankruptcy proceedings as it is the least "troublesome" and the one with the highest impact although it requires an outstanding sum of at least RM30,000. However, judging from the price of cars and houses nowadays some reaching hundreds of thousands and even millions, it should not be a "problem". The "problem" is with the amount less than the "magical" figure of RM30,000 as we have seen previously. It can be a personal loan or a shortfall or balance from the auction of a car or a house which still need to be collected.

This is where the Debt Collection Agency plays an important part as a "support group" for a more effective debt collection. This is more or less a "symbiotic" relationship between the Bank and the Collection Agency. As what I have mentioned before in previous articles, there are Banks who appointed the Debt Collection Agencies on a commission basis and there are Banks who "sold" the debt at a discounted "price" depending on each Banks' collection policy. The legality of such deal is still open for debate but since some loan agreement may have included this option, it may not be a big issue after all.

The main issue would be on the subject of selling off bad debts which has been written off and may have "expired" due to the restriction as provided in the Limitation Act and the basis of selling and collection would be on "best effort basis". A lot of people has been harassed for such debts by the Collection Agencies without knowing that the debt has expired and the Banks or the Collection Agencies have no right to collect the debt anymore. Even though "morally" the borrowers are still obligated to pay but the matter is up to the "discretion" of the borrower now as the borrower may want to pay only the principal sum and a "little bit" of "reasonable" interest. The matter can be settled amicably when the borrower has the capacity to pay to clear his/her name. If any one of you (meaning you the reader) has been harassed for a debt that is at least more than 6 (SIX) years since the last instalment paid, it is better to check with the Bank whether there is any legal action ongoing or check whether there is any Judgment obtained against you and check whether the judgment is still "alive" or more than 12 years WITHOUT any execution of Judgment. Bring a lawyer if you have to. The Collection Agencies are required to follow certain guidelines even though some claimed that their collection techniques resembles that of a loan shark.

Another point worth mentioning is that it is very important not to sever any ties with the Bank as you need to know what they are up to even though some of you would prefer to perform the "disappearing act". However, the "disappearing act" technique may haunt you later especially during a Bankruptcy proceeding where the chances to do some "time wasting maneuvers" may not be available until its too late. So stay in touch even though through a "proxy". "So near yet so far" kind of relationship.

WHAT ABOUT GUARANTORS?

The last question for this post. What about the guarantor? What will happen to them? The info graphic below has the answer.

I just want to add a bit of information. If a guarantor is the spouse of the borrower, it can be said that it is "the norm" or "acceptable" since there is a "sharing of benefit" unless the spouse has no knowledge about the loan as this also happens sometimes. If there is a divorce (some are caused by the loan itself) there would seem to be a problem of determining who is "responsible" but by law both are equally liable.

As for the "social" guarantor like being a guarantor for a friend or amongst siblings, it is more complicated. If the borrower suddenly "decides" to disappear, then the guarantor would have his/her life turned upside down. There is a Malay saying which literally means  "carrying a live monitor lizard" or "carrying an unnecessary burden" or something to that effect and that is exactly what it is. If among siblings, at the very least there is a chance to see them during festive season but among friends, I wish you good luck. So the next time somebody asked you to be a guarantor, think very, very carefully before signing on the dotted line. A friend of mine was asked to be a guarantor but due to his ignorance, he was instead "turned" into a borrower and now would have to bear the burden of paying the loan. So be careful before giving your identity card to anybody and I do mean anybody. People can fake savings account, Income Tax forms and other loan "documents" and all they need is an accomplice in the Bank to "manufacture" the loan. You may become a victim of a loan scam. A lot of guarantors has been declared a Bankrupt for "nothing" where they received no benefit whatsoever except for a tarnished reputation as a "bad person" in the eyes of the Banking sector.

Well, this is the end of quite a long post on the Legal Action and procedures for a Personal Loan. For housing and vehicle loan, there is a slight difference in the steps taken as both have their own sets of Laws or Acts to adhere to. The end result is the same after Judgment is obtained after the auction of the vehicle or the house where there is a shortfall (depending on some conditions). We shall discuss in detail in another post (again!). For the time being, digest this one first....

Legal Action Procedures: Personal Loan Part 2

THE FILING OF SUMMONS AND OBTAINING JUDGMENT

Continued from Part 1. As what has been mentioned before, at this stage, the Bank will severe all "Diplomatic Ties" (until payment is made, that is) with the borrower demanding the whole loan balance including costs. So, before proceeding, the Bank will attempt to call the borrower or by sms for the last time asking for payment with the threat of Summons and this time it is for real unlike the same threat previously used when the account is two or three months overdue.

When there is no response from the borrower, the instruction will finally be delivered. Sometimes it is Mr Lawyer who will follow up on this matter whether to proceed further as a "note of concern" because sometimes the Bank will just keep quiet and may not inform Mr Lawyer when payment was received.

After all the necessary documentation for Summons has been prepared especially the "Statement of Claim", Mr Lawyer will instruct his/her staff to file the Summons in Court. The Summons filing process is not "free" as it involves one of two methods namely the normal physical filing or through the "e-filing" method where the documents will be scanned by the staffs of Mr Lawyer or by the court's staff for a fee. It sounds simple enough, the clerk or "despatch" will go to the Court (by motorcycle) to do the physical filing or prior scanning is done at the office. However, Mr Lawyer's bill will indicate some "professional fees" required to read the instruction, prepare the documents (copying the statement given by the Bank on a ready made "template") and finally the filing and the filing fees apart from the standard Court fees shall also include the travelling cost of filing where the cost charged is as if it was Mr Lawyer himself/herself who did the filing using his/her gas guzzling luxury car complete with the lawyer's attire and all. (just joking Mr Lawyer, don't get annoyed, that is the "norm" in the industry)

After the process of filing Summons, the Bank will have to wait (again!) for the Court to issue the copy of the Summons with a "mention date" (we will elaborate further on this term). After getting the Summons copy, it will be delivered  to the last known address of the borrower and guarantor (if any) through registered post. The "mention date" used here is to give a better understanding. A few years back, the Summons will specifically have a date written as the "mention date" for the borrower to appear in Court. Nowadays with some amendment to the "Rules of the Court" it is not specifically written anymore. What is written is a certain date and the borrower will have to be present in Court after a number of days so specified. For example, it may be written this way "You are Summoned to appear in Court 14 days after this date" or something to that effect and the borrower would have to calculate the "mention date" all by himself. If there is no response or the borrower miscalculates the date, a Judgment in Default of Appearance will be granted by the Court.

During this time, a full scale "investigation" will be carried out by the Bank's "CSI" team to get more information on the borrower or guarantor (if any) especially their current whereabouts and daily activities. The "CSI" term is used loosely here because this is nothing like the "CSI" you used to see on TV (with slick moves, cool cars, nice music, cool shades, pretty ladies and advanced tools) so if you have a wild imagination about the Bank's "CSI" team, you may stop now. It may consist of the same guys/gals doing the collection or another "team" sometimes consisting of only one grumpy old bloke.

For the borrower, he/she still has the time to negotiate as the "olive branch" is still available since the time frame before the "mention date" is still available. As for the guarantor, we shall discuss in more details at the end of  Part 3.  For the borrowers of the type "able but do not want to pay", normally they will give in and make payment since most of them would like to take up more loan and would not want their record to be tarnished. For the "Scarface" or "Don Corleone" type of borrowers, (if you don't know who they are, you can Google Movie Wiki "The Godfather" or "Scarface") that is in the "not able /may be able but do not want to pay" category, the Summons would not have any effect whatsoever. (not yet). In order to understand fully the categories of borrowers, you can refer to this posting entitled PART 5 - THE COLLECTION DEPARTMENT  or you can see the chart that is reproduced here for easy reference:

After the period of "ceasefire" has ended that is the "last and the very last" chance to make a new promise or payment, the "mention date" finally arrived. Please refer to the info graphic below on the various possibilities that can happen on that day. No need to elaborate further on that.

We shall now go to the next month of overdue position by looking at the graphic below:

As what has been depicted, depending on the Court's decision, Judgment will be given if the case is not prolonged by any Notice of Objection or any other delaying tactics by the borrower's Lawyer. Please be reminded that the borrower's Lawyer MUST NOT be from the same Bank's panel of lawyers otherwise there will be a conflict of interest which means going against "the boss". There will be another waiting period to get the sealed and certified copy of the Judgment within one or two weeks from the mention date barring any long festive holidays.

Before we continue further, I would like to comment a bit about the allowed time limit of taking legal action. Banks or Creditors has until 6 (SIX) years from the date of default to start with the filing of Summons. That means the Bank can theoretically ignore a
default of a particular account for years (which is impossible unless the Bank itself is facing Bankruptcy or  in the process of being "eaten" by other Banks as in the 1997 financial crisis or the collection staffs are a bunch of buffoons and that goes to the boss as well) until the last day of the six year period to file Summons.

When Judgment is obtained, the Bank will have another 12 (TWELVE) years to execute the Judgment. Therefore theoretically, the Banks have at least 18 (EIGHTEEN) years to proceed with legal action against its borrowers. So, if there is no action taken in these two scenarios, it is then logically and fairly be concluded that by this non action the Bank has "discharged" or released its rights to collect the debt further as ample time has been given. Inability to locate the borrower is the normal excuse given for not pursuing a case such as those requiring personal service of Court Orders and Notices but avenues for "Substituted Service" in local newspapers are always available in order to avoid the "time barred" factor. We shall discuss the Limitation Act in another posting otherwise this post will take more space. We shall finish this story first.

Back to our personal loan story. After Judgment has been obtained, it is up to the Bank to choose the mode of "execution" normally after the loan has reached its seventh month overdue position as depicted in the info graphic below.

As you can see above, the mode of "execution" chosen will depend on certain conditions and timing and this is where the investigation of the "CSI" department will contribute significantly. We will go through the various modes of "execution" in the next post...

TO BE CONTINUED....

Legal Action Procedures: Personal Loan Part 1

Now we have reached the topic some of you have been waiting for. The procedures of legal action against borrowers who failed to pay their monthly instalments. We shall start with the legal action procedures for Personal Loan. Why start with Personal Loan? Because this type of loan is the "lowest" in term of ranking compared to other loans since the "strength" of this type of loan rests upon the monthly income capacity of the borrower. If there is an additional security, it would be in the form of a guarantor whose assessment is also on individual income capacity. Housing and car loan would have an added "security" in the form of the house and the car themselves apart from the financial "strength" of the borrower with a guarantor (if any). That is why personal loan is often called "unsecured loan".

In cases whereby the borrower has been declared a Bankrupt and in the event all of his/her assets are auctioned off, preference will be given to those "secured" creditors with the "unsecured" creditors being the last one being considered with whatever that is left to "fight" among themselves. Usually the creditors (the Banks) with unsecured loan will end up with nothing. Credit Card loans can also be considered as "unsecured loan" with a slightly different loan structure where a certain "credit limit" is given as the maximum loan amount with only the borrower's financial capacity to depend on with no guarantor. That is why the interest structure is high to cater for the higher risks. Usually only part of the maximum limit, for example RM10,000 is used (unless the borrower went on a crazy spending spree and finish it all up in one go) and after a period of one month without payment, the remaining credit limit will be "frozen" and a very high interest rate of 16% to 18% will be charged on the balance (compounded) together with other costs thrown in. Therefore the income from the interest and from other accounts (especially the "minimum payment of 5%" gangs) can cover for the temporary "loss" of payment to a certain extent.

The procedures of legal action for credit cards is a bit different from the normal personal loan based on the "higher" income from penalty charges and the "suitable" amount for legal action to take place. You shall be able to see later the rationale of taking legal action after seeing the procedures involved and it is slightly different. One more reason we start with personal loan is that the legal procedures are more straightforward as compared to housing and car loans where they are governed by their own set of laws namely the National Land Code and the Hire Purchase Act 1967 respectively. The end result would be the same that is to obtain Judgment to be followed by the Execution of Judgment in order to recover the whole loan amount plus interest and costs albeit with some differences.

Ok. We can start now. Please refer to the info graphic below. The full slide presentation can be viewed at:
Loan Recovery: The Legal Action Procedures or at Facebook Album Collection entitled Info Graphic on Legal Action Procedures

Look at the introduction screen or the "Official" Topic for the Slides:

If you want to know more about the "Source of Funds", that is the bicycle and Tyre pumps, you can refer to this link Facts about Digital and Paper Money and Usury . The interest structure of Personal Loans depends on the policy of the lending Banks with flat interest rate, monthly and yearly rests interest options. We shall elaborate on the differences between these interest rates in another post where we shall learn about the usage of the word "rests" in the context of interest calculation.

Ok. We will begin with the next info graphic. In any loan application, in the beginning especially during the disbursement of the loan, it is always a "joyous" occasion where the disbursement date is usually the agreement date. If you want to find out more on the excitement and "happy hour" atmosphere during loan processing, you can go to Part 5 - The Collection Department

To cut a long story short, a month has passed and the first instalment has become due for payment as depicted in the picture. In this example, we will present a situation where there is no payment made whatsoever to see how long it would it to obtain Judgment through the legal process and finally the execution of the said Judgment. Yes, execution sounds a bit "brutal" but some of the methods available are close to being "brutal".

In a real life situation, the "zero payment received" phenomena happens occasionally but most of the time, there are several "ding dongs", that is the flow of communication between the borrower and the collection personnel, between promises kept and broken, between the branch and Head Office personnel on approval of certain actions, the borrower gone "missing", sick leave, public holidays and a host of other things as depicted in the following diagram:

So, a few days without payment after the due date, the Bank obviously will start making calls and sending standard written reminders. With the advent of current technology, some will have internal text messaging capability (sms) to give "subtle" reminders to borrowers and it is very cheap compared to paper and postage costs. After making calls and sending reminders, there is nothing left to do but wait for the borrower's response preferably in terms of payment and not mere promises.

It should be mentioned that telephone reminders evoke a variety of reactions from borrowers. The polite ones will apologize profusely and make a promise to pay "as soon as possible". There are also those who pretend to be polite just to "buy" some time. There are those who show no audible reaction whatsoever by not even picking up the phone! Some will respond by just saying "Huh! Ok. Seven Days..." Kinda give you an eerie feeling reminding you of the movie "The Ring" where the caller will say the same thing and in seven days you're dead. Then there are those who will scold  the Bank's staff for "the lack of compassion and understanding" with dialogues such as "I will only pay at the end of the month. Who ask you to disburse the loan in the middle of the month?" Well, it was the borrower who used to call more than ten times a day asking for the disbursement. People have very short memory. Gone were the "happy" days during the loan application barely a month ago.

Another month has passed and now the account is 2 (TWO) months overdue. Whatever promises that were made has been broken. Another round of sms, phone calls and written reminders but this time it is the "Final Reminder" being issued threatening legal action. However, the Bank will still have to wait until at least another 20 to 30 days before invoking the actual legal action as this is still considered "too early". The official "Investigation Papers" or "Collection Folder/Files" may not be opened yet as the borrower might just turn up and update the whole thing so the Bank has to be "patient" and not be too hasty. For those Bank staff who has the initiative, they will start reviewing the loan application files for "clues" or any discrepancies that might prove useful in the future because processing was done by somebody else and they might miss something. The loan will start accumulating "penalty interest" and other costs as long as the monthly payments remain unpaid.

How times flies and now we have entered the third month of non payment. Another round of sms and phone reminders. The collection staff will have to wait for a few more days (again!) or until after another promised date for payment has passed. After waiting for a few more days without payment, that will be the final straw That's it. No more waiting. Time to get serious. Time for reinforcement. Time to instruct the lawyers to issue "Letter/Notice of Demand" or LOD for short. The Bank hopes that by the sight of this letter, it will be enough to send the shivers down the borrowers' spines (I have a more "mature" expression but this will do :) ) and make them update the overdue payment. However, before that can happen, and depending upon the policy of the Bank, prior approval must be obtained either from the officer, the Branch Manager or the "Head Office". Another waiting game (again!)

This is because legal action will involve extra cost. Banks do not like to incur costs which means they will have to get "money" from other sources. They created money (remember the money creation slides?) through the loan, charge interest as "income" and if payment is not "coming back", they will have to "borrow" the cost from other paying accounts. Even though late charges will contribute as "extra fresh air" income and the interest (even though no payment has been received) has already been recognized as "income" in reality they are just imaginary numbers. "Costs" would have to be paid in cash or in digital transfer. You may say that the payment of costs are still using "imaginary numbers" but the outflow of "money" will eventually be more than the "inflow" for this particular account as we go along. (confused yet? Good)

Ok. Enough with the confusion and on with the legal action. The first step as mentioned earlier is the "Letter/Notice of Demand" issued by the Bank's panel Lawyer (after this shall be referred to as simply "Mr Lawyer"). The cost of the letter typically ranges from RM30 to RM50 or more depending on the Lawyer Firms. Why so expensive? You may ask. Well, because of the letterhead of the Law Firm. During my working days quite some time ago, it used to be RM75 to RM100 due to the "scarcity" of law firms and most of them are well established and were educated "overseas". Some non English speaking borrowers may not understand the whole content of the letter, but seeing the Law Firm's letterhead and the Bank's name on it will definitely remind him/her that something serious is happening.

But now times has changed. With the increase of local Universities offering Law degrees particularly UIA (The International Islamic Universitiy) and other private colleges offering twinning Law programs with their overseas counterpart, more Lawyers and Law Firms are available to choose from and based on the theory of supply and demand together with the competitive factor, the "price" of LODs has come down considerably even though it is still considered expensive for a piece of 80 grams paper and a few Ringgit worth of postage stamp. Whatever it is, you will have to consider the "professional value" of the letter otherwise it would be a waste of time studying Law for all those years if anybody can issue such "professional" letter. (have to give the Lawyers a bit of a breathing space, otherwise some of my lawyer friends might get offended. :) )

Back to the collection officer or clerk. Another waiting period to get the final approval to proceed with legal action. When approval is finally granted, an instruction letter to Mr Lawyer will be issued. For Banks with sophisticated system, an "online" instruction will be issued. The staff from the Law Firm will have to "log in" into the system to check for new instructions. There is a certain fee charged for usage of the system and Mr Lawyer would have to pay for it. Hmm... no wonder legal fees are high. Upon receiving the instruction, Mr Lawyer's staffs will prepare the LOD to be sent to the borrower and guarantor (if any). All the waiting "games" and "ding-donging" may drag on to the following month.

The LOD will consist of the amount overdue and a time period to pay, normally 7 (SEVEN) to 14 (FOURTEEN) days failing which the Bank will proceed with further legal action. Depending (again) on the "ding dong" factor on the lawyer's side, usually by the fourth month of overdue position, the Bank will be able to decide on the next course of action. When no payment is received after the "grace" period, the Bank will proceed with an instruction to file Summons after getting the relevant approval. The Bank must prepare a detailed breakdown of the overdue amount, late charges and costs incurred so far (postages and LOD) together with the addresses of the borrower and guarantor (if any). At this point of time, the agreement between the Bank and the Borrower will be terminated.

TO BE CONTINUED...