When all else fails

Bankruptcy is a dirty word. We shrink from hearing about financial failure, yet it is common: the Official Receiver's Office made 3,972 bankruptcy orders in the first six months of this year.

This shows that bankruptcies are creeping up again, mirroring the state of the wider economy.

Similar orders in 2006 totalled only 653. They rose to 11,063 in 2007 and peaked at 16,157 in 2009, dropping to 9,183 in 2010. If this year's half-year trend continues, the 2011 total will top 8,000.

So what drives people to take the drastic step of filing for bankruptcy?

Often, like the debtor profiled here (see facing page), it's the only option after a downward spiral of mounting credit card and loan debt, with crippling annual interest rates of more than 30 per cent.

'At least 90 per cent of the people who approach us have some sort of a credit card problem,' says Alan Wong Hok-ming, solicitor with personal insolvency specialists Yip, Tse & Tang.

Since the outbreak of Sars in 2003, bankruptcy has become an increasingly popular way for local debtors to absolve their obligations. For most, it's the last resort after years of paying interest on credit cards while making little impact on the debt principal.

Most Hong Kong banks are reluctant to restructure credit card debt. They always insist on loan repayment in full, says Wong.

Banks may agree to extend the loan period and cut payment amounts, but even then, the instalments can be too high for those on low incomes.

'Income may be HK$10,000 per month and the debt has piled up to HK$200,000. But they have children to raise and can't make the monthly instalments. Compared to other countries, Hong Kong banks are inflexible. In other places during a financial crisis, banks consider generous measures to lessen difficulty. Hong Kong bank terms are not generous. I've never heard of a case where they reduced the amount to, say, 70 per cent of a loan,' says Wong. Banks commonly expect debtors to pay 40 per cent to 50 per cent of their monthly income. That's the case even if there's not enough left to pay household bills.

'Many people who approach us want restructuring, but because of the harsh bank terms have no choice to but to choose bankruptcy,' adds Wong.

Bankruptcy is not free. A petitioning debtor must deposit HK$8,650 with the official receiver for trustee expenses, plus a HK$1,045 court fee. Creditors who file pay too: HK$12,150 to cover the official receiver's fees, plus a court fee of HK$1,045. Solicitors typically charge about HK$14,500 on top.

It's a last resort. Wong' s clients have usually seen a debt counsellor or social worker at somewhere like the Caritas Centre first. This is typically to discuss a gambling addiction that has led to debt.

As an alternative to bankruptcy, some try a legally binding individual voluntary arrangement (IVA), which is an approved repayment schedule. The advantage is avoiding the stigma and legal restrictions of bankruptcy. It can be a win-win situation, with creditors getting more money than with bankruptcy.

Some people go straight for bankruptcy. It can be the easiest way out of a deep financial hole. An individual can do a debtor's petition to bankrupt himself, and four years later, he is discharged.

Indeed, for some it's tantamount to a 'get out of jail free card', says Desmond Liaw, senior associate at law firm Reed Smith Richards Butler, another specialist in the field.

'People do use this tactic, in the meantime having transferred all their assets beyond reach. They say, 'I live on The Peak, but the house is not owned by me.' It can get hard for a trustee or liquidator to prove the assets really do belong to the debtor.

So what does the process involve? A creditor can petition the court for a bankruptcy order, a step they might take to recover money owed. The debtor has the option of contesting the amount in dispute and/or making a proposal, such as an IVA, to negotiate the debt, explains Liaw.

The outcome of this depends entirely on the creditors, he warns. 'You can try to persuade them they will get more than by pushing for bankruptcy.' This is an advantage to the IVA, but was only partially successful for our case study participant, because he could not make the agreed payment schedule.

If the IVA fails and the bankruptcy action continues, the official receiver becomes the bankrupt individual's trustee, with the job of gathering assets and repaying creditors.

A statement of affairs, listing assets and liabilities is drawn up and the trustee then takes steps to recover property, such as real estate and cars, money in bank accounts and securities and investments.

There's no priority, but securities, stocks and shares go first, says Liaw. Expect a forced sale of your flat and even shared property. All this can take a while, because once word is out, other creditors may join in. The trustee relies on the creditors to provide information on hidden assets. Some people transfer their assets to their wife or someone else ahead of the action.

If the trustee thinks the individual is being less than forthcoming, he can apply to the court to look into a person's finances two years before proceedings began, in the case of assets transferred to a wife, and six months to anyone else. Failure to admit to having assets here and overseas is an offence.

There are many consequences of bankruptcy. You can only keep from your income what the receiver allows for living expenses. Bankruptcy will see an individual barred from several professions, such as lawyer and estate agent. Those bankrupted cannot be a company director, buy life insurance premiums or even take taxis. But after four years you can apply to discharge the bankruptcy order and start your life again.