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Commentary: Why are more people in Singapore going bankrupt?
SINGAPORE: The economic landscape post-pandemic has not been kind, with rising interest rates and inflation putting financial pressure on businesses and individuals alike.
According to data from the Ministry of Law's Insolvency Office, Singapore witnessed an unprecedented surge in personal bankruptcy applications in 2023, hitting an 18-year high at 3,986.
Companies in compulsory liquidation also climbed, with applications reaching 273 in 2023, up 6 per cent from 257 in 2022.
When it comes down to the wire, the decision to file for bankruptcy is often regarded as a last resort - a move laden with stigma, burdened by financial struggles and unforeseen adversities.
So why do people file for bankruptcy, and what is behind the rise of bankruptcy applications in Singapore?
Delving into this reveals an interplay of economic factors in the aftermath of the COVID-19 pandemic.
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During the pandemic, billions of dollars’ worth of government support measures were rolled out to support companies and individuals facing financial difficulties. These were instrumental in providing a safety net for those most affected.
Measures such as extended response times to statutory demands and credit support for outstanding debt offered temporary relief for debtors. This is seen from the fall in bankruptcy rates during 2020-2021 amidst the pandemic compared to the rising trend in 2018-2019.
With the phasing out of aid as Singapore moved on from the pandemic, some businesses and residents found themselves without the necessary cushion to weather the lingering aftershocks.
Some small and large businesses are now grappling with shrinking profit margins stemming from increased capital costs and higher expenses due to supply chain and labour disruptions.
As interest rates climbed, smaller firms felt the squeeze and struggled to repay loans. Retrenchments rose, more than doubling to 14,320 last year. Many households are feeling the pressure of higher living costs.
The uncertain economy is another factor. Singapore’s economy grew by a modest 1.1 per cent in 2023, avoiding a recession, but down from the 3.6 per cent growth registered in 2022.
With geopolitical uncertainties continuing to weigh on the global economy, Singapore expects to grow by 1 per cent to 3 per cent next year, although much will depend on the external environment.
“For some time to come, Singapore will have to operate in an external environment that will be less stable and favourable to our security and prosperity than the preceding three decades,” Finance Minister and Deputy Prime Minister Lawrence Wong said in his Budget 2024 speech on Feb 16.
Amid this economic climate, we must acknowledge that bankruptcies are a normal part of a framework that emphasises the contractual enforcement of debts.
As outlined in parliament in 2015, Singapore’s bankruptcy framework establishes a system for creditors to resolve unpaid debts in an orderly manner and strives for a balance between creditors, debtors and society by ensuring debtor accountability while allowing them to make a fresh start in their financial affairs. It also encourages responsible borrowing and lending practices.
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IS THE BANKRUPTCY THRESHOLD TOO LOW?
Given this context, it is imperative to consider how Singapore’s bankruptcy framework can continue to serve these objectives in the post-COVID-19 economy.
Under the Insolvency, Restructuring and Dissolution Act 2018, a bankruptcy application can be made against a debtor if he or she cannot repay debts of S$15,000 (US$11,260). The law also allows debtors up to 21 days to pay up on a statutory demand before bankruptcy proceedings may be commenced against them by creditors.
A crucial part of this framework is the opportunity for debtors to avoid bankruptcy by entering into a debt repayment scheme, which allows them to pay their creditors back over a maximum of five years. However, there are specific criteria for eligibility: Debtors must not hold more than S$150,000 in unsecured debt, and they cannot be sole proprietors or partners in a firm.
During the temporary COVID-19 support measures from April to October 2020, adjustments were made to these thresholds. The minimum debt level required for a bankruptcy application was temporarily raised from S$15,000 to S$60,000. Simultaneously, the eligibility threshold for the debt repayment scheme saw an increase from S$150,000 to S$250,000.
These adjustments provided a buffer during the challenging economic times brought about by the pandemic.
As we analyse the current surge in bankruptcy applications in 2023, the question arises: Should the bankruptcy threshold be re-evaluated in light of the longer-term impact on the Singapore economy following the pandemic?
Singapore had 9,669 undischarged bankrupts as of end-January 2024. Being declared bankrupt has various repercussions, including restrictions on overseas travel and challenges in securing employment. Bankrupts will also have their names listed on a bankruptcy register.
Given the changing value of money, raising the bankruptcy threshold may discourage filing for bankruptcy for smaller debts and push creditors towards negotiating debt settlements. However, the challenge lies in finding a balance between policy goals to avoid discouraging lending and increasing borrowing costs.
Similarly, attention turns to the debt repayment scheme. Modelled after the US Bankruptcy Code’s Chapter 13, Singapore’s debt repayment scheme aims to create mutually beneficial outcomes for creditors and debtors by ensuring that creditors receive payment of debts owed and debtors avoid the stigma of bankruptcy.
Broadening access to this scheme by raising the S$150,000 threshold or indexing it annually could provide relief to a larger segment of debtors. Allowing those operating an unincorporated business to qualify, provided that they earn a regular income, as permitted by Chapter 13, might also enable small- and medium-sized enterprises the opportunity to rehabilitate.
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LEGISLATIVE CHANGES IMPACTING BANKRUPTCY TRENDS
Adding another layer to the evolving landscape are recent legislative changes that directly impact the trajectory of bankruptcy cases. Notably, a significant amendment came into effect in November 2023, altering how bankruptcy cases are handled.
Previously, only institutional creditors were mandated to appoint private trustees in bankruptcy filings. With the amendment, all bankruptcy cases in Singapore, except those deemed of public interest, will be handled by private entities such as lawyers.
This means that creditors, once exempt from appointing private trustees, will now be required to incur extra costs when filing a bankruptcy application. It also means that public resources will not be used by creditors to enforce their debts or by debtors seeking a "safe harbour" from creditors, said the Ministry of Law.
The impact of this change, both on the efficiency of the process and the overall landscape of bankruptcy cases, remains to be seen.
UNDERSTANDING SINGAPORE’S BANKRUPTCY RISE
In essence, to make sense of the current surge in bankruptcies, we need to look beyond the immediate economic signals. It is about grasping the bigger economic picture and the specific impacts of recent legal changes.
Before any reforms, a nuanced analysis of bankruptcy trends is crucial. This means considering factors like the range of debt levels, the proportion of business owners among debtors, causes of indebtedness, the proportion of creditor-initiated bankruptcy applications and the effectiveness of creditor recovery in bankruptcy cases.
Additionally, understanding macroeconomic trends such as inflation, unemployment rates, and overall economic growth will provide a broader context, enriching our comprehension of the economic landscape that influences bankruptcy cases.
As Singapore navigates its economic recovery, policymakers face the challenge of refining bankruptcy frameworks to address the evolving financial landscape. Striking the right balance will not only support individuals and businesses, but also ensure a healthy lending environment for sustained economic growth.
Lance Ang is a Lecturer of Law at the Singapore University of Social Sciences and an Of Counsel at Adsan Law LLC. Adrian Peh is the Chairman of Adsan Law LLC.
Source: CNA/aj
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11-Mar 2024 Monday
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