A banking institution has the discretion to commence legal action against the borrower and guarantor either at the same time or after exhausting all legal avenues against the borrower.
However, with effect from 1 October 2003, the Bankruptcy Act 1967 provides that for social guarantors, i.e. a person who provides a guarantee for purposes such as:
- Loan, scholarship or grant for educational or research purposes
- Hire-purchase transaction for vehicle for personal or non-business use
- Housing loan solely for personal dwelling
A creditor shall not be entitled to commence bankruptcy action unless he proves that he has exhausted all avenues to recover all debts owed to him by the borrower.
In addition, for personal loans up to RM250,000 taken after 26 May 2001, banking institutions are required to use their best endeavours to recover the debts from the borrower and may only initiate legal action against the guarantor after one year from the date of initiation of legal action against the borrower.
Reprinted with permission from BankingInfo (A Consumer Education Programme)
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