A Creditor's Complete Guide To Debt Collection In Malaysia
- Rudi Cheu
- Apr 29, 2025
- 7 min read
In our decade serving as debt recovery lawyers in Malaysia, the Rule & Co team has seen many businesses give up on recovering customer debts, or worse, suffer reputational damage after hiring an unethical debt collection agency.
Without exception, they’ve regretted it, and our response was “You probably didn't have to do that!”
This guide is designed to help new creditors in Malaysia approach debt collection legally and methodically by arming them with two key facts:
Malaysian law generally sides with creditors, making legal debt recovery straightforward
Debt recovery is an ongoing challenge that benefits from a clear management process
Here's how we've broken it down:
Malaysian laws relevant to debt collection
establishing recovery probability
steps in recovering outstanding payment
pursuing debts through the courts
tax write offs for bad debts, and
how to evaluate professional debt collectors
Feel free to skip the guide and get in touch for a free recovery assessment!
Otherwise, let's begin.
Debt collection laws in Malaysia
There are two key legal considerations for businesses, namely the limitation period to recover a debt and rate of interest, if any, to charge on unpaid invoices.
Limitation period to recover a debt
Malaysia’s Limitation Act 1953 is the law to know for creditors, as this Act establishes:
creditors have a 6-year time limit from the date a debt becomes due to recover it
creditors lose the legal right to claim the debt is this period expires
the clock resets each time a debtor acknowledges the debt or makes partial payment
The above applies regardless of debt value, and we have experienced many debtors attempting to delay payment or ignore a creditor until the limitation period runs out.
The sooner a business acts, the better the chances of recovering a debt.
Rate of interest on unpaid invoices
A delinquent customer typically means overdue invoices, and businesses will want to charge interest on the outstanding amount.
In Malaysia, this requires two conditions to be legally enforceable:
agreement from both parties in the contract or invoice
the interest rate is not ‘excessive’ or ‘unconscionable’
The first is simple: Have a clause in your invoices and contracts that clearly states the overdue interest rate!
The second is more subjective, and while there’s no hard rule, 1.5% per month or 18% per year has become an unofficial standard generally accepted by Malaysian courts.
This doesn’t mean creditors cannot seek a higher rate, especially if explicitly stated and agreed to by the customer, but there is a risk of it being challenged as unfair.
Establish chance of debt collection success
We sometimes have to tell clients recovery efforts are likely to result in a net loss for their case.
From a business perspective, this is something every creditor should establish: Before investing resources, assess chances of recovery with three questions:
1. Is the debtor still in existence?
Whether your customer is a private individual or business, if they are bankrupt or insolvent, recovery is unlikely without a personal guarantor.
For individual debtors, check e-Insolvensi.
If they are a business entity, check these sources:
Sdn Bhds / Enterprises: MYDATA-SSM
LLPs: SSM Reprint Services
2. Does the debt have a legally disputable cause?
Determine if the customer has a valid reason for non-payment.
If they have proof of a genuine dispute (e.g. dissatisfaction with services), expect negotiations or possible litigation, but if they refuse to pay without defense, recovery is more straightforward.
3. Does the debtor have sufficient assets to pay?
Review the debtor’s CTOS or SSM Company Profile for financial indicators such as paid-up capital and balance sheet health.
Bear in mind that CTOS reports are not perfect, so for larger debts, it may be worth engaging a private investigator or forensic consultant to uncover hidden assets or income sources.
With these three questions answered, a business can better choose between pursuing a debt or writing it off as a loss.
A typical debt collection process
In a best-case scenario, a single payment reminder is enough to prompt full repayment or at least open the door to negotiations. However, we advise creditors to hope for the best but prepare for the worst!
Here are all possible steps in a typical debt recovery process.
Step 1: Payment reminder for outstanding payment
This is a polite but firm reminder with key details of the debt asking the debtor to settle the payment by a certain date.
Creditors can send as many as they want, but our recommendation is to send two:
an initial overdue payment reminder, followed by
a final payment reminder
Here’s an editable template of the first to start you off.
In our opinion, this is more than enough to determine that the customer does not intend to repay the debt, and a third reminder would make no difference.
Step 2: Lawyer's Letter of Demand (LOD)
This is a document issued by a lawyer to the debtor, giving a fixed deadline to make payment. It also warns that legal action will follow if payment is not made, as seen below.
Note: Creditors can technically call their own reminders a Letter of Demand and threaten legal action, but it’s more of a bluff than anything–it is the lawyer’s LOD that carries legal weight.
Step 3: Full repayment or negotiation
The debtor responds, allowing both parties to enter into negotiations to discuss repayment plans or possible settlements.
Step 4: Civil claim and debt enforcement
If negotiations fail, a creditor can initiate a civil lawsuit through different courts depending on the level of debt:
Small Claims Court for debts RM5,000 and below
Magistrates’ Court for debts up to RM100,000
Sessions Court for debts between RM100,001 - RM1,000,000
High Court for debts above RM1,000,000
Note that just because a creditor can take a debtor to court, doesn’t mean they should, but that said, a court judgement allows the debt to be recovered via multiple legal debt enforcement methods that give direct access to the debtor's assets.
6. Bad debt tax write-off
If the debtor is unable to pay, the creditor can apply for a tax write-off, ensuring they don’t owe tax on any unpaid invoices.
Mistakes that weaken debt collection
It’s common for newer creditors to fall victim to ‘professional debt avoiders’ who know exactly how to exploit their inexperience.
Common mistakes include:
giving indefinite payment extensions
relying on spoken agreements for late payment interest rates
avoiding escalation for fear of damaging relationships, and
agreeing to terms that rely on indefinite conditions (ex: I’ll pay you when I have money)
The last one might as well be “I’ll pay you when I win the lottery!”
To new creditors, our advice is to put yourself first—your debtor is almost certainly doing just that when they refuse to pay.
Suing someone who owes you money
If negotiations have failed and the business believes the debt is recoverable, a court judgment opens the door to powerful enforcement methods that are otherwise unavailable.
Method | Description |
Allows court to seize and sell debtor’s assets to satisfy the debt | |
Recover money directly from third party that owes your debtor | |
Requires debtor to appear in court and disclose their financial situation | |
Seize and sell individual debtor’s assets | |
Liquidate the corporate debtor’s assets | |
Committal proceedings | Imprison a debtor or company officer for up to six weeks for disobeying a judgement debt |
However, in our professional opinion, unless the debt is substantial (> RM150,000) the effort and expense rarely has a favourable ROI for creditors after you consider:
costs of legal representation
the fact cases can drag on for years
enforcement is still required to recover payment after winning
the small (but non-zero) chance of losing a case!
The exception is for debts under RM5,000 which can be handled through the Small Claims Court, as it has been designed to process smaller cases without the need for lawyers.
Debt collection agency vs lawyer
Businesses who don’t have time or simply don’t want to directly deal with it can outsource debt collection to agencies or law firms, both of whom provide recovery services but work differently:
Factor | Agencies | Lawyers |
Typical fee structure | Success-based (paid upon recovery) | Hourly with significant upfront fees |
Regulation | No central regulating body | Licensed and regulated by the Malaysian Bar Council |
Conduct | Varies from agency to agency | All bound by strict conduct rules |
Recovery methods | Phone calls, emails, and negotiations | Letters of Demand, filing civil suits, and subsequent legal enforcement |
While Rule & Co is, of course, a debt recovery law firm and slightly biased, we believe a good lawyer helps strike a balance between debt recovery and staying compliant with the law.
Additionally, we've had creditors approach us for help after being countersued by debtors due to questionable tactics by debt collection agencies, so effectiveness aside, a debt recovery lawyer is usually also the safer choice.
Tax deductions for bad debts
In the worst-case situation, a customer simply cannot afford to repay a debt, and it’s time to cut your losses with a tax write off so the business doesn't owe tax on the unpaid invoice(s).
Claiming this is a straightforward two-step process:
Issue a Letter of Demand (LOD): This serves as proof of the unpaid debt
Obtain supporting statements: Lawyers or auditors may need to provide verification, particularly for larger sums
It is a bitter pill to swallow, but better than owing tax on an unpaid debt!
That’s all from us, and we wish you all the best dealing with your customers!
Let Rule & Co handle your debt collection
If your reminders have been ignored or you simply don’t want the hassle of chasing payments, Rule & Co is a debt recovery law firm that helps creditors recover debts via legal strategies that minimise upfront cost, maximise recovery, and safeguard your reputation.
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