Filing for bankruptcy is a radical solution to unmanageable debt that is being used more and more often by individuals for personal, rather than business, debt.
By Roz Wrottesley
Filing for bankruptcy is a radical solution to unmanageable debt that is being used more and more often by individuals for personal, rather than business, debt.
Bankruptcy might be a branch of the law you don’t want to tangle with, but formal debt eradication has an impressive pedigree going back to the Roman Empire. Debt and insolvency (when debt exceeds assets and cannot be repaid) are clearly part of the human condition, considering that they feature in the Bible and were recognised as issues in Ancient Greece, when debt defaulters repaid their creditors by entering into debt slavery for a few years.
In this more humane era, we have a legal process designed to give the “honest debtor” a chance to settle matters with his or her creditors and start afresh. By filing for bankruptcy in terms of the Insolvency Act, an insolvent person (or business) asks the High Court to declare him/her legally bankrupt, accepts the “diminished legal capacity (capitis diminutio)” that goes with bankruptcy and invites the court to go ahead and sequestrate his/her estate.
Sequestration is the process of liquidating the debtor’s assets and distributing the proceeds to the creditors as equitably as possible, given that no claim will be met in full.
Voluntary sequestration (as opposed to compulsory sequestration, when a creditor, or creditors, apply for the debtor’s sequestration) may be granted by the court if there is clear evidence that:
- The debtor’s estate is genuinely insolvent;
- Liquidating the debtor’s assets will benefit the creditors; and
- The value of the assets will cover the costs of sequestration.
Ironically, as this list indicates, you need to own assets before you can apply to be declared officially broke.
Who can file for bankruptcy?
“South Africa is one of the few countries in the world where people can be too poor to file for bankruptcy,” says Rohan Lamprecht, head of the insolvency division at the law firm Dionne Lamprecht Inc. in Rustenburg, North West, which specialises in insolvency law. To ensure that the process is in the interests of creditors, the court will not consider issuing a sequestration order unless the sale of assets will realise a value equivalent to at least 20 percent of the debt, he says. And since the application takes place in the High Court, the process itself can cost between R15 000 and R30 000.
The other sure sign that bankruptcy is a middle-class solution is that debt must exceed R50 000 in order to be truly viable. If you owe less than that, you can apply to a Magistrate’s Court for the kinder option of an administration order or you can undergo debt review.
Lamprecht says it is time to consider bankruptcy if:
- You are genuinely insolvent, and
- Your creditors have threatened, or already launched, legal proceedings against you.
“This they do with three possible goals: to attach your assets and have them sold by sheriff’s auction, to attach a portion of your salary via an emoluments attachment order granted by the court (also known as a garnishee order), and/or to attach any money owed to you by someone else, again through a court order,” says Lamprecht.
“The problem is that assets usually fetch very poor prices at these auctions and the proceeds are reduced even further by the deduction of various fees and commissions, such as removal and storage fees, sheriff’s fees and auctioneer’s commission, the legal fees of the creditors and the collection commissions charged by attorneys or collection agencies.
“Creditors will usually keep instituting legal proceedings against you until the debt has been settled in full, including interest on the capital amount,” says Lamprecht. “The legal fees can be exorbitant.”
Sequestration puts an immediate stop to legal proceedings and to the harassment that debtors often experience at the hands of creditors, he says. “Effectively, your debt is written off as soon as the process begins and creditors have no further claim against you. In legal terms, the debt is vested in a trustee appointed by the Master of the High Court, who takes on the responsibility of realising the assets and apportioning the proceeds.”
Whatever the settlement, a creditor can never come back to you for more. And there are other advantages, says Lamprecht:
- You won’t spend years repaying your creditors’ legal costs and other expenses, plus interest, before you get to repay the capital debt;
- Interest ceases to accumulate on the capital amount you owe, which makes repayment much more manageable.
- Uncompromising creditors have no choice but to accept restructuring of the debt into affordable instalments;
- Your creditors will be informed of the sequestration, but in most cases, you won’t have to tell anyone – not even your employer;
- You can expect sequestration to be carried out impartially.
When your insolvency is the result of a bad business decision, a mistake, or an economic event you couldn’t have foreseen, filing for bankruptcy without delay can prevent the situation from getting even worse.
The process ends in rehabilitation without prejudice – automatically at the end of 10 years, or earlier if the court grants an application.
The consequences of sequestration
These be far-reaching, depending on the insolvent’s specific circumstances, says Natasha Fourie, an associate at Centurion-based law firm Barnard Inc. Writing on the company’s website, she outlines the impact of sequestration on certain contractual rights, on the spouse (where marriage is in community of property), and on certain employment rights.
The property of the insolvent
All the movable and immovable property of the debtor falls into the insolvent estate and is available for the payment of the debt – and this includes any property acquired after sequestration, but before rehabilitation. There are certain exclusions, however, such as the debtor’s basic necessities, such as clothing and bedding, his or her pension and any compensation received for personal injuries.
Note that the courts have found that property is deemed to be part of the insolvent estate and is vested in the trustee even if it comes to light as much as 30 years after sequestration.
A further consequence of sequestration is that all civil proceedings instituted by or against the insolvent are put on hold until the appointment of a trustee. (Criminal proceedings are not affected.) Similarly, any judgements against the insolvent are discontinued as soon as the Sheriff of the court receives notice of the insolvent’s sequestration.
Employment of the insolvent
An insolvent is also disqualified from practising certain professions or careers. An insolvent may not, among other things:
- Be a director of a company;
- Partake in the management of a close corporation of which he is a member;
- Hold a fidelity fund certificate in accordance with the provisions of the Estate Agency Affairs Act;
- Be registered as a manufacturer or distributor of liquor;
- Act as a trustee of a trust under certain circumstances (depending on the trust deed) and may be removed as trustee by the Master;
- Be a member of the National Assembly of Parliament, the National Council of Provinces or provincial legislature.
The insolvent’s spouse
If there is an existing marriage in community of property, there is in principal only one (joint) estate. Both spouses are regarded as insolvent and the joint estate is sequestrated. If a marriage out of community (with or without accrual) exists, Section 21 places the burden on the solvent spouse to prove that all the goods in his/her estate are really his/hers and should be excluded from the debtor’s estate.
BANKRUPTCY STEP BY STEP
The process hinges on an application to the High Court of South Africa that includes a “statement of affairs” – a comprehensive breakdown of the debtor’s financial obligations – and an affidavit spelling out why the applicant is unable to repay the debt. Lamprecht outlines the process as follows:
1. Draw up the statement of affairs
The statement of affairs is put together by the debtor’s attorney and requires the following information on every creditor:
- Name of creditor;
- Complete postal address;
- Amount owed;
- Reasons for debt – for example, lease agreements, asset finance agreements, personal loans, store accounts, mortgage bond; and
- Confirmation of whether or not the creditor has any form of security for payment of each claim, such as the home or vehicle for which finance was provided.
“As soon as we have finalised the draft statement of affairs, we proceed with drafting of the founding affidavit,” says Lamprecht. “The affidavit deals with the reasons for insolvency, monthly expenditure and certain other information prescribed by law and the High Court.”
2. Evaluate the assets
“Next, we arrange for valuation of the debtor’s assets by a sworn appraiser recognised by the Master of the High Court, to confirm the value listed in the provisional statement of affairs,” says Lamprecht. “Ownership of these assets will vest in the trustee appointed by the Master of the High Court once the application is granted.
“Should the asset value be inadequate, the attorney will propose possible asset restructuring and/or asset-acquisition options to achieve the minimum value required.”
3. Sign and submit the statement of affairs and affidavit
Both documents are printed in duplicate, signed before a Commissioner of Oaths and then sent to the High Court.
4. Advertise in the Government Gazette
When these documents have been accepted by the court, the attorney places an advertisement in the Government Gazette giving interested parties an opportunity to comment by a certain date. The advertisement must be approved for publication before 3pm on a Friday in order to appear the following Friday, no more than 30 days before the closing date for responses.
“Once the advertisement has been published, the debtor is under the protection of the Insolvency Act and creditors may no longer instruct the Sheriff of the Court to attach and sell your property, “ says Lamprecht.
5. Submit statement of affairs for public inspection
The final statement of affairs is sent to the Master of the High Court.
6. Give notice to creditors and other parties
Notice of the insolvency application is sent to all the creditors by the debtor’s attorney. Many people are concerned about the consequences of telling their employers about impending insolvency/sequestration, but Lamprecht says applicants have no obligation whatsoever to disclose this.
7. The “Notice of Motion”
The attorney drafts and issues the “Notice of Motion”, which is the mechanism for reserving a place on the High Court roll for the application to be heard.
8. Service and lodging of application
Copies of the application are served on the Master of the High Court and, if required, the South African Revenue Service (SARS); the original is filed by the court registrar. The attorney sends a copy, accompanied by his brief (or instructions), to the advocate who will represent his client in court.
9. The court date
The insolvency application comes before the High Court and, if necessary, the advocate will argue the case. The debtor does not need to be in court. If the High Court is satisfied that all the necessary provisions of Section 4 of the Insolvency Act (which outlines the process) have been met, the court will accept the surrender of the estate and issue a sequestration order.
Once you have been declared insolvent and sequestrated, you lose control of your financial affairs until you are rehabilitated. However, there is no need to wait the full 10 years for automatic rehabilitation. In fact it is a good idea not to do so, according to Insolvency Care, a countrywide network of attorneys who specialise in this field. An article published on the group’s website in April advocates taking back your power to manage your own affairs as soon as possible and outlines the process:
Who is eligible for rehabilitation?
The insolvent party, a duly authorised agent of the party (if the insolvent party is not living in the country), the widow/widower of the insolvent (if the marriage was in community of property) and/or the executors of the insolvent’s deceased estate can apply for rehabilitation of the insolvent party after sequestration.
When to apply?
The application can be brought to court once the creditors’ claims and the costs of sequestration have been paid. Alternatively, the insolvent must have submitted an “offer of composition” that has been accepted by 75 percent of the creditors and will provide them with a minimum of 50c in the rand, as long as the insolvent has either provided the necessary security or made payment on the offer.
First-time insolvents can apply for rehabilitation after six months if no claims have been submitted and proved against the estate, provided that it is the first time that the applicant has been sequestrated and the applicant has not been convicted of certain types of offences.
Where there have been claims proved against the estate and paid, an insolvent who has been sequestrated for the first time must wait 12 months before applying for rehabilitation, provided he or she has not been convicted of certain offences before the date of application. If the insolvent has been sequestrated before and, again, has not been convicted of certain offences, he or she can apply for rehabilitation after 36 months.
An insolvent who has been convicted of certain offences must wait five years before applying for rehabilitation.
How rehabilitation works
The applicant must have the help of an attorney to apply to the branch of the High Court that has jurisdiction where he or she lives. Before the application is brought, the attorney gives notice of the applicant’s intention to apply for rehabilitation after insolvency and the notice is published in the Government Gazette and submitted to the Master of the High Court. Permission must be obtained from the estate trustee/curator for the application. The curator can object to the application if there were problems with the estate, so it is important for the insolvent party to cooperate with the curator throughout the sequestration process and insolvency period to avoid this.
Once the application has been made, the court provides a provisional rehabilitation order and the matter is postponed for about 30 days. If no objections have been lodged against it by the return date, the application is granted and a final order issued. The applicant’s attorney drafts the affidavit, and when the applicant has signed it, the documents are submitted to the court, which provides a case number and date. Since the application is made via the affidavit, the applicant does not have to appear in court.
What rehabilitation means
Rehabilitation effectively ends the insolvency. All the debts will have been discharged. The only debts the insolvent party will be left with and have to pay after rehabilitation are those that were incurred with the permission of the trustee/curator after sequestration.
The insolvent party’s legal status changes to “rehabilitated” and the “sequestrated” notice on his or her credit record is replaced with “rehabilitated”. This status remains in place for a period of five years, after which it is removed. All judgments listed by the credit bureaus should be removed, but it may be necessary to ensure that this happens.
Insolvent: When your debts exceed your assets. You are insolvent even before you approach the court to be declared insolvent.
Bankrupt: another term for court-declared insolvency. When you cannot pay your debts, the court may declare you bankrupt.
Sequestration: The legal process of attaching and liquidating a person’s estate for the benefit of creditors.
Liquidation: The process of selling off the assets of an insolvent business for the benefit of creditors.
This article first appeared in the 2nd quarter 2019 edition of Personal Finance magazine under the title “Going for broke”.