What Happens When You Are Declared Insolvent? Questions Answered

Although so much has been said about the sequestration proceedings before and after the court awarding the ruling of bankruptcy, you may still have questions, such as: “what happens when you are declared insolvent?” Below, we answer questions in terms of the procedures, the advantages, and the effects of being declared insolvent.


What Happens in Terms of Procedures When Are You Are Declared Insolvent?

sequestration lawyerA trustee is appointed to oversee the sale of assets and the distribution of the proceeds to the creditors. The trustee arranges the writing up of the assets to be included in the estate and sale. In addition, the trustee meets with the creditors. You are also required to meet with the trustee and should give your cooperation during this period.

Once the assets have been sold on auction and the creditors have received their benefits, the trustee prepares the first liquidation account. If no further claims have been brought against the estate, all the proceedings have been completed, and the time required has lapsed, you can apply for the rehabilitation of your estate. Indeed, this can be done quickly if specific requirements are met. We recommend speaking to our attorneys to learn more about the requirements for rehabilitation.


What Happens in Terms of Your Debts When You Are Declared Insolvent?

You stop payments to creditors the moment that the notice of intention to surrender your estate has been published in the Government Gazette. All garnishee orders against your salary are cancelled. The creditors no longer approach you and may not ask you to make payments. Once the order for your sequestration has been finalised, your estate is under the control of the trustee. The proceeds of the sale of assets are used to pay the minimum benefits to the creditors. Up to 80% of the debt can be written off as the minimum requirement is 20 cents out of the rand. The cost of the sequestration is paid, as are the legal fees. You no longer have debt and can start fresh.


What Happens in Terms of Your Legal Status When You Are Declared Insolvent?

You do not have full contractual capacity. This means you must disclose that you are insolvent when asked about your insolvency status on any agreement. In addition, you need the written permission of the trustee to enter into a credit agreement. It does not mean that you cannot enter into an essential credit agreement; only that the trustee must provide the permission for doing so. You regain full contractual capacity once you have been rehabilitated.


What Happens to Your Property Ownership When You Are Declared Insolvent?

All the property that you have owned up to the date of being declared bankrupt and any property you acquire during the period of sequestration form part of the insolvent estate. As such, you will not have any immovable property, except for property that you are legally entitled to keep in a separate estate. Although the trustee is in control of the property, they do not get ownership of the property. The trustee is representative of the creditors. Once their claims have been satisfied, the trustee acts as a representative of the insolvent, which is you.


What Happens to The Surplus After the Creditors Have Received Their Benefits?

The cost of the sequestration is paid after the preferred and then the unsecured creditors have received their benefits. If there is still a surplus after the sequestration costs have been covered, the surplus is returned to you.


What Happens If You Are Married in Community of Property When You Are Declared Insolvent?

You have a joint estate. As such, the properties of both partners are included in the insolvent estate.


What Happens to The Property of Your Spouse If You Are Married Out of Community of Property?

In this instance, the property of your spouse also forms part of the insolvent estate as if it were yours. Your solvent spouse must reclaim the property, and thus needs proof of ownership. Only once the trustee releases the property from the insolvent estate can your solvent spouse have their normal powers of ownership over the property. Consult with our attorneys regarding the appropriate steps to take in protecting the assets of your spouse.


What Happens to Your Property Outside the Republic of South Africa When You Are Declared Insolvent?

Only the properties located in South Africa and your contingent interests in South African-based properties are included in the insolvent estate. As such, any immovable properties outside the borders of the Republic of South Africa are excluded. However, if you are domiciled within the court’s particular area of jurisdiction, you are deprived of your movable property, regardless of where such property is located.


What Happens to Property You Inherit After You Have Been Declared Bankrupt?

Inherited property, even after sequestration, becomes part of the insolvent estate. The only way to prevent such is to refuse to accept the property inheritance. You can, thereby, allow the inheritance to pass to someone else and thereby protect it from becoming part of the estate.


How Being Declared Insolvent Affects Your Status

You still have contractual capacity but must have permission from the trustee to enter credit agreements. You can enter into any agreement as long as you do not attempt to dispose of assets forming part of the surrendered estate or enter a contract that can have an adverse effect on the surrendered estate.


Do You Still Have the Right to Enforce Payment for Work Performed After You Have Been Sequestrated?

Yes, insolvency is not intended to take away your right to earn an income. If you have performed work and have not been paid for such, you can enforce payment.


Is a Contract Entered into Without Consent of The Trustee Still Valid?

Yes, but the trustee can void it. Speak to our attorneys about your rights to enter agreements after having been declared insolvent.


Are There Employment Positions That You May Not Fill While Under Sequestration?

Yes. You cannot be a director of a company or member of a close corporation. You may need permission from the trustee to fill certain positions. We recommend seeking legal advice regarding positions for which you need permission and the ones that are excluded while you are insolvent. You may, for instance, not hold office as an insolvent estate trustee, be a business rescue practitioner, member of parliament, a registered distributor of liquor, or the executor of a deceased estate during the period of sequestration.


Can You Still Bring Legal Proceedings in Your Personal Capacity If You Are Insolvent?

Yes. You can initiate legal proceedings for issues regarding your status, issues not affecting the surrendered estate, claims for remuneration for work that you have completed, pension claims, and claims for personal injury and defamation.


Can You Still Acquire Assets After the Sequestration?

Yes, provided the assets do not form part of the surrendered estate and fall into categories, such as pension, personal injury claim, remuneration, specific insurance benefits, or defamation claim benefits.


Are There Any Benefits to Being Sequestrated?

Yes. Up to 80% of the debt can be written off. All garnishee orders against your salary are cancelled. You can start fresh and once the requirements for rehabilitation have been met, you can apply to be rehabilitated and regain full contractual capacity and control over your estate.


In Conclusion

It is imperative to seek legal guidance regarding questions you may have about what happens when you are declared insolvent. Get in touch with our attorneys for more information and help with the application process.


Disclaimer: This article is for information purposes only and does not constitute legal advice. Call on our attorneys for legal advice, rather than relying on the information herein to make any decisions. The information is relevant to the date of publishing.

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