What is the State of Insolvency in South Africa? How Debtors Get Help

The year 2020 took its toll on consumers as proven by the sharp increase in household debt to income ratio from 72,8% (2019) to 77,1% (2020). With the 2021 lockdown regulations also not kind to the economy, the potential level of insolvency in South Africa is worrisome.

The figures from the TransUnion Q1 report are indicative of consumers turning to credit as a means to make ends meet. With a reduction in new credit applications, one can easily assume a reduced rate of insolvency in South Africa. However, lenders seem to rather extend their credit offerings to their existing clients instead of giving credit to new clients. This can be indicative of lenders taking steps to mitigate risks.


Is There a Way to Deal with the Higher Risk of Insolvency in South Africa?

insolvency implicationsThe economic picture is dire. The question is whether there is a way to deal with insolvency in South Africa? The Insolvency Act stipulates for an applicant to qualify for voluntary sequestration, they must be truly insolvent. This means their income must not be enough to pay all their debts when due and their liabilities must exceed their assets. The voluntary sequestration must benefit creditors. In addition, the sale of assets on auction must bring in enough money to pay each creditor with a claim at least 20 cents out of the rand.


Potential Positive Effects of Sequestration

Individuals who qualify can apply to court to be declared bankrupt. It may not be the ideal situation but considering that up to 80% of their debt can be written off, it does provide a solution for debtors who have no other options left. This enables them to start fresh without creditor harassment and debt.

Once attorneys publish the notice of their client’s intention to sequestrate and notify the creditors, the client does not have to deal with the creditors any more. The debtor must immediately stop all payments to creditors, who have to wait for the sale of assets and distribution of benefits.

The debtor’s pension money, income from personal injury claims, and salary are safe. The sequestrated individual receives a new tax number and creditors cannot claim against their new estates. Insolvent parties can become debt-free in a relatively short period.


Potential Negative Effects of Sequestration

The sequestrated party requires the permission of the trustee/curator to enter credit agreements, may not be a director of a company, and may not hold a liquor licence. Asset loss and having their credit record indicate their sequestrated status are more negatives to consider.

Individuals struggling with debt can get more information about the sequestration process here.


In Conclusion – Where to Get Help?

With a higher potential risk of insolvency in South Africa in 2021, individuals struggling to pay their debts, even after having tightened their belts, should seek legal guidance for solutions to their debt problems and how to apply for sequestration. Interested parties can determine if they qualify through the online sequestration assessment application form.


Disclaimer: This article is for informational 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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