How does bankruptcy work exactly? Bankruptcy works by giving those who are in debt the opportunity to get back on their feet and start over by wiping out their debt. The process is also a last resort if there are no other options for dealing with one’s debts.

 

How Does Bankruptcy Work?

Involuntary bankruptcy is when a creditor applies to court for the insolvent debtor to be declared bankrupt because they are unable to pay their outstanding debts. Voluntary bankruptcy is when a debtor files for bankruptcy because they want to surrender their financial estate and be declared bankrupt.

sequestrationBoth instances entail a legal process. This means attorneys handle the applications to court. The process is called sequestration. In the instance of involuntary bankruptcy, the process is often referred to as compulsory sequestration. When the individual voluntarily surrenders their estate, it is called voluntary sequestration.

In either case, the assets of the individual are written up and the court appoints a curator/trustee to oversee the sale of these assets on auction. The proceeds of the sale are used to pay out the minimum benefits to the creditors in the specific order applicable according to the Insolvency Act of South Africa.

Once the creditors have received their benefits and all claims against the insolvent party’s estate have been finalised, the curator/trustee submits the first liquidation account to the Master of the Court. Sequestration costs, legal fees, and the trustee/curator costs are also paid from the proceeds of sale.

The insolvent party receives a new tax number, as they have a new financial estate. They remain under sequestration until they have been rehabilitated. Specific requirements must be met for rehabilitation. Read more about when you qualify for rehabilitation here.

 

What are the Consequences for the Insolvent Party?

The insolvent party’s debt is paid off through the sequestration. The person cannot enter credit agreements without the written consent of the curator/trustee and cannot act as a director of a company while under sequestration. They cannot hold a liquor licence and may not act as a general trader. Read more about the negative effects of sequestration here.

 

Positive Effects of Sequestration

The positive effects of sequestration include:

  • Having up to 80% of debt written off in the instance of voluntary sequestration
  • Pension, personal injury claim money, tools of trade, and salary are not affected with voluntary sequestration
  • A new tax number is issued, giving the insolvent party a clean tax slate
  • No more creditor harassment
  • Almost immediate relief, as all payments to creditors must stop once the publication of the notice of intent to sequestrate has been published and the creditors notified
  • Opportunity to start fresh without debt and rebuild a financial estate

 

Implications of Rehabilitation

If the sequestrated individual does not apply for rehabilitation, then they stay sequestrated for ten years. It is in their best interest to apply for rehabilitation as soon as requirements are met. Once rehabilitated, they regain full control of their financial estate, can again occupy the excluded government positions, be a director of a company, act as a general trader, and apply for credit without requiring permission from the curator/trustee. Their credit record shows that they have been rehabilitated.

 

Where Does One Find More Information on How Bankruptcy Works?

More information on how voluntary sequestration works is available here.

 


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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