Important Mistakes to Avoid With Voluntary Sequestrations in South Africa

Voluntary sequestrations are legal means for debtors to have a large portion of their debts paid off in one go. One has to understand that courts do not award sequestrations if creditors cannot benefit. Fortunately, for debtors, the sale of assets in their estates must only provide for sufficient funds to pay for the sequestration process, legal fees, administration of their estates, and the benefits owed to the creditors.

sequestrationThe above may still seem as if voluntary sequestrations do not hold any benefits for the debtors. However, the Insolvency Act stipulates that the minimum benefit to the creditors must be realised. This means that creditors must be able to receive at least 20 cents out of the rand for debt owed from the sale of assets in the surrendered estate.

The debtor thus pays up to 80% less than the full amounts owed. If there is a shortfall, then the insolvent party must pay it in through a lump sum or by means of down payment with no added interest. As such, voluntary sequestrations enable people to become debt-free in a relatively short period.

There are, however, pitfalls to avoid with voluntary sequestrations, most having to do with actions before filing for bankruptcy. We briefly look at these pitfalls below.


Making a Large Payment to One Creditor

The debtor can, in an attempt to pay off debt, decide to pay a large amount to one creditor. However, it can come back to haunt the debtor once he has filed for bankruptcy. The Insolvency Act stipulates that one cannot benefit a particular creditor over the others. Other creditors can claim that preferential treatment was given to the particular creditor.  It is thus better to speak to a financial planner or insolvency attorney on how to handle the growing debt if a debtor wants to file for bankruptcy.


Keep Paying Creditors

The debtor should stop payments to all creditors immediately once the notice of intention to sequestrate has been published. Any such payments can also be seen as an attempt to benefit one creditor over the others. The debtor should still pay their rent, utility bills, and routine service bills.


Creating New Debt

One of the mistakes often made prior to voluntary sequestrations is that of making new debt just before filing for bankruptcy. Debtors should only make new debt if they have no other choice. The only way to get out of the hole is to stop creating a deeper hole. A creditor can oppose the application for voluntary sequestration because the debtor made the debt without the intention of paying it back. This can result in a fraud case against the debtor, and the debtor then faces criminal proceedings while still having to pay back the new debt.


Transferring a Large Sum of Money

Any unusual financial transactions before sequestrations can raise the alarm bells. Creditors do their homework and argue that the debtor never intended to pay back money owed if the debtor transfers money to family or friends, withdraws large amounts, or transfers title deeds or assets to other people. Such actions can be seen as fraud and a means to hide assets. Debtors risk legal prosecution, more financial problems, and failure of their voluntary sequestration applications if they make any unusual transactions shortly before sequestrations.


Applying for Sequestration Just Before Inheritance Pay-Out Is Due

A debtor may think that if they file for bankruptcy before they receive an inheritance or large sum of money, that the money is excluded from the insolvent estate. Unfortunately, all inheritance money received after the sequestration and before rehabilitation form part of the surrendered estate. It is thus essential to rather decline the inheritance money than to have it distributed amongst the creditors.

Avoid the above and many other mistakes associated with sequestrations by making use of our legal guidance and assistance in dealing with debt.


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.

close slider