When to Apply for Insolvency as Opposed to Debt Review

Fear of the process to be sequestrated, the costs involved and the status of sequestration are among the reasons why people shy away from applying for insolvency declaration.

However, considering what can happen if the debt is left unpaid. It is certainly better to take the initiative and apply for insolvency, before creditors attach assets and sell such off at forced auctions. The prices for the assets are exceptionally low, and the debtor remains responsible for the outstanding debt. Although the amount may be smaller, steep interest rates apply, and the debtor remains in the debt cycle.

At the same time, creditors keep on harassing the debtor, and can also attach a portion of the debtor’s salary or debt owed to the debtor. In this way, they keep going until the debtor has paid in full, as well as all the interest, sheriff, auctioneer, storage, legal and collection fees. The alternative is to either undergo debt review or to apply for insolvency.

The benefit of debt review is that the debtor doesn’t lose their immovable property, but debt review is only viable if the debt can be paid off within five years. If not, the debtor should consider applying for insolvency.

With the latter, the debtor is able to get rid of up to 80% of their debt at once, with the remaining 20% either being paid by cash or down payments over a short period, with no interest. No further claims can be brought against the debtor, and the creditors may not ask for additional interest. The debtor can thus become debt free in a relatively short period of time.

While with debt review, the debtor must continue to pay a consolidated monthly amount, which is distributed amongst the creditors according to court order, with insolvency, once the sequestration process is completed, the debtor will have a fresh estate which is debt free.

There will be no monthly repayment. With debt review, should the debtor miss one payment or be late with such, the debt review agreement can be declared void and all the creditors can demand immediate full payment of the debt owed. The process stated right at the beginning of this article then starts. With the debt review, there is still interest payable, even though it is more affordable, but a creditor can oppose the debt counsellor’s request for lower interest rates and ask the maximum allowed. This keeps the debtor in debt review for longer.

Having to live with the sword over their head of monthly payments and the fear of missing one can be extremely frustrating for the debtor. Fortunately, it is still possible to apply for insolvency, even if one is under debt review. Our attorneys will explain the process.

The above being said, in both instances, the debtor pays off debt with the aim of becoming debt free. In both instances, the debtor’s credit standing is negatively affected, and unless permission is given by the trustee and the debtor declares their insolvency status in application for credit, under sequestration, the debtor can also not enter into credit agreements. The debtor can also not be a director of a company until rehabilitated.

In both instances, the debtor must receive income to pay off the debt. If the debtor doesn’t receive an income, then debt review is not an option, and an application for administration must be made. In both instances, the debt must be substantial, but with sequestration, the liabilities must far exceed the assets of the debtor.

So, why apply for insolvency if debt review is available?

It is possible to still be unable to pay off the debt, even if it is a reduced monthly amount. In such an instance, the debtor can apply for insolvency to completely get rid of their debt, and thus get the chance to start over. If the debt review is for a period of longer than two to four years, it is better to apply for insolvency.

Once sequestrated and once the benefits have been distributed to all the creditors with claims against the insolvent estate, the debtor can immediately apply for rehabilitation.

The standard period before rehabilitation is about four years, but it is possible, if all requirements are met, to be rehabilitated earlier. With such, it is possible to regain financial status quicker, even if the original debt was bigger than normally the case in debt review applications.

We recommend speaking to our attorneys to help you consider all your options, and to assist you when you want to apply for insolvency in South Africa.

Disclaimer – Information provided in this article is for general information purposes only and not intended as legal advice. We recommend seeking legal guidance for all matters related to insolvency and to speak to our attorneys before relying on the accuracy of the information provided in this article to make decisions affecting your financial status.