How Insolvency Affects Your Financial Status

Insolvency is when your liabilities far exceed your assets and you are unable to pay debts owed to creditors. To be declared bankrupt or insolvent, you need to apply to court through a process called voluntary sequestration. Note that you must have enough assets to ensure that the sale thereof can realise sufficient funds to pay the preferred creditor claims in full. Preferred creditors are the creditors who have security against the insolvent estate, employees who have claims against the insolvent estate, and SARS. According to the Insolvency Act, a business is insolvent when its liabilities exceed its assets. The business must stop trading and apply for liquidation, even if it doesn’t have enough assets to ensure full payment of claims against the insolvent estate by the preferred creditor, and the liquidation process thus differs from sequestration. For the purpose of this article we look at issues related to voluntary sequestration according to the requirements of the Insolvency Act and its amendments.

Signing Surety for a Business

If you have signed surety for a business and the business is liquidated, you will also be held accountable in person for the debt for which you signed surety. This may mean that, unless you are able to pay the debt, your estate may also be sequestrated. It is recommended not to sign surety for business or any other debt.

Sureties Still in Place

Read credit documents carefully, especially when signing surety. Even when the debt is paid off at the financial institution, the surety can stay in place. You must ensure that the bank or financial institution cancels the surety in writing, as the institution can later still use the surety against you and demand payment.

Sequestration without Property

Though having immovable property is preferred when applying for sequestration, the Insolvency Act stipulates that you must have enough assets to ensure sufficient benefit to the creditors. Preferred creditors must be able to receive at minimum 20 cents from the rand. However, without immovable property, you must have sufficient funds to ensure that the creditors can receive 22 cents from the rand. If you have other assets, such as vehicles, furniture, boats, insurance policies, and stock exchange investments, which can be used to ensure sufficient benefit to the creditors, it is still possible to apply for voluntary sequestration.

Insolvency and Your Salary

Your salary is safe against creditor attachments after your application for voluntary sequestration. You thus don’t have to fear excessive garnishee orders that would make it difficult to pay your monthly expenses.

Protection of Your Pension

Your pension is also protected against attachment, as the Insolvency Act stipulates that no attachments can be made against any funds covered by the South African Pensions Act. As such, you don’t have to be concerned about your retirement funds.

Insolvency and Employment

When sequestrated, you are not allowed to assume or keep the role of director in a company and you cannot be an actuary. This applies until you have been rehabilitated. However, you should not lose your job because of your financial situation. The employer can only terminate your employment contract if there is a stipulation in the Letter of Appointment that prohibits you from being insolvent whilst still employed at the employer.

Contracts after Sequestration

You can still enter into a contract, but only if the contract doesn’t have any relevance to the assets that form part of the estate surrendered for sequestration. You can thus enter into a rental agreement or a service agreement, such as a cellphone contract. Creditors usually ask on their credit application forms if you are sequestrated or have been declared insolvent and it can determine whether they are still willing to supply credit. Keep in mind that you must seek the permission of the trustee if you want to enter into such credit agreements, to minimise the risk of non-compliance with sequestration requirements. Also, be sure to disclose that you are insolvent on any agreement or application that requests the information, as it is illegal to lie about your credit standing and financial situation when applying for credit.

Seek legal advice from our attorneys regarding the process to apply for insolvency status and guidance on how sequestration will affect your financial status.

Disclaimer: The article is for informative purposes only. It does not serve as legal advice nor is it intended as such. Please speak to our attorneys before relying solely on the information herein to make any decisions.