Though the terms of bankruptcy and insolvency are used interchangeably, there is a distinct difference between the two. For one, a person can be insolvent without being bankrupt. However, one cannot file for bankruptcy unless insolvent. Insolvency is a financial state whereas bankruptcy is a legal state regarding your financial welfare.

Let us explain it in more detail. Insolvency refers to the inability to pay debts upon due dates. One can thus avoid bankruptcy, even if you are insolvent, by taking immediate steps in reducing monthly expenses, such as entertainment, transport, groceries, professional association memberships, insurance policies, and subscription services. You can borrow money from friends or family members to pay off store accounts or to pay your home loan. You can return a vehicle to the bank or sell some of your assets to cover debts. You can enter a debt-restructuring agreement, allowing for a lower monthly instalment or you entering debt review. As an alternative, you can apply for a debt consolidation loan and pay off all the debts, leaving you with one creditor to pay monthly.

Bankruptcy and insolvency thus have distinguishable meanings. In order to avoid bankruptcy, it is essential to address your insolvent state as soon as possible. However, if you are truly insolvent and wish for your debts to be discharged, you can apply to be declared bankrupt. This is done through the voluntary sequestration process whereby your attorneys apply to court to have your financial estate surrendered and you are declared as bankrupt.

Two types of insolvency can be distinguished. You can be cash-flow insolvent. This means you cannot pay your debt because you lack the funds. You can thus not pay debts on due dates. You can also be balance-sheet insolvent. In this instance, your liabilities exceed your assets. Should you not address the situation, you can eventually end up with a cash-flow problem.

The above said, it only becomes problematic once a creditor demands payment and you cannot pay what must be paid. The creditor can take steps, such as applying for judgement against you and thus the repossession of assets to sell in order to recoup the money owed. Deb collection can take the form of attorneys harassing you to acknowledge the debt and sign an agreement towards paying a lower instalment. However, interest rates may be high and you pay the attorney fees in addition to administration of the process. This can leave you in a dire financial state for a long time.

The situation can be temporary. If someone gives the money to pay the credit cards or rent, then the situation is addressed for a while. Unless you are able to reduce expenses or increase income, you are closer to being cash-flow- and balance-sheet insolvent. You now risk creditors applying for the compulsory sequestration of your estate. In this instance, the creditors only need to prove that you have committed an act of insolvency.

An act of insolvency is an action that shows you are most probably insolvent and thus unable to pay your debts. To protect against financial losses, the creditors may approach the court to have you declared bankrupt and thereby ensure that they at least receive part of the debt owed. However, sequestration is expensive, and the creditors must wait until the process has been completed before they receive their benefits.

As such, creditors often resort to the repossession of assets and agreements to keep you accountable for the balance due. The bank, for instance, forecloses on your property and sells it on auction. If the entire debt owed is not recovered, you stay responsible. In this instance, you are without your property and must still pay the bank.

If you are truly insolvent, you can apply for voluntary sequestration. You thus file for bankruptcy. In this instance, your insolvent estate is placed under the control of a curator or trustee, and the assets are sold on auction. The proceeds of sale are used to pay the minimum benefit of 20 cents out of the rand to the creditors. Once the notice of intention to voluntary sequestrate has been published, you are legally protected against further debt collection. Once you are rehabilitated, the debt is discharged completely, and you can start fresh.

If your liabilities exceed your assets and you are unable to pay debts when due, take the responsible step. Get in touch with our insolvency attorneys to help you file for bankruptcy in South Africa.

Disclaimer: This article is for information 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.