Legal Articles

Financial struggles can be overwhelming, and many South Africans facing insurmountable debt often consider sequestration as a potential solution. While sequestration can offer relief, it is important to understand the process, its implications, and how it compares to other debt solutions such as debt review. This guide explores sequestration in South Africa, whether it is suitable for you, and the steps involved in applying for sequestration.

What is Sequestration?

Sequestration is a legal process where an individual is declared insolvent, and their estate is surrendered to the court. It enables the sale of assets to repay creditors, offering relief to individuals who can no longer meet their financial obligations.

In South Africa, sequestration is governed by the Insolvency Act, and it can be voluntary (initiated by the debtor) or compulsory (initiated by the creditor). Once sequestration is approved by the court, a trustee is appointed to manage the debtor’s estate, liquidating assets and paying creditors.

Sequestration vs Debt Review: Key Differences

Understanding the difference between sequestration and debt review is crucial when deciding which option is best suited for your financial situation.

Sequestration

• Process: Sequestration involves surrendering all your assets to a trustee, who sells them to repay creditors.
• Debt Relief: Once sequestration is granted, all your debts are settled through the sale of your assets. Any remaining debt that cannot be settled is written off.
• Impact on Assets: You may lose assets, such as property or vehicles, as they will be sold to repay creditors.
• Credit Record: Sequestration negatively impacts your credit record, and you will be declared insolvent for a minimum of four years. During this time, you cannot apply for credit or incur new debts without approval from the trustee.

Debt Review

• Process: Debt review allows you to restructure your debts without surrendering assets. A debt counsellor negotiates with creditors to reduce your monthly payments and extend the repayment term.
• Debt Relief: Debt review does not write off debt; it simply reduces payments to a more manageable level.
• Impact on Assets: Your assets, such as your home and car, are generally protected under debt review, provided you maintain the agreed repayments.
• Credit Record: While under debt review, your credit record reflects that you are undergoing debt counselling, and you cannot apply for new credit until the process is complete.

Sequestration Process in South Africa

The sequestration process involves several steps, which can take time and requires careful consideration:

1. Sequestration Application

The sequestration process begins with an application to the court. You will need to file an affidavit outlining your financial situation and why sequestration is the best solution. The application must prove that you are factually insolvent, meaning that your liabilities exceed your assets, and that sequestration will benefit your creditors.

2. Appointment of a Trustee

Once sequestration is granted, a trustee is appointed by the court. The trustee’s role is to take control of your assets, liquidate them, and distribute the proceeds among your creditors. The trustee will manage all aspects of the estate to ensure that creditors are treated fairly.

3. Sale of Assets

During sequestration, your assets will be sold to pay off as much of your debt as possible. However, certain essential items, such as household goods, may be exempt from the sale. The funds raised from the sale of your assets will be distributed to your creditors.

4. Discharge from Insolvency

Once sequestration is completed and creditors have been paid, the court may grant a rehabilitation order. This typically happens after four years, and it lifts the restrictions imposed by sequestration, allowing you to start rebuilding your financial life.

Sequestration Without Assets

In some cases, individuals may seek sequestration without assets. This is known as “friendly sequestration,” where a debtor voluntarily applies for sequestration even if they do not have significant assets to sell. In such cases, the court must be convinced that sequestration will still provide a benefit to creditors, usually through future earnings or income.

While sequestration without assets is possible, the court typically prefers that some form of asset liquidation will occur to settle debts.

Pros and Cons of Sequestration

Pros

• Debt Relief: Sequestration allows for the full or partial settlement of debts, providing relief from financial pressure.
• Fresh Start: Once you are rehabilitated, you can start over financially, free from the burden of previous debts.
• Creditor Protection: Sequestration offers protection from legal actions by creditors, as all debts are consolidated under the trustee’s management.

Cons

• Loss of Assets: Sequestration may result in the loss of valuable assets such as property and vehicles.
• Long-Term Credit Impact: Sequestration significantly impacts your credit record for several years, making it difficult to obtain credit in the future.
• Legal Costs: The sequestration process can be costly, including court fees and the fees of sequestration attorneys and trustees.

When is Sequestration the Right Choice?

Sequestration may be the right solution if:

• Your liabilities far exceed your assets, and you have no other way to manage your debt.
• You are unable to meet your monthly financial obligations, even after considering debt restructuring options such as debt review.
• You have assets that can be sold to satisfy creditors, making sequestration a beneficial process for both you and your creditors.

However, sequestration may not be the best option if you want to protect your assets, or if your debt is manageable through other means, such as debt review.

Van Deventer and Van Deventer Inc. - Sequestration Attorneys Johannesburg and Cape Town

If you are considering sequestration, it is vital to consult with experienced sequestration lawyers who can guide you through the process. Professional advice can help you weigh the pros and cons and determine whether sequestration is the best solution for your financial struggles.

At Van Deventer and Van Deventer Inc., our team of expert sequestration attorneys in Johannesburg and Cape Town can assist you with your sequestration application, explain the process in detail, and help you achieve financial relief. Contact us for a consultation to discuss your options.