Difference between Debt Review and Sequestration in South Africa

Debt Review and Sequestration are legally regulated debt solutions offered to consumers in South Africa to assist with managing debt. In this article, we discuss the difference between Debt Review and Sequestration in South Africa and also which of the two may be the best possible solution for your specific financial situation.

Debt Review vs Sequestration in South Africa

Debt Review and Sequestration are two formal debt-relief mechanisms designed to assist individuals who are unable to meet their financial obligations. Although both aim to provide relief from overwhelming debt, they differ significantly in terms of process, impact, legal implications and long-term consequences.

Debt Review - An Overview

Debt Review is a regulated process under the National Credit Act 34 of 2005. A registered Debt Counsellor is appointed to renegotiate your existing contracts with credit providers. They will begin by assessing your financial situation to determine if you qualify for the process.

This process is intended for individuals who are over-indebted but still have some income available to repay their creditor providers over time. Note that you cannot take on new credit while being under Debt Review.

Debt Review - the Process

Once you enter Debt Review, the Debt Counsellor evaluates your income, expenses, and outstanding debts. Then, they propose a new, affordable repayment plan to your credit providers. If the credit providers agree to the new proposal, an acceptance letter is provided that confirms the agreement. These acceptance letters are used to draft new contracts which must then be formalised by a Magistrates court or the National Consumer Tribunal. This new contract replaces the original contractual agreements and will remain in place until the the Debt Review Process is completed - as long as you pay the restructured installment in line with the agreement.

Debt Review also restructures how you pay your debts. You will pay one consolidated installment via a Payment Distribution Agency (PDA).and the PDA distributes the funds to your credit providers.

You will receive a Debt Review Clearance Certificate once you have cleared all of your debts,, declaring you to be free from Debt Review. You are credit worthy once the Clearance Certificate is issued. The entire process takes 60 months to complete (if you have unsecured debt only) or 72-84 months (if you have unsecured debt and a vehicle).

Sequestration - An Overview

Please take a look at our articles regarding sequestration for more detailed overview of this process. In short, Sequestration in South Africa is a formal insolvency process governed by the Insolvency Act 24 of 1936.

Sequestration can become an available option when you meet the following conditions:

• You are unable to pay the debts as they fall due.

• Collection agencies are already handling your debt.

• You have shortfalls on from repossessed assets - financed homes and vehicles.

• The renegotiated installment under Debt Review is still not low enough to manage expenses.

• You have judgments and/or emolument attachments on your income.

• Your debt exceeds R150,000.

Related: Is Sequestration a Good Idea in South Africa?

How does Sequestration Work?

Sequestration writes off a large portion of your debt. i.e. 60-75% of your debt. This excludes financed assets as financed assets must be returned to the bank.

An Insolvency Practitioner is appointed to assesses your financial situation and verifies your outstanding debt. They will determine how much of your debt will be written off and what your installment will be over a negotiated period, usually not longer than 24 months. Once the decision is made to proceed with the process an application is made to the court. Your credit providers and all other relevant parties are informed of your intention to proceed with Sequestration and a court date is obtained to put the process in place.

Trustees will be appointed to finalise the Sequestration once the court order is granted. The Trustees will verify and finalise the creditor providers’ claims and 25-40% of those claims are paid to the credit providers. Once the credit providers have received this percentage, a liquidation and distribution account is completed by the Trustees documenting and finalising the process. This account is submitted to the Master of the Court for approval.

Rehabilitation occurs 12 months after the liquidation and distribution account is approved. The entire process can take 48 months to complete and you are credit worthy once a rehabilitation order is granted. This concludes the sequestration process.

Key Differences between Debt Review vs Sequestration

Ongoing repayment v/s Insolvency

Debt Review focuses on restructuring your payments so you can a pay a lower installment towards the debt you owe at a lower interest rate over a longer term.

Sequestration, in contrast, involves the surrender of any financed assets and writes off a large portion of unsecured debt, acknowledging that you cannot realistically repay all your debts.

Credit Status and Restrictions

Under Debt Review, you cannot take on any new credit. You are cleared from the process once the Clearance Certificate is issued. If you do not complete the process you remain under Debt Review for as long as it takes you to settle all of your debt. If this occurs your original contractual agreements are reinstated and you remain liable for all of your debt until settled. A Clearance Certificate can only be issued once all of the debt, that was included under Debt Review, is either prescribed or settled. 

Under Sequestration, you also cannot take on new credit. You are cleared from the process once a Credit Rehabilitation order is granted. Regardless, because of the Sequestration Order, your debt remains written off and no credit provider can ever reinstate contracts after the Sequestration Order is granted. If you do not apply for early Credit Rehabilitation after 48 months, then you become automatically rehabilitated by law after 10 years.

Suitability for Different Situations

Debt Review is better suited when you have a stable income and can afford restructured payments.

Sequestration is usually considered when debt far exceeds your ability to repay, and restructuring is no longer feasible.

Conclusion

Debt Review and Sequestration are both viable options to deal with overwhelming debts in South Africa. However, when it comes to choosing between the two, you should first consider Debt Review before Sequestration. If Debt Review does not assist enough then Sequestration is your next option.

Debt Review offers a protective restructuring process that preserves your assets, while Sequestration provides a reset at the cost of surrendering your financed assets.

Either way, you will require a Debt Counsellor or an Insolvency Practitioner to assist you with the situation. At Solvendi, our focus is on assessing your financial situation and providing you with the correct solution that fairly favours you. For more information, please contact us today!

Disclaimer: This article is intended for general informational purposes only and should not be interpreted as legal advice. Any actions taken based on the information provided are done so at your own discretion. Solvendi cannot be held liable for any outcomes resulting from such actions. We encourage you to consult with us directly before making decisions solely based on the content of this article.

Contact us to discuss your current situation and receive a free detailed assessment of how the process works and what your costs will be. We have legal experts with 20 years experience that can guide you through the process. Our main aim is to be as informative as possible. Let's Chat.

If you require advice with regards to Sequestration, Business Liquidations, Insolvency, Bankruptcy or Credit Rehabilitation kindly contact SOLVENDI as follows:

National: 087 220 0710

Head Office: 010 880 7589

Email: consultations@solvendi.co.za 

Website: www.solvendi.co.za