How do I Declare Bankruptcy in South Africa?

Bankruptcy and insolvency are related but different.

Insolvency is a state of economic distress. An individual or company can be insolvent without being bankrupt, especially if the insolvency is temporary and correctable. Insolvent individuals / companies can reverse course by cutting costs, selling assets, borrowing money, renegotiating debt or allowing themselves to be acquired by a larger corporation that agrees to take over the insolvent company’s debts in return for control of its products or services.

Insolvency can lead to bankruptcy if the insolvent party is unable to successfully address its financial condition.

​Bankruptcy is a legal proceeding that decides how an insolvent debtor (company or individual) will deal with unpaid obligations. This usually involves selling assets to pay the creditors and erasing debts that can’t be paid. It can release a debtor from most debts, provide relief and allow them to make a fresh start. An individual or company can enter into voluntary bankruptcy. To do this they would meet with an insolvency practitioner, assess their current financial situation and if applicable complete and submit a Bankruptcy Application. Bankruptcy normally lasts for 24-48 months.

For the purposes of this article we will focus on the bankruptcy of an individual. For companies please go to "A Step by Step guide to Liquidation Process in South Africa."

What does Declaring Bankruptcy mean in South Africa?

In South Africa, the legal mechanism for personal bankruptcy is voluntary sequestration under the Insolvency Act 24 of 1936. Sequestration either means the court accepts the voluntary surrender or your debt or a creditor obtains a sequestration order. against you for debt owed. When you declare bankruptcy in South Africa, you generally choose the voluntary sequestration route. It is not a good idea to leave debt for so long that a creditor brings a forced sequestration application against you. The sequestration process in South Africa is presented in the article "How to Apply for Sequestration in South Africa: A Complete Guide" and outlines the process of voluntary sequestration.

To declare yourself bankrupt/insolvent, you must fulfil certain criteria. Let's discuss them one by one.

1. You must be Insolvent

Insolvency refers to your liabilities or debt exceeding your assets. An insolvent person is unable to pay debts as they fall due. Hence, in your application to declare yourself bankrupt, you must prove your insolvency.

2. Advantage to Creditors

While the sequestration process eases the burdens of a debtor, it must ensure that the creditors (those who granted you credit) will receive a better return than if the debtor (those who received the credit) simply stayed insolvent without bankruptcy.

There are 2 types of creditors in a sequestration. Secured creditors and unsecured creditors:

Secured Creditors:

A Secured Creditor holds a legal claim, known as a security interest or collateral, over specific assets of the debtor to secure the debt. Examples of secured creditors include vehicle and home finance. Why? The Creditor owns the vehicle or home until the finance provided for that asset is settled.

Secured Creditors receive priority in a sequestration and so the existing financed home and vehicle must be handed back to the creditor. This is so that the creditor can recuperate some of the credit that they granted to you when you purchased the asset.

This might seem scary, but in reality a person experiencing insolvency is already in arrears with repayments for these assets and at risk of losing them anyway.

Unsecured Creditors:

Unsecured Creditors have no specific collateral or security interest (like a home or vehicle) to back the credit. Examples include overdraft facilities, personal loans, credit cards, revolving credit plan and store cards. In this case an asset cannot be returned to settle this debt. Therefore, in a sequestration 70-80% of this debt is written off. You as the debtor only have to pay back 20-30% of this debt to the creditor.

3. Sufficient Funds or Assets to Cover Costs

You must have enough reliable assets or funds to pay the legal and administrative costs of sequestration, such as court fees or trustee costs. In some instances these costs can be paid off over a negotiated term and so finding an attorney and trustee, that is willing to assist you with this, forms part of the research you must do to find the right fit for your current situation.

What is the difference if you lose assets with sequestration or without sequestration

With sequestration, the shortfall is written off. You may also be allowed to live in your property for the 3-6 months it takes to finalise the sale of the property. During this period you are not obligated to pay the bond costs which can be a huge advantage for someone burdened by financial issues. While your credit record is impaired for 3-4 years when you sequestrate, after this period you can return to obtaining credit again. You have also written off the debt and so for the period of 3-4 years there are no debt repayments. Your income can be used for living expenses and not to repay debt.

Without sequestration, you are left with a shortfall after the repossession of these assets. The shortfall can take many years to settle and your credit record will remain impaired until this occurs.

4. Statement of Affairs and Founding Affidavit

A Statement of Affairs outlines all your liabilities and other financial details, such as your assets and income. Along with that, debtors also need to submit a Founding Statement, which is an affidavit that outlines their financial circumstances, motivation for seeking sequestration, and other legal aspects.

What should I do if I want to declare myself bankrupt in South Africa?

Bankruptcy is a legal process, which means debtors must approach an attorney to handle the process on their behalf. This is where we can assist you.

Our team of registered insolvency practitioners will assess your situation at no cost and determine the course of action. If sequestration remains the only way to resolve your financial situation, we will assist you in drafting the necessary documents.

The application process begins with the Statement of Affairs and a Founding Affidavit.

Let's take a brief look at how the process unfolds into insolvency resolution.

1. Verification of Documents and Notifying Creditors

Your application is submitted to the Master of the High Court and other relevant authorities, such as SARS. Your legal representative will also handle communication with your creditors on your behalf. Besides this, your state of bankruptcy will also be published in the Government Gazette. This notification also includes a court date, which is required as part of an official notice to all Creditors.

2. Matters into the court

After the procedural requirements, the court will examine your financial situation and benefit to the Creditors. If all is well, the court will grant a Sequestration Order and appoint a Trustee. The appointed Trustee will settle the creditors' claims and distribute the available assets. The distribution is recorded in a Liquidation and Distribution account (L & D Account), which is submitted to the Master of the High Court once the claims are finalised. Once the Master confirms the L&D account, the sequestration is finalised. You can rehabilitate or become credit worthy in 12 months after the L&D account is confirmed by the Master of the Court.

Bankruptcy is not the End!

Once you declare bankruptcy and the sequestration process is successfully carried out, you are finally debt-free. Now, you can move towards a better future with Credit Rehabilitation after a certain period of time. In South Africa, credit rehabilitation can occur automatically after 10 years or through an early rehabilitation order after 36-48 months from the date of the sequestration order. In some special instances it can occur as soon as 24 months after the Sequestration Order is granted. This will make you a credit-worthy part of society again.

So, should I declare myself Bankrupt?

As an individual suffering from a burden of mounting debts, declaring yourself bankrupt can provide the relief you are looking for.

To understand whether you must declare yourself bankrupt, we highly advise you to assess your situation with an insolvency practitioner. At Solvendi, our team of experts can help you assess your situation, provide alternatives to bankruptcy wherever possible, and make sure our clients do not lose more than they have to. For a free assessment, give us a call 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.

Considering Voluntary Sequestration? 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