Is Sequestration a Good Idea in South Africa?
- Solvendi - A Tradition of Excellence
- Sep 5
- 5 min read
Approximately 12 million adults in South Africa struggle with unmanageable debt, according to the Finmark Trust. One legal solution that often comes up in this context is Sequestration, a process in which an individual voluntarily applies to be declared insolvent by a court. The court then appoints a trustee to manage and distribute the insolvent party's assets to its creditors. But the big question remains: Is sequestration a good idea in South Africa? In this article, we explore the arguments both for and against this process.
Why would Sequestration be a Good Idea in South Africa?
a. A Fresh Financial Start
Once a sequestration order is granted, you get an opportunity to wipe your slate clean. When granted, your liabilities related to the unsecured debt drastically reduce. In South Africa, approximately 60-75% of your unsecured debt will be written off. Debt will also stop accruing interest charges. In some cases, sequestration may write off all your debt, too, which is why it is crucial to consult with an insolvency expert to assess your debts and financial situation.
The remaining 25-40% debt will be managed through a trustee appointed by the court. In the distribution process, the financed assets are returned to their respective creditors. However, paid-off assets such as vehicles, electronics, tools of the trade, and household contents remain safeguarded by the trustee. For someone overwhelmed by mounting financial obligations, sequestration provides a breathing space and a chance to rebuild life without being hounded by creditors.
The paid off assets are not removed from your possession. They stand as security while you pay back the 25-40% over a negotiated period. Once the 25-40% is paid off, the assets are released from security. Essentially you are buying those assets back from the Trustee. Logically, if you do not pay the 25-40% back over the negotiated period, those assets will be taken from you to recuperate the costs.
b. Legal Protection Against Creditors
Once the sequestration order is in effect, all legal proceedings and demands from your creditors are halted. This means you will no longer receive relentless phone calls and risk losing essential possessions in a disorderly manner. Instead, the process becomes structured under the supervision of a trustee.
Since the trustee acts as a mediator through a legal framework, this provides reassurance for both the debtor and the creditor.
c. Better Settlement for Creditors
While the process may seem debtor-sided, interestingly, sequestration is also beneficial to creditors. Creditors often stand a better chance of receiving partial payment in a controlled insolvency process than if they pursue individual enforcement actions. Since the debtor's debt settlements are fairly distributed, creditors may recover more than they otherwise would.
d. Pathway to Rehabilitation
In South Africa, a debtor may apply for credit rehabilitation after a set period, which restores their financial standing and creditworthiness. With Solvendi, credit rehabilitation can begin as soon as 24 months after the sequestration process. Alternatively, if you choose not to proceed with the early rehabilitation process, then you will be automatically rehabilitated after 10 years in law.
Why is it not a Good Idea?
a. Loss of Financed Assets
One of the prominent drawbacks is that sequestration requires surrendering most, if not all, valuable assets that are financed. Your property, cars, and other essentials, if financed, are at risk of being lost if you go through sequestration. For many, the emotional and practical consequences of losing such possessions outweigh the relief of debt forgiveness. In reality though, most consumers would have probably lost these assets in any case. It would have just taken a longer time, and the longer it takes the more debt you owe in terms of interest charges and also the shortfalls left from the repossession of financed assets. As an example, if you have a financed home at risk of being repossessed, it can actually be used to write off all of your debt in the sequestration possess. You can also live in that home for 6-9 months while the process is being wrapped up legally.
b. Damaged Credit Record
Being declared insolvent has long-term implications. Credit bureaus maintain the record of sequestration until credit rehabilitation occurs. During this time you cannot access any form of credit. Accountants, estate agents, brokers cannot use their licence numbers during this time. Bank employees cannot sequestrate and are encouraged to apply for Debt Review. For anyone hoping to maintain financial flexibility, this can be a tremendously crippling experience. However, had the option to sequestrate not existed, it is unlikely that you would have had access to credit and due to the impaired credit record certain forms of new employment too.
c. Legal Costs
Apart from having to pay back 25-40% of your debt, you also have to cover the financial legal costs that come with the sequestration process. Ironically, those already facing financial difficulty may struggle to fund the process, making it an inaccessible option for many.
d. Impact on Reputation
Beyond finances, sequestration also carries a social stigma. Many people find it daunting to form professional relationships with creditors and people from other professional backgrounds. You may face discrimination at work and in other places if your status is discovered. Even with credit rehabilitation, it may take an additional 12 months to achieve a healthy credit score.
Conclusion: When is Sequestration a Good Idea in South Africa?
Sequestration is most certainly not a one-size-fits-all solution. It depends on the unique circumstances of each case. However, sequestration can be a good idea in the following scenarios in South Africa.
The debtor has debts so large that no other form of debt relief (such as debt counselling) is feasible.
There are sufficient assets to cover the legal costs and allow creditors to receive a meaningful dividend.
The debtor is prepared to lose their financed assets (including a roof over their head) for the possibility of a fresh financial start.
The long-term benefit of rehabilitation does outweigh the temporary stigma and restrictions.
In contrast, for those who have an alternative to sequestration, we highly recommend seeking those options first. Those with small debts, valuable assets, or the ability to negotiate payment arrangements may want to look at solutions like Debt Review as an option before considering Sequestration.
Ultimately, it is an extremely valuable debt solution to have access too if all other options to recover have failed, but should be taken only after careful consideration and a detailed consultation with financial and legal experts.
Solvendi will conduct a detailed assessment regarding your current debt situation and choose the best course of action for your financial future. Our assessment, and the legal advice provided in that assessment, is free of charge. There is also no obligation to proceed if you feel that this option will not suit your current situation. For more information, we highly recommend giving our experts a call and booking an appointment with us.
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
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