Declared insolvent: What’s the meaning? (+ how does it work)

What does it mean when someone is declared “insolvent”?

And why would anyone choose to go through the process…

Let’s find out.

 

Declared insolvent

A person or business is declared insolvent when they can’t afford to pay all the debts they owe. In South Africa, insolvency is governed by the Insolvency Act 24 of 1936. This act lays out the process, rules, and legal proceedings involved.

• Insolvency is when you can’t pay your debts because your liabilities (what you owe) exceed your assets (what you own). It’s a financial state.
• Bankruptcy is the legal process that happens when an insolvent person or business formally declares they can’t pay their debts. In South Africa, this process is called sequestration for individuals.

 

It’s very serious. There’s a lot that goes into it, and it has real lasting consequences.

Let’s get specific.

 

 

Declared insolvent meaning

A person is declared insolvent when their liabilities (what they owe) outweigh their assets (what they own),  making it unaffordable for them to repay their creditors.

It is a legal declaration that typically goes through a court. During the process, a judge confirms their financial distress and legally declares the person insolvent.

After this, a trustee takes control of the individual’s financial affairs. The trustee follows the guidelines of the Insolvency Act to oversee the sale of the insolvent person’s assets to repay as much debt as possible.

 

How to declare insolvency as an individual

Declaring insolvency as an individual relies on a formal legal process designed to help manage unpayable debt. In South Africa, the most common way for individuals to declare insolvency is through voluntary sequestration. This involves asking the court to take control of everything the individual owns (their estate) and showing that selling these assets will help repay at least some of the debts to the people they owe money to (their creditors).

The alternative to voluntary sequestration is compulsory sequestration…where the creditors go to court to apply for sequestration.

Steps to declare insolvency as an individual:

1. Start with an informal financial assessment
2. Talk to a legal professional
3. Explore alternatives
4. Make a decision
5. File for sequestration
6. Attend the court hearing (this is the point where the individual is officially declared insolvent.)
7. Follow the sequestration process
8. Apply for rehabilitation

 

1. Start with an informal financial assessment: Review debts, assets, and income to determine if liabilities exceed assets (what is owed is more than what is owned). This will help in deciding whether declaring insolvency is necessary.

2. Talk to a legal professional: Speak to a lawyer or financial advisor who specialises in insolvency. They will explain the process, available options, potential outcomes, and can help with the legal steps.

3. Explore alternatives: Before declaring insolvency, consider options like debt counselling (debt review). This alternative may be a safer option (more on this in a moment.)

4. Make a decision: After looking at the financial situation and getting advice, decide if formal insolvency through sequestration is the best option. Remember, sequestration involves selling assets to pay creditors—so weigh the consequences carefully.

5. File for sequestration: Submit a sequestration application to the High Court to initiate the formal process of declaring insolvency.

6. Attend the court hearing: Present financial details at the hearing. If the court agrees that debts exceed assets and sequestration is necessary, a provisional sequestration order will be issued. This is when insolvency is officially declared.

7. Follow the sequestration process: Once declared insolvent, the court appoints a trustee to manage and sell the assets in the estate. The money from these sales will repay the creditors.

8. Apply for rehabilitation: After 4 to 10 years, apply for financial rehabilitation to clear the insolvency status. This will remove the record from the credit history and allow the rebuilding of a healthier financial standing.

 

Steps to take before declaring insolvency

Before considering insolvency, it’s important to explore other debt-relief options. Alternatives could help you regain control of your finances without going through insolvency and sequestration.

 

Consider debt counselling (debt review)

This legal process, overseen by a debt counsellor, allows applicants to restructure their debt through a court-approved plan. This process makes the debt more affordable by reducing the total monthly cost. Plus, it lets the person keep all of their stuff. (Which is A LOT better than sequestration.)

The best part…

Unlike insolvency and sequestration, which have a serious long-term impact on your credit record. Debt counselling (debt review) is temporary. It doesn’t stay on your record.

(Try comparing the advantages and disadvantages of debt review.)

 

 

Rehabilitation and its impact on your credit score

After sequestration, individuals can eventually apply for rehabilitation.

Rehabilitation is a legal process that declares them financially ‘restored’ and clears the insolvent status. Allowing them to return to normal financial life.

It usually happens 4 to 10 years after sequestration. (Yes, that’s a really long time.)

After rehabilitation, the sequestration order is removed from the individual’s credit record. 

Let’s break down the pros and cons…

 

Advantages and disadvantages of insolvency

The pros:

• Protection from creditors: Declaring insolvency stops creditors from taking further legal action. It halts ongoing lawsuits, repossessions, and wage garnishments. But, it won’t protect the assets.
• Structured debt resolution: Insolvency provides a legal process to deal with overwhelming debt in a structured way.

 

The cons:

• Loss of assets: Personal assets, including property, may be sold to repay creditors.
• Negative impact on credit record: Insolvency severely affects credit, making it difficult to obtain loans or credit for up to 10 years.
• Limited access to credit: Until rehabilitation is completed, it will be challenging to access any new credit or loans.

 

In summary

There you have it.

Someone can be declared insolvent by choice or as a consequence of creditors going to court.

Either way, the insolvency kicks off the sequestration process—which ends with personal belongings and a “for sale” sign. Figuratively speaking, of course.

For most people, debt counselling is a much better alternative. It’s simpler and avoids all the damage of insolvency and sequestration.

If you want to talk to someone about managing your debt, we can help. Try our online assessment at My Debt Hero to see if you qualify to reduce your debt.