Debt Counselling, Administration & Sequestration compared

If you have come to a point where your debt is out of hand and you just cannot repay it, you may have a choice between sequestration, administration and debt counselling. Let’s take a look at the pros and cons of these options.

You may apply to the high court for the voluntary sequestration of your estate (your pool of assets and liabilities).  The court will have to determine whether this is in the best interests of your creditors and will not necessarily grant this relief unless you own sufficient assets that can be sold to repay your creditors, and so make it worth their while.

There are also costs associated with sequestration and your creditors will also have to pay these costs out of your insolvent estate (this means they will get even less). If your assets are too small in value to cover the costs and bring in at least one tenth of the total value of the amount owing to your creditors the court is unlikely to grant your request that your estate be sequestrated.

If you get a sequestration order, your assets will be sold and each of your creditors who applies to be repaid will get a portion of their debt repaid. The balance will be legally written off and this means you never have to pay it and cannot be forced at some later date to repay the balance owing.  This is probably the major benefit of sequestration – potentially having up to 90% of your debt written off for good. Plus the peace of mind of knowing there will be no more harassment from your creditors.

Creditors must make a claim against your insolvent estate and if they don’t their claims will be written off. Those who do make a claim will have to help pay the costs of sequestration.  Only if there is any money left over will they share what is left between them.

The best aspect is that your creditors cannot keep coming back to you for more after they have made their claim and received their share. The only exception is if you suddenly start earning a substantial income, which is considered to be significantly more than your monthly needs – in this case some of that excess could be taken to settle your creditors’ outstanding claims.  In most cases this is very rare.

The downside of all this is that you lose your assets and you have no control over how much they are sold for and you get none of the proceeds either.  In addition, your credit record carries a notice of sequestration and you will be legally barred form obtaining credit until your estate is rehabilitated.

Until recently the only other option was Administration which is still only applicable where you owe less than R50 000.  Unlike Sequestration, Administration does not result in a portion of your debt being written off.  The main aim of administration is to give you breathing space to repay your debts in full by reducing the monthly repayments to an amount you can afford.

Administration orders are granted by the magistrates courts and they also usually result in your being unable to obtain credit as a notice of administration is often placed on your credit record and will remain there until the administration order is set aside.  The costs of administration are usually quite high but as a temporary measure it can be a useful way to protect yourself from legal action, provided you only owe in the region of R50 000.

The latest debt relief procedure is debt counselling in terms of the NCA. Debt counselling is similar to Administration but there is no cap on the amount you can owe.  In this scenario the primary intention is not to write off your debts but rather to rearrange them.  However, the remedies available to you include having the court force your creditors to write off some of the capital and/or interest.  As the name implies there is a certain amount of rehabilitation that the debt counselling process hopes to achieve.  Firstly, you wil be required to spend less on credit and repay your debts as a first priority and second, once your debts are repaid your debt counsellor may issue a clearance certificate, which will have the effect of dramatically improving your credit record.

Debt counselling or administration usually allows your debts to be restructured and for payment to be made over a far longer time period, thereby decreasing the monthly instalment required. Unfortunately, in the long run you always pay more because interest mounts up.

The advantage of this approach is that it is possible that you can avoid losing everything, and you may be able to repay your creditors, with the aim of getting into a better position, bringing down your expenses, perhaps getting a higher paying job, and then paying more than is required. This has the potential of repaying those debts once and for all, rather than paying and paying and not seeing any reduction in the amount still outstanding!

A few other points in summary….

Sequestration allows you to write off some of your debt – perhaps even most of it – but you lose your assets. You will not be able to get credit again without the approval of the trustee (the person appointed by the court to manage your assets), you are very unlikely to get more credit, and you will have to apply to be rehabilitated later, which isn’t that easy.

It usually doesn’t happen before 4 years have elapsed from the date you were sequestrated, which means that for 4 years you cannot qualify for a loan or enter into any credit or financial agreements.  Even once you have been rehabilitated you will battle to get credit for another 5 years (so that’s 9 years all in all!) as the notice of rehabilitation which gets added to your credit record will discourage creditors from lending to you even though they are allowed to once you have been rehabilitated. Also, you must first persuade your creditors that sequestration is the best option for them too. Because they pay something towards the costs, they can refuse to do this and then you may be forced to choose another option.

Debt counselling or administration means you keep your assets – but someone else will decide how much you repay your creditors every month, and they will only leave you with enough to live on. Stretching out your repayments in this way will help to make them more affordable and help you stay afloat. If you choose this route, try and find a way to reduce your monthly expenses so you can repay the debts faster.

Should you require assistance or further information on these matters, please contact us.

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