A common misconception about debt obligations is that debt review and sequestration are closely related processes. While they may seem similar at first glance, it is crucial for individuals to understand the distinct differences, similarities, and legal implications of both. This will help determine which option best suits their financial needs.
In both cases, sequestration results in the individual losing control of their assets, which are sold to pay off debts.
Far too often, individuals in financial distress consider sequestration as the only solution, overlooking the debt review process. This is often due to confusion between the two or a lack of understanding of either option.
What Are Debt Review and Sequestration?
Both debt review and sequestration are legal mechanisms designed to help individuals manage overwhelming debt. They provide financial relief and protection against creditors, with both processes requiring court involvement.
However, each approach has different applications and outcomes.
The Debt Review Process
Debt review involves approaching a Debt Counsellor who assesses whether the individual is over-indebted. If so, the Debt Counsellor develops a budget and a proposal to restructure the debt. This proposal is then sent to creditors, followed by negotiations between the counsellor and the creditors to agree on revised terms.
Once an agreement is reached, the matter proceeds to court, where a debt review order is granted. This court order protects both the consumer and the credit providers, ensuring that debts are repaid in a structured and affordable way.
The Sequestration Process
Sequestration is essentially the process of being declared bankrupt, and it comes in two forms:
Voluntary Sequestration: The individual initiates the process by surrendering their estate to the court, providing evidence of insolvency. A trustee is appointed to sell the debtor’s assets, with the proceeds going to creditors.
Involuntary Sequestration: Initiated by creditors, this occurs when a debtor cannot pay their debts, and the court declares them insolvent. The debtor’s assets are sold off, regardless of their willingness, and the creditors are repaid.
In both cases, sequestration results in the individual losing control of their assets, which are sold to pay off debts.
Impact on Credit Record
Both debt review and sequestration affect your credit record significantly.
Debt Review: As soon as you enter debt review, a flag is placed on your credit record, preventing you from entering new credit agreements. Once your debts are fully paid, you can apply to the National Credit Regulator to have the flag removed and restore your credit status.
Sequestration: Sequestration results in being declared insolvent, which severely impacts your credit record. The insolvent status can last for years unless the individual applies for rehabilitation. During this time, the individual cannot apply for credit or serve as a company director.
Cost Comparison: Debt Review vs. Sequestration
Sequestration: This is an expensive process due to court fees, attorney fees, and trustee costs. After the assets are sold, any remaining administration costs must be covered by the creditors themselves, often resulting in creditors not receiving the full amount they are owed.
Debt Review: The cost of debt review is significantly lower, involving only a fee paid to the Debt Counsellor. Creditors do not contribute financially to the process, as they will receive their outstanding debts over time, albeit at a slower pace.
Control Over Assets
Debt Review: The individual retains complete control over their assets throughout the debt review process. The aim is to restructure debt and provide a path to financial recovery.
Sequestration: The debtor loses all control over their assets, which are sold off to repay creditors. This can be seen as a more drastic and punitive approach.
Which Option Is Best?
Debt review is often the better option for individuals who still have a regular income and want to regain control over their finances without losing their assets. It focuses on restructuring debt and creating a manageable repayment plan.
Sequestration, on the other hand, should be seen as a last resort for individuals who are truly insolvent and have no means to repay their debts. It involves losing assets and has long-term consequences on creditworthiness.
Conclusion
When considering debt review vs sequestration, it is essential to understand that while both options offer relief, they come with different implications for your financial future. Sequestration is a more extreme measure and should be viewed as a last resort, whereas debt review provides a more rehabilitative approach aimed at helping individuals get back on their feet.
If you’re struggling with debt, it’s vital to weigh these options carefully and consult with professionals to determine the most suitable course of action.
WHO ARE WE AT VHT
VHT Attorneys is a boutique law firm with a large vision. We provide innovative legal solutions with a renowned standard of integrity and confidentiality.
We help our clients:
- Remove Debt Review Status
- Commercial & Corporate Law
- Labour Law
- Dispute Resolution / Litigation
