When debt becomes unmanageable, most South Africans are presented with two very different escape routes: debt review or sequestration.
They are often spoken about in the same breath, as though they are two versions of the same thing.
They are not.
One is a rearrangement of what you owe.
The other is a High Court declaration that you cannot pay at all.
Choosing the wrong one can cost you a great deal of money, and in some cases your home.
At VHT Attorneys, we work with consumers on both sides of this decision every week, whether that means guiding a client through debt review, assisting with a debt review removal application, or advising on whether sequestration is genuinely a realistic option.
This guide sets out the honest legal picture so that you can make an informed choice.
Guardians of Fairness
What Is Debt Review?
Debt review, also called debt counselling, was created by the National Credit Act (NCA) in 2007. It is a statutory process, not a court declaration of insolvency.
A debt counsellor registered with the National Credit Regulator (NCR) assesses whether you are over-indebted. If you are, they negotiate a restructured repayment plan with your credit providers, extending your terms and reducing your monthly instalment to something you can realistically afford and they may be able to with the consent of your credit providers be able to negotiate a reduction in the interest rates.
That plan is then made an order of the Magistrate’s Court or the National Consumer Tribunal.
The critical point is this: you still pay your debts in full.
You simply pay them more slowly, at a reduced monthly amount, with legal protection from repossession and creditor harassment while you do.
You also keep your assets. Your house and your vehicle remain yours, provided you keep up with the restructured payments.
What Is Sequestration?
Sequestration is an entirely different mechanism, governed not by the NCA but by the Insolvency Act 24 of 1936.
It is a High Court application in which your estate is formally declared insolvent. A trustee is appointed under the supervision of the Master of the High Court, your assets are sold, and the proceeds are distributed among your creditors according to a statutory order of preference. Whatever remains unpaid is, in effect, written off.
There are two routes into sequestration:
Voluntary surrender – You approach the court yourself and ask it to accept the surrender of your estate.
Compulsory sequestration – A creditor applies to have your estate sequestrated against your will, usually after you have failed to settle a judgment debt.
The consequences of the order are the same in both cases. What differs is who initiates it, and how heavy the evidentiary burden is.
The Advantage-to-Creditors Hurdle
Here is the point most people misunderstand about sequestration: you generally need assets before a court will declare you insolvent.
The Insolvency Act requires the applicant to show that sequestration will be to the advantage of creditors, this was also the guideline followed in the case of Ex parte Ford and Others. Following that, and the reasoning in Ex parte Ogunlaja (2011), the general guideline applied in practice is that the estate should yield a dividend of roughly 20 cents in the rand to concurrent creditors.
If you have nothing worth selling, there is no advantage, and the court will usually refuse the application. Sequestration is therefore not a solution for someone with debt but no assets, which is precisely the position many over-indebted consumers find themselves in.
What Each Option Costs
Debt review fees are regulated by NCR guidelines and are paid over time rather than upfront. Broadly, they comprise an application and administration fee, a once-off restructuring fee equal to your first restructured installment (subject to a prescribed maximum), a legal fee for obtaining the court order, a monthly aftercare fee, and a payment distribution agency fee deducted from each monthly payment.
Your counsellor is obliged to give you a written breakdown before you sign anything. If they will not, that is a red flag.
Sequestration is markedly more expensive and is paid largely upfront. Legal costs commonly run from around R25,000 to R60,000 or more, depending on the complexity of the estate and the province in which the application is brought.
Those costs cover counsel, the application itself, the statutory advertisements in the Government Gazette and a local newspaper, and the trustee’s security.
Because the costs of sequestration are paid from the free residue of the estate, a debtor with insufficient assets simply cannot fund the process.
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The Consequences You Need to Weigh
The effect on your credit record differs meaningfully.
Under the NCA’s credit bureau regulations, a sequestration order is displayed for ten years or until a rehabilitation order is granted, a rehabilitation order can be applied for after four years after the provisional sequestration order was granted, you can also apply sooner if you have sufficient assets to solve proven claims against the estate. A rehabilitation order itself then remains for a further five years. Rehabilitation is not automatic for a decade; in most cases you must apply to court after four years, unless earlier grounds apply.
Debt review, by contrast, is removed relatively quickly. Once all your obligations are settled, or all short-term credit agreements are settled and your mortgage is up to date, your debt counsellor must issue a clearance certificate under section 71 of the NCA, and the bureaux must remove the listing within the prescribed period. You can also remove the debt review flag by applying to the relevant Magistrate’s court to have the debt counsellor’s finding that you were over indebted rejected, subject to the condition that no order was previously granted for your debt review.
Anyone claiming they can remove your debt review status any other way should be treated with real caution, and our debt review scam checker is a useful first port of call.
There are further consequences of sequestration worth knowing. As an unrehabilitated insolvent you cannot enter into credit agreements or hold certain offices without permission, and you may not act as a company director without leave of the court. If you are married in community of property, sequestration affects the joint estate, meaning your spouse’s assets are drawn in too.
Under debt review, you also may not apply for new credit while the review is active, but you retain your assets, your directorships and your legal capacity.
Which Route Is Right for You?
As a very rough guide: debt review suits consumers with a stable income who are over-indebted but not hopelessly so, and who want to keep a home or vehicle. Debt review aims to maintain a person’s reasonable standard of living while allowing the credit to be repaid over a longer period of time.
Sequestration suits debtors with substantial realisable assets and debt so large that no repayment plan could realistically clear it. It follows the earlier guideline that the sequestration should be to the benefit of the creditors.
Neither is a shortcut, and neither should be entered into on the strength of a marketing call.
Speak to VHT Attorneys
The decision between debt review and sequestration depends on your assets, your income, your marital regime and the nature of your debts. It is not a decision to make from an advert.
VHT Attorneys is a boutique firm with deep experience in South African credit and insolvency law.
We will give you a frank assessment of which route, if either, actually serves your interests, and we will tell you plainly if neither does.
Contact VHT Attorneys today for an initial consultation, and face your financial position with proper legal support behind you.
Matthew Upton
Candidate Attorney