FINANCIAL DIFFICULTIES – YOUR OPTIONS

FINANCIAL DIFFICULTIES – YOUR OPTIONS
The following options are available to you.

OPTION 1 : DO NOTHING
Do nothing and let your creditors take judgment against you and attach/es and sell/s your assets or obtain a Court Order whereby you must pay the debt in monthly instalments (which does allow for sufficient funds to allow you to pay your reasonable monthly expenditure). You would be likely to have sleepless nights for years to come, worrying about your debts constantly increasing by the addition of interest and legal costs and when the Sheriff will be knocking on your door to attach your possessions (including your home). The Sheriff may also serve a garnishee order on your employer – which means that they are forced to pay a portion of your salary to the creditor/s.

The negative consequences of debt is that Judgment taken by a Creditor stands for THIRTY YEARS or until such time as the debt, interest and costs have been settled in full. If the proceeds of the sale of your assets in execution, which are almost always negligible and in the case of the sale of your home would not be protected by a reserve price, are not sufficient to discharge your debts, you shall remain liable for the balance of the debt for the full 30 years or until the debt had been settled in full. This means that you may not easily recover and you may never build up assets again in fear or creditors attaching them to satisfy their claims.

This approach constitutes apathy and is not recommended.
OPTION 2 : DEBT COUNSELING
You may invoke the protective measures provided for in terms of the National Credit Act by approaching a debt counselor to conduct a debt review for you in the event that you are found to be over-indebted and attempt to put a payment re-arrangement in place with your creditors.

Whilst the debt counselor is considering your application for debt review you cannot enter into further credit agreements.

Debt counselling may either achieve the writing off of debts through the creditor’s non compliance with the said Act (reckless credit granted), or procure that the debts are restructured and for payment to be made over a longer time period, thereby decreasing the amount that you normally pay towards your debts in a particular month. Save for instances of debts possibly being written off on account of the creditor’s non compliance of the said Act, debt counselling does not procure that your debt would be written off.

The Magistrate’s Court can, in cases of reckless credit (non compliance with the provisions of the said Act), either during legal proceedings or on its own accord or in consequence of a proposal by the debt counsellor, suspend the applicable credit agreement/s for a certain period of time or restructure your obligations under the credit agreement/s. If the Magistrate’s Court sets aside, either in whole or in part, your obligations in terms of the credit agreement/s on the grounds of reckless lending, you do not have to perform any of your obligations under the agreement/s at all. If the agreement/s is/are suspended, as opposed to being set aside, in addition to not being obliged to make any payment during the period of suspension, no interest, fee or charge may be debited and the credit provider’s rights under the agreement or under any other law in respect of that agreement/s is/are unenforceable. When the period of suspension ends, the reciprocal rights and duties of the parties are revived and are fully enforceable, except to the extent that the Court may order otherwise. The interest, fee and charges which would have otherwise accrued during the period of suspension will not, however, be permitted to be recovered.

Unfortunately, except for the principles referred to above relating to reckless lending and suspension, debt counselling does not improve your financial position, but merely allows you to pay monthly amounts to your creditors which you are able to afford, but your debts would continue to mount with added interest and legal costs.

The monthly amount that you must pay to your creditors will only leave you with enough funds to maintain a below average financial existence. Stretching out your repayments in this way will help to make them more affordable and help you to stay afloat.

OPTION 3: VOLUNTARY SURRENDER
The question is simple: Can you afford to pay back your debt or can’t you? If you can’t or if your debt is likely to continue to burden you down for the next 5 or 7 or 10 years, this option must be seriously considered. If you knew of a way to completely get rid of your debt you can save the monies that you would have paid to your creditors over the next 5 to 7 years, would you rather take that option or would you endeavour to achieve the impossible, namely to pay off your debt? The answer is simple: This option affords you exactly that opportunity: to get completely rid of your debt and start fresh on the same day that you decide to surrender your estate.

The moment that you decide to surrender your estate voluntarily, you stop paying all debt. To pay any further debt at this stage would be throwing good money after bad. The monies that would have been paid towards debt can be used to pay the costs of the application to Court. Once the application costs have been paid, all your income vests in you, as there are no creditors to pay.

The moment that the final order is granted, you are sequestrated and free from debt.

Your cash flow improves. You are able to start a new life and get back on your feet.

You may remain living at your present residence for up to six months or longer, until the property is sold, free of charge – you only have to pay electricity and water.

During the period of sequestration, it is possible for you to enter into debt, start a business, buy a house or trade generally, subject to the approval of your trustee.

You can also make an offer to your trustee to purchase back your property or assets when you are in a position to do so.

None of the creditors can ever demand payment or proceed with steps against you.

If they do not get paid from the proceeds of the assets sold, the debt must be written off by them.

You can carry on with your life as per normal.
There are, however, disadvantages which are outweighed by the advantages. THE INSOLVENT ALWAYS WINS. The disadvantages are that:

1. it is expected of you to throw your assets, if you have any, into the “kitty” so that it can be sold to pay the creditors. That is the sacrifice that is required of you. Given the circumstances it is a small sacrifice to make as you can purchase back your assets from the trustee;

2. you would obtain no further credit during the period of your insolvency and for some 5 years after your rehabilitation (a blessing in disguise as credit got you into this mess);

3. your Trustee will be in control of your financial affairs until your rehabilitation;

4. you would have to report on your financial affairs to your Trustee until your rehabilitation;

5. any superfluous income / funds that you may obtain during your insolvency may be appropriated by your Trustee to pay a further dividend to your creditors which, in practice, almost never happens.

An application to surrender the joint estate of spouses married in community of property, irrespective of when the marriage was contracted, must be made by both spouses.

If you are an unrehabilitated insolvent, you may surrender your new estate which you would be able to prove has been acquired by you subsequent to the previous sequestration.

You may apply to the High Court for the surrender of your estate (i.e. the sequestration of your estate if you can show that:-

1. you are actually insolvent (your liabilities exceed your assets). However, the fact that the evidence adduced by you discloses that the value of your property exceeds the amount of your liabilities is not decisive against you if it is established that you do not have the financial means to pay your debts in full and it is improbable that your assets will realize sufficient funds for such purpose.

2. there are sufficient assets in the free residue (i.e. that part of your estate which is not subject to any secured claims) to defray all the costs of the sequestration. The Court must be satisfied that the value of the free residue of your estate is sufficient to ensure that, after allowing for any claims and costs which may be a prior charge upon any of the proceeds of the sale thereof, there would be an amount available to discharge those costs of sequestration which are payable “out of” the free residue.

3. It would be to the advantage of your (concurrent) creditors for your estate to be sequestrated. You must prove, on a balance of probabilities, that in fact there will be the requisite advantage to creditors, i.e, to them as a body. Practically 11c in the Rand must be available as a dividend to concurrent creditors. Note that to the extent that you may not own assets of sufficient value to procure the requisite dividend, you may tender such part of your future income that you can afford to pay to the trustees to be appointed, monthly, to “achieve the target”.

Note that whilst the effect of your sequestration is that your assets would vest in the Master of the High Court until a Trustee has been appointed to administer your estate, when your assets shall vest in the Trustee for liquidation and distribution of the proceeds to your creditors, certain of your assets do not fall into your insolvent estate, which includes:-

1. any moneys received by you in the course of your profession, occupation or other employment which, in the opinion of the Master of the High Court are necessary for the support of yourself and your dependents;

2. pension to which you may be entitled for services rendered by you, in terms of the Insolvency Act and various other statutory enactments;

3. compensation for any loss or damage which you may have sustained, whether before or after your sequestration, by reason of any defamation or personal injury;

4. wearing apparel, bedding, household furniture and tools and other essential means of subsistence or such part thereof as your creditors or if none have instituted a claim, the Master of the High Court, may determine;

5. certain insurance policies- if requested we will advise you further in this regard;

6. a contingent interest as a fideicommissary heir. A simplified definition of a fideicommissum is when an heir has inherited property with the proviso that upon his / her death it must devolve on you;

7. gratuities and benefits under the Occupational Diseases in Mines and Works Act;

8. compensation under the Workmens Compensation Act;

9. benefits under the Unemployment Insurance Act;

10. property excluded under the Land Bank Act;

11. trust monies of an Attorney, Notary or Conveyancer;

12. property acquired with monies received by you.
However, in an endeavour to establish an advantage to creditors you may voluntarily renounce, in favour of your creditors, the protection afforded by the Insolvency Act which precludes the sale of the above-mentioned property of your estate.

The advantage to creditors upon which you may rely is that they may have the benefit of a direction issued whereby you would pledge such portion of your salary as would not be required for the maintenance of those depended on you or to maintain your own reasonable monthly expenditure, as may be required to supplement any shortfall to procure a dividend of at least 11c in the Rand to your concurrent creditors.

Too many people have misconceptions about insolvency that prevent them from considering it as a viable option. Don’t allow this to influence you! The following are some of the myths persons have about insolvency:

1. Insolvency will ruin my credit record. This is absolutely false. What ruins your credit record is your inability to pay your debts on time. After your insolvency your debts would be discharged and you would be given a fresh start. If you can keep on top of any new debts you incur after you emerge from Insolvency your credit record should, to the contrary, improve with time.

2. Filing insolvency makes me a bad person. Absolutely not! Insolvency enables you to make a fresh financial start and become a productive member of society again. Do you think it makes you a better person to avoid your creditors, ignore your bills and drive yourself further into a debt hole that you’ll never get out of, or to take on new credit responsibly, and pay your bills on time? Millions of persons file for insolvency each year and become productive members of society-you can too.

3. I won’t be able to get credit after my insolvency. Think about it. If you owned a credit card company, who would you rather give a credit card a person who has a massive debt load and is in arrears with his / her accounts, or a person whose accounts have been settled?

4. I can’t afford to hire an attorney for my insolvency. When you hire an experienced Insolvency attorney he / she works hard to make it financially possible for you to file for insolvency. We many offer payment plans. You can make a down payment and pay the balance in installments over time. We know that if you are considering insolvency, you’re having financial problems. We do not make those problems any worse.

5. I will never recover. The contrary is true. When you are rehabilitated, you will be fully restored to your status and no further assets which you may acquire and amounts that you may earn or which may accrue to you can be taken by your former creditors. As to when you may be rehabilitated, this depends on various circumstances which are complex to the extent that we will not burden you with this at this point in time and which, of course, does not address your immediate problem. This will be addressed in the future, in which regard we will retain communication with your trustee to determine when an Application for your Rehabilitation may be brought and at that point in time communicate with you in this regard. Depending on your specific circumstances, you may be rehabilitated after 6 months from the date of your sequestration or at intervening periods thereafter. On average this occurs after 4 years of your sequestration.

6. Insolvency cannot get rid of debt like student loans and taxes. Not true.

7. I won’t be able to buy a house or a car, or rent an apartment, after insolvency. Again, not true. Although it may take you a little time to start purchasing things, you should be a good credit risk once you emerge from Insolvency, and you shouldn’t have too much trouble making these types of purchases.

8. I don’t want to go through a difficult and time consuming Court case. Forget about jury trials, cross examination, and all of the other courtroom drama you see on TV. In most Insolvency cases, you’ll never appear before a judge. The Court will mostly rely on written affidavits. Application takes more or less 6 weeks.

OPTION 4 : VOLUNTARY DISTRIBUTION:
All creditors (not only some of them) may agree (note that they are not compelled to agree), that they will accept a voluntary distribution whereby a fixed amount per month would be payable to your creditors proportionate to the amounts of their claims. Such a proposal would often be likely to be acceptable to creditors if they are advised of the alternative, namely that client shall institute proceedings to be declared insolvent. This could be very effective and avoid sequestration, but is uncertain as most creditors are unlikely to apply their minds to such a proposal within a stipulated period (which must be stipulated to avoid a delay during the course of which your financial position may worsen) or at all and again, as with the protective measures in terms of the National Credit Act, administration orders and debt counseling, you do not procure an effective writing off of your debts.

When approached creditors might also refuse and initiate legal action to recover the money due to them, in anticipation of a possible bankruptcy. This option should be handled very delicately, and creditors should be assured of the debtor’s intention to avoid bankruptcy.

OPTION 5 : MORATORIUM OF CREDITORS:
You may try to convince all your creditors that you are expecting to receive a sum of money from a source that would be adequate to pay all your debts. However, the success of this approach is entirely dependant on the consent and co-operation of the creditors. Again, as with the protective measures in terms of the National Credit Act, administration orders and debt counseling, you do not procure an effective writing off of your debts.

OPTION 6: COMPROMISE:
An agreement is reached between the debtor and the creditors that certain assets will be liquidated subject to terms and conditions. The proceeds will then be accepted as full and final settlement of the debts, once again subject to certain terms and conditions.

OPTION 7 : ADMINISTRATION ORDER
This option will only partially affect your status. However you may only use this option if your debts do not exceed the amount stipulated in the Government Gazette, which is at present R50 000,00. The Court will then grant an order to the effect that you will be liable to each creditor pro-rata for a specific amount of money to be paid to the Administrator for distribution to your creditors each and every month, until all your debts have been paid.

This option does not procure to writing off of your debt. An administration order simply allows for the debts to be restructured and allows for payment to be made over a longer time period. With added interest your debts will increase.

The advantage of this approach is that you retain your assets and that you may be able to manage to repay your creditors by getting into a better financial position and finding a way to reduce your monthly expenses so that you can repay the debts faster. You may have to consider moving in with family and renting out your house if needs be; selling your new car and buying an older one; selling as many possessions as you can, perhaps getting a higher paid job and endeavour to repay your debts more quickly.

OPTION 8 : FRIENDLY COMPULSORY SEQUESTRATION:
This option is initiated by a friend of yours who is also your creditor who must show that he / she has a claim which entitles him /her to apply for your sequestration (note that this claim may not be fabricated – it must be truly and honestly due), that your liabilities exceed your assets, fairly valued, or that you have committed an act of Insolvency by having addressed a letter to him/her wherein you state that you are unable to pay the debt) and that there is reason to believe that it will be to the advantage of your creditors that your estate be sequestrated. As in the case of a voluntary surrender, practically at least 11c in the Rand must be available as a dividend to concurrent creditors and to the extent that you may not own assets of sufficient value to procure the requisite dividend, you may tender such part of your future income that you can afford to pay to the trustees to be appointed, monthly, to “achieve the target”.

It must be disclosed to the Court that it is a “friendly compulsory sequestration”. The negative side to this type of sequestration is that the friend would potentially be liable solely or partly and in the latter event to the extent that creditors do not prove their claims, for payment of a contribution towards any shortfall to cover the costs of sequestration.

Security must be furnished for an amount sufficient to cover the fees and charges necessary for the prosecution of the sequestration proceedings and costs of administration until the appointment of a trustee.

In an application for a friendly sequestration the court does not concern itself with your interests. If you are weighed down by a mountain of debt and there is little hope of your being able to tide over your difficulties or if you wish to avoid harassment by your creditors then it seems that your remedy is to apply to court for the voluntary surrender of your estate.

Many provisions which have to be complied with if a voluntary surrender of your estate is implemented, designed to protect the interests of creditors, do not apply to applications for a friendly sequestration. Consequently, while there is nothing sinister in itself in a friendly sequestration, there is a real possibility that creditors may be prejudiced. For this reason alone courts scrutinize such proceedings with great care. When considering the interests of creditors the fact that sequestration proceedings are taken against a debtor with his concurrence is a fact which cannot be disregarded.

It is not sufficient for a creditor opposing the grant of a sequestration order to show that the applicant was activated by friendly considerations towards the debtor; the onus is on the opposing creditor to show that the object of the application was not to benefit the applicant, but the debtor. Note that the same principles referred to under Option 2 apply with regard to property that would
not fall into your insolvent estate.

As to your subsequent rehabilitation the same principles will apply as set out under option 2.

OPTION 9: DEBT CONSOLIDATION:
One big loan is used to pay off many others and the one loan is repaid over a long-term period. This is usually done to secure a lower interest rate and for the convenience of having to pay only one creditor, thus saving on administrative costs. Debt consolidation may involve the conversion of a number of unsecured debts into one unsecured loan, but more often it involves a secured loan against an asset that serves as collateral, most commonly a house. In this case a mortgage is secured against the house.

Debt consolidation is often advisable in theory when someone is paying credit card debt. Credit cards can carry a much larger interest rate than even an unsecured loan from a bank.

Debtors with property such as a home or car may get a lower rate through a secured loan using their property as collateral. Then the total interest and the total cash flow paid towards the debt is lower, which allows the debt to be paid off sooner, incurring less interest. In practice many people are in credit card debt because they spend more than their income. If that habit continues the consolidation will not benefit them much because they will simply increase their credit card balances again.

COSTINGS
As to costings, the first consultation is free, at which we shall explain the costings involved in implementing the recommended best option for you.

Kindly study the written communication and make notes of the information recorded therein in respect of which you may require clarification or which you do not understand or other issues that you wish us to explain and contact us to arrange a consultation with you for the said purposes.

Disclaimer: This article is for information purpose only and does not constitute legal advice. Call on our attorneys for legal advice, rather than relying on the information herein to make any decisions. The information is relevant to the date of publishing.

Leave a Comment Cancel Reply