Sequestration in South Africa: Everything you need to know

Understand sequestration

When debt piles up, it can become overwhelming. Many South Africans consider a legal option such as sequestration when they’re no longer able to keep up with their monthly debt repayments.  

But how does sequestration work, and could it affect your financial future?

Our guide to sequestration aims to help you understand the benefits and drawbacks of this process, and explores alternative solutions, to help you make informed decisions to handle your debt.

What is sequestration?

In general terms, insolvency occurs when you’re overwhelmed by debt and can no longer manage your repayments.

This may result in sequestration, a legal process where the High Court declares you insolvent and appoints a trustee to manage your estate and sell your assets to pay off your outstanding debts. The sequestration order is a formal declaration that you’re insolvent.

The primary purpose of sequestration is to distribute your assets fairly among your creditors. However, your estate won’t be sequestrated if doing so does not benefit your creditors.

Sequestration is usually seen as a last resort if you can’t meet your financial obligations. It can provide a “financial reset” – a structured path to becoming debt free if other options, including debt counselling, have failed.

The main piece of legislation governing sequestration in South Africa is the Insolvency Act 24 of 1936, which outlines the procedures and requirements for declaring someone insolvent.

The National Credit Act 32 of 2005 regulates consumer credit, including debt counselling in cases of overindebtedness.

What is the difference between sequestration and liquidation?

Sequestration applies to individuals (“natural persons”) and partnerships, while liquidation applies to companies and close corporations.

How else do sequestration and liquidation differ?

How sequestration can affect you

Sequestration has long-term consequences and is not something you should embark on lightly.

Here are some of the ways it could affect you:

• You can lose your assets, including your property, vehicles, and other valuables. The only property excluded are your basic necessities, such as food, clothing, bedding, and so on. All other moveable and immoveable property falls within the insolvent estate. 
• Sequestration will have a long-lasting impact on your credit record – the sequestration order will remain on your credit report for years. 
• It will be difficult to access credit in the future. After rehabilitation, the sequestration notice is removed from your credit profile, but your credit score will be affected by previous judgements. You’ll need to start over in terms of building your credit score. 
• You may struggle to find work in certain professions. If you’re insolvent, you may not become a company director, hold an estate agent’s fidelity fund certificate, manufacture or distribute liquor, act as a trustee of a trust, or be a member of a provincial legislature. 

The financial and lifestyle consequences of sequestration

Once the court has formally declared you insolvent, you’ll face some restrictions that will affect your daily life, business activities, and long-term financial freedom. For example, at the very least you won’t be able to:

• Take out new credit. Even after you’re rehabilitated, you’ll need to rebuild your credit score over time, which means it will be hard to access loans. 
• Buy any more assets.
• Run your own business. 

Types of sequestration

There are two types of sequestration in South Africa. These are:

• Compulsory sequestration. This is when the court declares you insolvent based on applications brought by your creditors. 
  
  
• Voluntary sequestration. Also known as voluntary surrender, this is a legal process whereby you apply to the court to be declared insolvent and voluntarily hand over your assets to a court-appointed trustee. The trustee agrees to sell your assets to pay off your creditors. Voluntary sequestration usually happens when all other methods of debt relief have failed. The court must be satisfied that:
  

1. You own enough assets or property that can be sold to cover the costs of the sequestration process.
2. Your creditors will benefit from the sequestration. In some cases, debtors try to escape debt without offering creditors anything in return, so it must be proved that creditors will obtain meaningful benefit, i.e. at least 20 cents for every rand owed.

Qualifying for sequestration

To qualify for sequestration in South Africa, you need to:

• Be a natural person (individual), not a business entity (company)
• Be at least 18 years old and mentally capable of making financial decisions
• Live in South Africa or have assets in the country
• Have a valid address where legal documents can be delivered
• Be unable to pay your debts (either because you don’t have enough monthly income to cover repayments, or because your total debts exceed the value of everything you own)
• Prove to the court that sequestration will benefit your creditors
• Agree to hand over control of your assets to a court-appointed trustee

Not sure if sequestration is right for your situation? There are other debt relief options that might work better for you.

Request a free call-back from one of our debt experts at DebtBusters. Our qualified debt counsellors can discuss your financial standing and guide your next steps.

Sequestration: Step by step

If sequestration is the right debt relief option for you, the following process will apply in the case of voluntary sequestration. Note that many steps can take place at the same time.

Step 1: Consult an attorney. Start by consulting an insolvency attorney, who will review your situation. Once your legal practitioner has advised you on the way forward, they will submit the necessary documentation to a sequestration attorney, including information about your debts, creditors, income, expenses, assets, and any legal action taken against you. Your insolvency attorney will also draft and review a preliminary statement of your financial affairs, after which the final version will be prepared.

Step 2: The final statement is submitted. Your final statement of affairs is submitted to the Master of the High Court. It will include a list of your assets and debts, income and expenses, and a sworn statement regarding your financial situation.

Step 3: Your creditors and the authorities are notified. Your attorney will notify the South African Revenue Service, the Master of the High Court, and your creditors. A formal notice is published in the Government Gazette, and a local newspaper (for voluntary sequestration). From this point on, you stop paying creditors, legal action is suspended, and interest on your debts is frozen.

Step 4: Inspection period for creditors. Your statement is made available for inspection at the Master of the High Court’s office, giving creditors a chance to review it and raise any objections. The attorneys ensure this process is handled correctly.

Step 5: The court date is booked. A date is secured on the High Court roll for your application to be heard. The attorneys manage this step for you.

Step 6: Court hearing and trustee appointment. A judge will consider whether you are indeed insolvent, whether sequestration will benefit your creditors, and whether all requirements have been met. If the court is satisfied, a provisional sequestration order will be granted. The court will set a return date, allowing creditors time to object. If there are no objections, the court will grant a final order of sequestration, after which the Master of the High Court will appoint a trustee.

Step 7: Trustee meeting and asset management. You’ll meet with the trustee and possibly your creditors. Your attorneys may negotiate to buy back key assets. The trustee handles the sale of any remaining assets and submits a report to the Master of the High Court.

Step 8: Applying for rehabilitation. You can apply to be rehabilitated once your debts have been paid off. Once approved, your sequestration ends, and you regain full financial control. You are automatically rehabilitated after 10 years, subject to the court’s approval.

What happens to your vehicle during sequestration?

If your car or motorbike is financed through a hire purchase agreement, the vehicle legally belongs to the bank or finance company until you make the final payment. During sequestration, the finance provider has the right to repossess it, even if you’ve made most of your payments.

That said, if your instalments are up to date, the bank may consider letting you keep your vehicle. This isn’t guaranteed, however, and if you’ve missed payments, repossession is likely.

A vehicle registered in someone else’s name, such as a family member or a company, shouldn’t be included in your estate, unless there’s reason to believe it belongs to you.

If your vehicle is fully paid off, you might be able to keep it, depending on your financial situation and the overall value of your estate. In some cases, you can negotiate with the trustee to buy back the vehicle from the insolvent estate if you need it for work or daily transport.

Every situation is different, and it’s important to get proper legal advice.

Advantages and disadvantages of sequestration

There are clear pros and cons to sequestration.

Advantages

• Complete debt relief. Once sequestration is finalised, most of your unsecured debts are written off – provided you don’t have enough assets to cover them. Creditors must submit their claims to be approved by the trustee.
• Protection from creditors. When sequestration is in process, legal action by creditors is halted. This includes stopping garnishee orders, debt collection efforts, and any new legal proceedings against you.
• You retain your income. Your salary and income remain yours. Creditors can’t claim your earnings, and existing garnishee orders are cancelled. 
• Your privacy is maintained. Only your creditors are notified of the sequestration. Your employer and others are not informed, and you won’t lose your job because of the sequestration.
• Minimal court involvement. You don’t have to appear in court. The application for sequestration is made to the High Court, but your legal team will represent you. 
• Potentially retain essential assets. Your trustee may be able to arrange with your financial institution to keep your vehicle, provided your instalments are up to date.
• A structured resolution and path to financial rehabilitation. Sequestration provides a clear legal framework to resolve debt issues. After five years, you can apply for rehabilitation, provided you meet specific conditions. This allows you to rebuild your creditworthiness.

Disadvantages

• Loss of bonded property. If you own a property with an outstanding bond, it will be sold to repay your creditors. This means you’ll lose your home unless you can make alternative arrangements, which can be traumatic. 
• Restricted access to credit. During sequestration, you’re prohibited from obtaining new credit, including credit cards and loans. 
• Insolvency has lasting consequences. You will be classified as insolvent and may only apply for rehabilitation once all your creditors have been paid. Unless the court rules otherwise, you’re automatically rehabilitated after 10 years from the date of sequestration. 
• Banking limitations. You may be restricted from opening certain bank accounts, such as cheque accounts, and from accessing credit facilities. All financial activities are subject to oversight by your trustee.
• Professional and legal restrictions. If you’re insolvent and haven’t yet been rehabilitated, you can’t hold some public offices or serve as a company director. You also can’t enter into certain legally binding agreements or hold offices where public trust is vital.
• Rehabilitation is a legal process. If you want to regain financial and legal independence, you must apply for rehabilitation through the High Court. This process involves legal procedures, with all the associated costs. 

The court automatically rehabilitates most people 10 years after sequestration. Learn how to rebuild your credit score.

Sequestration fees

• The cost of sequestration varies, based on the complexity of your case and the value of property registered in your name. Note that fees typically vary from province to province. 
• You will also be liable for costs relating to the publishing of information in the Government Gazette and newspapers.
• There may be additional costs depending on the specifics of your case.

Alternatives to sequestration

Sequestration can offer almost immediate relief from debt, but it comes at a cost. You must understand its risks and benefits to make an informed choice.

It’s also helpful to know that there are several alternatives to sequestration in South Africa. These include:

• Voluntary debt settlement. Negotiate directly with your creditors to settle your debts. They may consider assisting you by agreeing to reduced amounts or extended repayment terms.
• Selling assets. Consider selling non-essential assets to pay off debts and avoid formal insolvency proceedings. Bear in mind that if the assets are subject to finance agreements, you can’t sell them without the creditors’ consent, as they may still have a claim over them.
• Debt counselling. This is a formal legal process under the National Credit Act, which is available to you if you’re overindebted and unable to meet your financial obligations. A registered debt counsellor can negotiate with your creditors to restructure your debt repayments to make them more manageable. 

Contact DebtBusters today to discuss your options and find out if you qualify for consolidating your debt through debt counselling, which will simplify your monthly repayments, free up cash, and keep your assets secure.

How to keep on top of your finances

Debt can snowball easily. Here are some tips to help you avoid becoming overwhelmed by debt.

• Save so you have a three-month emergency fund in place. Putting away small amounts every month will allow you to build up a financial cushion. 
• Prioritise high-interest debts. Focus on paying off high-interest debts – such as credit card debt – first. These debts grow fastest and cost the most over time. By reducing or clearing them, you’ll lower the total amount of interest you pay, improving your overall financial health.
• Automate your instalments to avoid missed debt payments. Paying regularly and on time will ensure you don’t end up paying penalties or late fees, and helps boost your credit score. 

DebtBusters has a useful self-analysis test that helps you understand your financial behaviours and provides insights on where you can improve.

FAQs

How long does sequestration stay on my credit record?
In South Africa, a sequestration order typically remains on your credit report for five years. The next step is rehabilitation, which is flagged for another five years. You’re automatically rehabilitated after 10 years, unless a court orders otherwise.

Can I apply for sequestration if I’m self-employed?
Yes, provided you’re insolvent and can prove that sequestration is the best option for you and your creditors.

Facing sequestration is stressful. Find out how you can survive insolvency.

Not sure how to deal with your debt? Call DebtBusters today on 086 999 0606. Our expert consultants will guide you on the best way to manage your debt.