How easy is it to declare bankruptcy?

bankruptcyUS President Donald Trump famously declared himself bankrupt four times – a fact that Hillary Clinton loved to rub his nose in. In South Africa, filing for bankruptcy is possible, but it’s not easy.

“If someone files for bankruptcy or sequestration, it’s really when their liabilities exceed their assets by a large margin. They see no light at the end of the tunnel. They are in a hole and don’t have income to pay for it,” explains Paul Slot, president of the Debt Counsellors Association of South Africa (DCASA).

The reason why bankruptcy is not a simple exercise is because it’s so expensive. It has to be done via a High Court application so you have to hire legal experts. “On an unopposed basis this can cost you anywhere between R15 000 and R30 000,” says Gareth Cremen, partner at multinational law firm, Hogan Lovells.

What’s more is that you don’t get off scot-free when it comes to what you owe creditors and you may have to make some major sacrifices. “There should be assets to pay back the creditors of between 15-20 per cent for every rand that was borrowed. And that is normally derived from a sale of a house, car or cash. The High Court will not approve a bankruptcy if there is no benefit to the creditors. Someone would be appointed on your behalf to sell what you have and ensure that it goes to the credit providers,” adds Slot.

What are the pros and cons of sequestration?

The only benefit of filing for bankruptcy is that you get rid of your liabilities and get to start over again. This may suit the likes of Donald Trump who declared that filing for bankruptcy was a common business decision and that he was smart to make this move.

However, for the common person on the street, bankruptcy means a blemish on your name for many years. “Being declared bankrupt will tarnish your credit rating for up to 10 years, making it difficult or very expensive to get traditional loans like a home loan,” explains Charlotte Vermaak, principal of Chas Everitt Nelson in Mandela Bay.

“After a period of 10 years after being declared bankrupt, the individual will automatically be considered rehabilitated, and free to trade and contract again. Alternatively, the individual can also apply for rehabilitation earlier than this, but this is at the discretion of the Court to whom an application must be made.”

Bankruptcy should not be taken lightly as it could have a dramatic impact not only on your life but your spouse’s too, especially if you are married in community.  “Due to the fact that there is one communal estate of parties married in community of property, both parties to the marriage will be sequestrated and will be held liable for the debts incurred by the communal estate,” says Cremen.

You will not be able to borrow money in the time that you are declared bankrupt and there may be certain jobs, particularly in the financial services sector, that you will be rejected for. “In some cases you won’t be able to sign rental contracts as they will ask whether you have been declared insolvent,” adds Slot.

Bankruptcy is not for everyone

While bankruptcy affords the applicant the ability to wipe their financial status clean and start over, it’s not a route that everyone can have access to, particularly as it’s not affordable.

Rather, it appears to be a solution for entrepreneurs and wealthy individuals who’ve made investment blunders. “I think sequestration has its place especially where the liabilities exceed the assets by a large margin. Some entrepreneurs move through bankruptcy before they actually get their billions. But for the normal man on the street it would be difficult to do. It has a place if you have assets and no income. If there is income and you can repay the debt, that’s a better option,” says Slot.

Other solutions

If you are stuck in a quagmire of debt with debt collectors hounding you at every turn it may be tempting to stick your head in the sand in the hope that your financial problems will just go away. But this would be the wrong thing to do.

If you find yourself in this position, one of the first things you should do is tell the companies that you owe money to that you are going through financial trouble. While this may alert them to your situation and cause some embarrassment, it affords you the opportunity to negotiate a repayment plan if they are open to it. Companies are generally open to negotiation as they prefer to avoid engaging in legal action as it can be costly and time consuming for them too.

“If the debtor is over-indebted, an alternative consideration is debt counselling. The debt counsellor must negotiate a restructured payment plan with the creditors and obtain a court order confirming the new plan,” explains Cremen.

Slot warns that if you avoid the problem, credit providers will chase after you and impose judgements on you. This may result in a court order to garnish your wages, which means money will be taken out of your paycheck before you get it to pay your creditors back. “Judgements can be enforced for 30 years. By default a lot of consumers use this but it is the least efficient way. That’s why sequestration is handier. For some people it works but generally we don’t recommend it to an individual because of the expense involved,” says Slot.