Understanding Insolvency
Sequestration information
For consumers under debt stress Debt Review is often the key to solving their issues. For others though Sequestration might be the best course. When meeting with a Debt Counsellor be sure to discuss this option. Most consumers know little about insolvency and sequestration however. Industry expert Nanika Prinsloo of Prinsloo & Associates helps us understand more about this debt remedy. Let’s consider what happens to all your “things” when you are sequestrated.
ASSETS AND INSOLVENCY
When a debtor is sequestrated, a concursus creditorum is established. This means that all the creditors of the debtor get together and share in the proceeds of the assets of the debtor (the “insolvent”).
The insolvent must “throw all the assets that he/she owns in the hat”, so that it can be sold and the proceeds divided amongst the creditors. Let’s take a closer look at what this means.
INSOLVENT OWNS AN IMMOVABLE PROPERTY
Where the insolvent owns an immovable property, the property will be sold and the proceeds divided amongst the creditors. That is the theory in terms of the Insolvency Act. What will most probably happen in real life, is that the bank (bondholder) will receive all of the proceeds, because in these times property just does not sell for an amount sufficient enough to cover more than the bond.
Property is either sold on an insolvency auction arranged by the Trustee, or if there is a private offer that is acceptable, the Trustee can accept such offer on behalf of the bank.
Once the property is sold, the proceeds will be paid over to the bank. Any shortfalls the bank must write off and any other creditor that does not get paid must write their debt off.
FURNITURE
Where the insolvent owns a property, furniture that is unencumbered (fully paid), can be purchased back from his/her own insolvent estate. The furniture is valued at second hand execution sale prices which are minimal. The furniture does not leave the possession of the insolvent as nobody is interest it. (It has no value and it is more expensive to arrange another auction to sell the property, so it is easier for the insolvent to purchase it back).
Any furniture that is still subject to a lease or installment sale agreement must be returned to the company that it was purchased from. The company will sell the furniture themselves after repossession and will put in a claim for any shortfalls against the insolvent estate. (Majority of companies do not even prove a claim – they just write the outstanding balances off.)
VEHICLES
Any vehicles that are fully paid, will form an asset in the insolvent estate. These assets will be valued by a sworn valuator as to the value. If the insolvent person wants to, he/she can purchase it back from the insolvent estate at the price it was valued at. It is not necessarily book value, but depends on the condition of the vehicle and what it is valued at to fetch at an execution sale (second hand value).
Any vehicles that are subject to lease, or installment sale agreements, will be returned to the bank or the institution that financed it. It is a myth that one can keep the vehicle after a sequestration. We are aware that people are wrongly advised that this is the case. It is not lawfully possible, as firstly the sequestration suspends the agreement and secondly, if the vehicle is kept and paid after sequestration, the insolvent person is benefiting one creditor (the bank) over all the others and that is not possible in terms of the Insolvency Act.
OTHER ASSETS
Any other assets that the insolvent has that is fully paid and has value (heavy equipment, boats, trailers, caravans) will form part of the insolvent estate and will be sold on an insolvency auction, unless the insolvent person him/herself purchases it back.
The same applies: any such assets under finance will be returned to the entity that sold the asset.
TOOLS OF TRADE
If assets are used as part of “tools of the trade” of the debtor who is being sequestrated, he/she can get permission from the Trustee that the assets can be excluded from the insolvent estate. Although, majority of the time, the Trustee will allow the insolvent to purchase the assets back and pay it off over a period (normally a year).
INSOLVENT DOES NOT OWN IMMOVABLE PROPERTY
If the insolvent does not own immovable property, he/she must be able to pay a minimum of 20% of the total of his/her outstanding debt. His/her furniture will not be looked at by the Trustee.
CELLPHONES
The same applies to cellphones – since there is an existing contract, it is to be suspended (unless of course the phone is on “pay-as-you-go”.)
PROPERTY ATTACHED IN TERMS OF A WARRANT FOR EXECUTION
If a house has been attached by the Sheriff, the person can still sequestrate as long as the property has not been transferred off his/her name. In other words, even if an execution auction has taken place, the person can still sequestrate, as long as the property has not been transferred off the name of the person who owns it. (In such a case sequestration should not take place longer than about 3 weeks after an execution sale.) If moveable property was attached, and the execution sale has not yet taken place, the moveable property will still form part of the insolvency.
INHERITANCE
If a person was sequestrated and then received an inheritance during the insolvency period, that inheritance will form part of the insolvent estate. The insolvent can refuse to accept the inheritance and then it will not form part of his/her insolvent estate, but then also he/she does not receive the inheritance at all.
SALARY, COMMISSIONS, OTHER EARNINGS
Monies received because of employment (also for self-employed persons) this is income and remains that of the insolvent.
POLICIES
Some policies are excluded from insolvency. Policies which have been in force for at least three years, and which is an assistance, life, disability or health policy, and where the insolvent or his/her spouse is the life insured, are excluded from an insolvency.
Any assets which the insolvent acquired exclusively with such policy benefits (proceeds) within a period of 5 years from the date on which they were provided are also excluded.
MONEY PAID AS A RESULT OF A CLAIM FOR DEFAMATION OR PERSONAL INJURY
Example: Mrs. X was in a car accident. She got awarded R100 000 in a court case. She received the monies after date of sequestration. This R100 000 will not form part of the insolvent estate.
Example: Mr. X was slandered by his neighbor. He was awarded R100 000 in court after he successfully sued the neighbor. The R100 000 is paid after date of Mr. X’s sequestration. The R100 000 does not form part of his insolvent estate, he can keep the money.
COMPENSATION FOR OCCUPATIONAL INJURIES OR DISEASE
Any person injured whilst at work and gets paid monies for this occupation injury, can keep the money even if it is paid out/received after date of sequestration.
UNEMPLOYMENT INSURANCE BENEFITS
These benefits are excluded from insolvency.
This article is a general discussion on assets included or excluded in insolvency and is not an exhaustive list. A consultation with an expert will determine which assets will be in, or excluded in each and every insolvency.
This article written by Nanika Prinsloo of Prinsloo & Associates.
email: nanika@vodamail.co.za