Compulsory vs. Voluntary Sequestration: What’s the difference?
Dealing with overwhelming debt can be daunting, and it can feel like there’s no way out. Thankfully, the sequestration process presents a way to gain a fresh start, either through voluntary or compulsory sequestration. But what’s the difference between the two, and how do you know which is right for your situation? In this article, we will look at what each option entails to better understand both options.
What is Sequestration?
Sequestration is a legal process designed to assist individuals who are insolvent – meaning they cannot pay their debts as they come due. Through this process, you can have your debts effectively written off under certain conditions, allowing you to regain financial stability. In South Africa, the process can be initiated voluntarily or through a compulsory court order. Understanding each path will help you make a more informed decision that better aligns with your financial situation and future goals.
Voluntary vs. Compulsory Sequestration
Voluntary Sequestration:
This is when you, as the debtor, apply to the court to declare yourself insolvent. In this case, you initiate the process, usually with the help of a legal professional, by filing a formal application to surrender your estate. Voluntary sequestration typically includes a detailed plan that demonstrates your inability to pay off your debts and also requires some form of security or offer to creditors.
Compulsory Sequestration
Compulsory sequestration, on the other hand, occurs when a creditor files an application to have the debtor declared insolvent. Creditors may take this step if they believe it’s the best way to secure payment, and the debtor has failed to meet multiple debt recovery attempts. Here the creditor must attempt to prove that the debtor is indeed insolvent and unable to meet their financial obligations.
Eligibility Requirements: Who Qualifies for Each Type?
To qualify for either option, applicants must meet specific criteria:
Voluntary Sequestration
Generally, debtors need to prove that their liabilities exceed their assets, and that sequestration would benefit creditors more than trying to pay off the debts in an informal arrangement. Many people choose this option when they want to avoid creditor harassment and create a structured plan for debt recovery. Debtors should be able to provide assets (or security for creditors) equal to or more than 20% of the total outstanding debt.
Compulsory Sequestration
Creditors can apply for compulsory sequestration if debtors owe them a significant sum and have consistently failed to meet payment obligations. The creditor must show that sequestrating the estate would yield a better outcome. The debtors’ financial situation should also justify the process.
Legal Implications: Obligations and Outcomes for Debtors
Sequestration, while offering debt relief, carries certain legal obligations and consequences:
- Legal Obligations: During sequestration, a trustee or curator will manage your estate, and you must comply with their instructions. You’re required to disclose all assets, and failure to comply could result in legal repercussions.
- Impact on Financial Records: Both voluntary and compulsory sequestrations will be recorded on your credit profile, making it challenging to access credit, open a new business, or take on additional loans for some time.
- Post-Sequestration: Once the process is complete, you’ll be released from many of your financial obligations, allowing for a new start. However, rebuilding your credit and financial standing will take time and careful planning.
Getting Expert Legal Advice
Voluntary and compulsory sequestration are both complex processes, and understanding each can be challenging. Our team of legal experts is here to guide you through the details, answer your questions, and help you make the best decision for your financial future. Get in touch with us at Cawood Attorneys today to learn more about how we can assist you in finding a sustainable solution for your future.