Debt review vs sequestration: which is right for you?

Choose debt review if you have a reliable income and your debt could be repaid over a longer period at a lower monthly instalment. Choose sequestration only if your debt is so far beyond your income that no realistic repayment plan works, and you own assets worth enough to give creditors a real benefit. They are not two versions of the same thing. One reschedules debt, the other ends it by selling what you own.

What debt review does

Debt review, or debt counselling, is the consumer protection process built into the National Credit Act 34 of 2005. You apply through a debt counsellor registered with the National Credit Regulator. The counsellor assesses whether you are over-indebted, negotiates a restructured repayment plan with your credit providers, and has that plan made an order of court.

The practical effects:

• You make one affordable monthly payment through a payment distribution agency.
• Credit providers may not take legal steps against the accounts under review while the process runs properly.
• You keep your house, car and other assets, as long as you keep paying.
• You may not take on new credit until you have a clearance certificate.
• You still pay the debt in full, usually over a longer term, so you pay more interest overall.

Timelines and stages are covered in how long debt review takes.

What sequestration does

Sequestration is the formal insolvency route under the Insolvency Act 24 of 1936. You apply to the High Court for the voluntary surrender of your estate, or a creditor applies to have you sequestrated. If the court grants the order, a trustee takes control of your estate, sells your assets, and distributes the proceeds to creditors according to a legal order of preference. Whatever is left unpaid is not enforceable against you afterwards.

The practical effects:

• You lose the assets in your estate, including a home and vehicles, unless a third party buys them from the estate.
• Your debt burden ends once the process runs its course.
• You are an unrehabilitated insolvent, which limits what you can do. You generally cannot obtain credit without disclosing your status, cannot be a company director without leave of the court, and cannot hold certain positions such as an estate agent or a trustee.
• You must apply to court for rehabilitation, which usually becomes possible some years after the sequestration order, and rehabilitation happens automatically after ten years if nobody has opposed it.

The qualification hurdle people miss

You cannot simply ask to be declared insolvent because you owe too much. A court will only grant voluntary surrender if it is satisfied that the sequestration will be to the advantage of creditors. In practice that means your estate must be able to produce a meaningful dividend after the costs of sequestration are paid.

If you have no property, no vehicle worth anything and nothing else of value, you may well fail this test. Someone in that position often has no assets to lose, which is exactly why sequestration may not be available to them.

Cost

Debt review is comparatively cheap to enter. The debt counsellor's fees are regulated under the National Credit Act and normally consist of an application fee, a restructuring fee and a monthly aftercare fee taken from your monthly payment. There is no separate legal bill to start it.

Sequestration is expensive. It is a High Court application requiring an attorney and usually counsel, plus publication in the Government Gazette and a newspaper, plus the trustee's costs from the estate. It commonly costs tens of thousands of rands, and that money generally has to be found up front. Ask for a written fee estimate before you instruct anyone.

Effect on your credit record

Both are recorded by the credit bureaus and both make new credit difficult.

Debt review appears as a debt review flag, which the bureaus must remove once your debt counsellor issues a clearance certificate. Sequestration appears as a sequestration order and the restriction runs until you are rehabilitated. Rehabilitation itself has to be recorded, and you should check afterwards that the bureaus have updated your record.

A quick way to compare

Other options in between

There are middle routes worth asking about before you commit to either.

• Negotiating directly with credit providers. Many will restructure or accept a settlement without any formal process.
• An administration order in the magistrates' court, which is available where your total debt is below a limit set by regulation. It is a court-supervised repayment plan run by an administrator.
• Selling an asset yourself. Selling a vehicle at market value normally raises more than a forced sale by a sheriff or a trustee.
• Voluntary surrender of financed goods under the National Credit Act, which is a way of ending a vehicle agreement without a court battle, although you remain liable for any shortfall.

Where to get help without paying

The National Credit Regulator on 0860 627 627 can tell you whether a debt counsellor is registered and takes complaints. The Credit Ombud, now part of the National Financial Ombud Scheme South Africa, handles credit disputes at no cost. Legal Aid South Africa on 0800 110 110 can tell you whether you qualify for assistance, and our legal aid page explains what is covered. University law clinics also advise on over-indebtedness for free.