Debt Review vs Sequestration: A Comprehensive Guide

Introduction

Debt is a heavy burden that many South Africans struggle with daily. Over-indebtedness can feel overwhelming, but solutions like Debt Review and Sequestration offer relief to consumers seeking a way out. While both options aim to address financial distress, they differ significantly in terms of process, impact, and long-term outcomes. This guide delves into these two popular forms of debt relief, helping you make an informed decision about your financial future. Whether you're considering protecting your assets or seeking a clean slate, understanding these options is the first step to regaining control.

Reality of Too Much Debt

Debt spirals often begin innocently—credit cards, loans, or financing for essential purchases. But when repayment becomes impossible due to unforeseen circumstances like job loss or medical emergencies, debt can snowball. South Africans are increasingly feeling the pinch, with high unemployment rates and rising living costs exacerbating the problem.

The National Credit Act (NCA) defines over-indebtedness as a situation where a consumer cannot meet their debt obligations. Being over-indebted doesn't just impact your finances; it affects your mental health, relationships, and quality of life. This is where debt relief options, like Debt Review and Sequestration, come into play. These legal mechanisms provide structured ways to manage or eliminate debt, offering hope to those in financial despair.

Signs of Over-Indebtedness:

• Borrowing to repay existing debt.
• Frequent calls or threats from creditors.
• Skipping essential payments to cover debts.
• Feeling overwhelmed by financial obligations.

Understanding that you're not alone in this struggle is crucial. DebtCut, as your partner in debt relief, is here to guide you toward the best solution for your unique situation.

Sequestration

Sequestration is a legal process that declares an individual insolvent and allows for the liquidation of their assets to settle outstanding debts. It is governed by the Insolvency Act, primarily aimed at those whose liabilities significantly exceed their assets. Sequestration offers a “fresh start,” but it comes at a cost.

How Sequestration Works:

• Application Process: The consumer or creditor applies to the High Court to declare the individual insolvent.
• Asset Liquidation: Assets are sold to repay creditors. At least 20% of the debt must be covered after costs.
• Rehabilitation: After a few years (typically four), individuals can apply for rehabilitation, allowing them to regain financial independence. However, only after a time span of 10 years is an individual automatically rehabilitated.

Pros of Sequestration:

• Immediate Relief: Stops creditor harassment and legal actions.
• Debt Cancellation: Unsecured debts are written off once the process is complete.
• Fresh Start: Offers the chance to rebuild finances.

Cons of Sequestration:

• Loss of Assets: Property and other valuable possessions may be sold.
• Costly Process: Legal fees and court costs can be significant.
• Credit Impact: A sequestration order is noted on credit records, making future borrowing difficult.

Sequestration is ideal for those with no viable means of repaying debt and who are willing to sacrifice assets for a clean slate.

Debt Review

Debt Review is a structured process introduced by the National Credit Act to assist over-indebted consumers. Unlike sequestration, it focuses on repayment rather than liquidation. Debt Review protects consumers from creditor harassment while ensuring debts are repaid in a manageable way.

How Debt Review Works:

• Application: A registered Debt Counsellor evaluates your financial situation to confirm over-indebtedness.
• Rearrangement: The Debt Counsellor negotiates lower monthly payments and interest rates with creditors.
• Payment Plan: You make a single monthly payment to a Payment Distribution Agent (PDA), who pays your creditors.

Pros of Debt Review:

• Asset Protection: Prevents repossession of homes and vehicles.
• Lower Monthly Payments: Makes debt repayments affordable.
• Legal Shield: Protects against legal action from creditors.
• No Court Process: The process is simpler and less costly than sequestration.

Cons of Debt Review:

• Credit Restriction: You cannot apply for new credit while under Debt Review.
• Commitment: Requires regular monthly payments until debts are cleared.
• Not Instant: Takes time to become debt-free, depending on the level of debt.

Debt Review is ideal for consumers who have an income and want to pay off their debts while keeping their assets intact.

Asset Protection

One of the key differences between Debt Review and Sequestration lies in the treatment of assets.

Under Debt Review, your assets (such as your home or car) are protected as long as you adhere to the repayment plan.

In Sequestration, assets are liquidated to repay creditors, with few exceptions.

For consumers with significant assets, Debt Review offers a way to preserve their financial security while working towards debt relief. DebtCut specializes in negotiating favourable repayment terms to ensure your financial stability during this process.

How to Enter the Debt Review Process

Entering Debt Review is straightforward but requires commitment. Here's how the process works:

1. Evaluation: Reach out to a registered Debt Counsellor, like DebtCut, for a free financial assessment. DebtCut will evaluate and inform you to the exact extent your debt burden can be relieved before you sign any binding document or pay any fees.
2. Application: Once over-indebtedness is confirmed, you’ll sign an application form to begin the Debt Review process.
3. Debt Restructuring: The Debt Counsellor will communicate with your creditors to negotiate lower payments and interest rates. A new repayment plan will be submitted to the Magistrate’s Court for approval.
4. Payment Plan Implementation: Make one affordable monthly payment to the PDA, who will distribute it to your creditors.
5. Debt-Free Certificate: After all debts are paid, a clearance certificate is issued, and the Debt Review flag is removed from your credit record.

Conclusion

Choosing between Debt Review and Sequestration depends on your financial circumstances and goals. Debt Review is an excellent option for those who wish to retain their assets and can commit to a repayment plan. Sequestration, on the other hand, is a more drastic measure suited to individuals whose debts far exceed their means.

Both solutions provide legal protection and a path toward financial recovery. If you’re unsure about the best route, consult a trusted partner like DebtCut. Our understanding team will evaluate your situation and guide you every step of the way, ensuring you can move forward with confidence and clarity. Take the first step towards debt relief today—contact DebtCut for a free consultation!

‍