What does going bankrupt actually mean?

If you’re in a deep financial hole, is it worth considering bankruptcy – and what happens if you do? We get some expert insight.

It can happen to anyone – even famous folks like Mike Tyson, 50 Cent and Donald Trump (six times!)… but what exactly does it mean? And what happens when you declare yourself bankrupt or insolvent?

“First of all, you don’t declare yourself bankrupt,” says Rohan Lamprecht, an attorney at insolvency law specialists Dionne Lamprecht Inc. “You can only be declared bankrupt by a court, under the Insolvency Act.” It gets technical in that you can apply to have yourself placed under voluntary sequestration, or your creditors can bring an involuntary application against you. Either way, the person seeking the order will have to prove to the court that the process will benefit the creditors (in other words, the people to whom you owe money).

As to the difference between insolvency and bankruptcy, “For the man in the street it’s all the same thing,” Lamprecht explains. “Bankruptcy, sequestration, liquidation, insolvency… It’s all the same really, and it’s a technical term stating that your assets are superseded by your debts. When a court declares you insolvent, you become bankrupt, and placed under the protection of the Insolvency Act.”

Digging out of personal debt

Bankruptcy is often seen as something that only happens to businesses that go bust, but – more and more in recent years – it’s also become a debt-management option for individuals. Debt is a key factor in insolvency: if you’ve run out of cash but don’t have any debts, you’re broke; but if you’ve run out of cash and you owe money to people, and that debt is greater than the value of the things you own, then you’re heading towards insolvency. Debt review or debt counselling, then, is a very important part of the insolvency process.

Being declared bankrupt is attractive in that it can help you eradicate your unmanageable debt, especially if what you owe is more than what you own. But it’s not a step to be taken lightly. Your assets (usually your house, car, furniture, and so on) will be sold on auction to ensure your creditors can realise a minimum benefit of 20 cents to the Rand. Those proceeds will also pay for the legal fees and the curator costs – and you can’t avoid the legal fees, because your application has to be done via a High Court.

Being declared bankrupt also prevents you from doing certain things. “Some people have a very warped sense of it, thinking that if you’re insolvent you become legally like a minor child,” says Lamprecht. “That’s not correct. You can write a cheque (if there’s money in the account), but you can’t obtain credit. The Act also states that you can sign contracts and enter into business deals, provided that you don’t get rid of any assets that belong to your estate and that would now fall under the insolvent estate.”

Here he points to Section 23.3 of the Insolvency Act. “This section deals with the rights and obligations of the insolvent,” he says. “It stipulates that, ‘An insolvent may follow any profession or occupation or enter into any employment’, except that of a general dealer. That’s because general dealers used to serve as informal banks. It also says, ‘The fact that a person entering into any contract is an insolvent, shall not affect the validity of that contract.’”

Legalities and limitations

So you can work, spend money, sign contracts… but just remember that some companies won’t hire an unrehabilitated insolvent, and some landlords won’t rent property to one either. Remember, too, that being declared bankrupt will tarnish your credit rating for a period of up to 10 years. (You’re automatically declared rehabilitated after a decade, if you haven’t applied to be declared so sooner.)

In short, it’s a big step – but, in some cases, a necessary one. “Bankruptcy helps you deal with your debt, but it doesn’t get rid of it,” says Lamprecht. “People don’t always understand debt review clearly. It doesn’t mean your debt simply gets written off. Rather, it’s a way of extending your term of payment.”

And, at least, it means you’ll be able dig your way out of your debt hole, and – eventually – start your financial life afresh.