Debt Counselling and Bankruptcy - What is the difference?

Many people are facing the situation where they are unable to pay creditors each month and need to consider debt counselling or sequestration/bankruptcy to get out of debt.

Many people refer to sequestration as liquidation or bankruptcy. Liquidation is when a company surrenders all the company assets to creditors. Sequestration is when an individual surrenders all his assets to his creditors via an administrator. Bankruptcy is a state of your financial position and is the legal term. When your liabilities exceed your assets, you are bankrupt. Is also called insolvent, which is the financial term.

Debt counselling is when you approach a debt counsellor to negotiate with your creditors on your behalf for lower monthly payments on your debt. The National Credit Act allows the customer to be protected from his creditors taking legal action against him and debt counsellor is allowed to offer lower monthly payments to creditors to help over indebt customer.

So when do you apply for debt counselling and when do you apply for sequestration? One of the main requirements to apply for debt couselling is that you must have an income so that you can offer your creditors a new payment plan. Your essential expenses, like food and transport, are subtracted from your income. Hat you have left is offered to your creditors as payment. So you are able to make part payment to credits but not the full payment as usual. What you have available each month is divided evenly among your creditors. All your creditors are included, even the creditors that are up to date so that one creditor is not favored above the other.

Debt counselling is beneficial to creditors as well, because they will receive all their money at the end of the agreed term, but over a longer period of time. The customer is saved from blacklisting and can borrow money again when process is complete or situation of customer improves in such a way that he can apply to opt out of debt counselling. Debt counselling is voluntary, so you can leave debt counselling when your situation changes for the better.

Sequestration or voluntary sequestration has a more dramatic effect on customer. Sequestration is the customer’s last option to take if debt counselling fails to reach an agreement with all the creditors. Sequestration will be an option as last resort if the customer has no money to offer his creditors each month and creditors do not except final offer from customer. So the customer has no income or has no money or funds left after paying for essential living cost to offer creditors as payment.

The customer will go to his attorney and ask to apply for voluntary sequestration at court. The court will appoint an administrator that will take full control over customer’s estate which includes all movable and unmovable assets. All assets will be sold, normally via auction. The administrator will deduct his cost and hand balance of proceed to creditors. Creditors will normally not get all the money back owed to them. The rest will be written off by the creditor. The customer will not be allowed to sign any contracts or be a director of any company. On the customer’s credit report judgment and sequestration will show for a very long time.

A customer can apply for rehabilitation after about 5 years, but that does not mean your creditors will forgive you and write off the debt. You might find that you will not be able to borrow from them again until you have paid the outstanding debt owed to the creditor.