What does it mean to be bankrupt?

US President Donald Trump famously declared himself bankrupt four times – a fact that Hillary Clinton loved to rub his nose in during the 2016 US presidential elections. In South Africa, filing for bankruptcy is possible, but it’s not easy and can be very costly.

If someone files for bankruptcy or sequestration, it’s really when their liabilities exceed their assets by a large margin. Bankruptcy occurs when a business or individual cannot repay the debts owed to creditors.

If you are struggling with insurmountable personal debts, bankruptcy might be a viable option to help you back on the path to a debt-free future and rebuild your financial life. However, this is something to consider only after you’ve exhausted all other options.

So, what is bankruptcy?

Bankruptcy is a court-based procedure where you are declared unable to repay your debts by a Court. You can either choose to become bankrupt or it can be enforced against you if you cannot pay your debts.

Filing for bankruptcy involves petitioning the court to accept surrender of your estate for the benefit of your creditors. This process is also known as voluntary sequestration.

The courts will only approve this process if they determine it’s in the best interests of your creditors. In practice, this means that your creditors will receive a minimum of 10 cents per rand that you owe once your assets are distributed among them.

During the legal process your assets will be placed in the hands of an officially appointed Trustee, who will manage your finances, and take steps to turn your assets into money, which can then be used to pay off creditors.

Bankruptcy lasts for a minimum of 10 years from the day it is declared, after which you’ll automatically be considered “rehabilitated”, meaning you’ll be cleared of the legal implications of bankruptcy and you’ll be free to trade and contract again.

What can bankruptcy do?

When you file for bankruptcy, you can wipe the slate clean of most of your unsecured debts. This includes credit and store cards, unsecured personal loans, utility bills and medical bills.

Filing for bankruptcy will stop creditor harassment and collection activities. You can also keep a number of possessions under bankruptcy, including household goods and personal effects of a reasonable value.

At the same time, it is important to understand that bankruptcy isn’t a financial cure-all. Bankruptcy cannot prevent a secured creditor from repossessing property. It doesn’t cover secured debts such as mortgages, car loans or furniture and equipment rental. You will probably lose assets such as real estate, antiques and luxury electronic items, artworks and some jewellery, any inheritance, tax refund or winnings, and money in your bank accounts.

Filing for Bankruptcy in South Africa

In South Africa, you have to take the following steps to file for bankruptcy:

  • apply to the High Court for voluntary sequestration and, in an affidavit, explain your present financial situation and what led to it; an attorney can help you complete these steps
  • publish a declaration that you’re applying for voluntary sequestration, for example in a newspaper
  • use registered mail to let your creditors know you’ve filed for voluntary sequestration.

Once you’ve filed an insolvency claim, you will receive a letter from the court appointed valuator will ask you to come in for a meeting to assess your assets, including physical assets, bank accounts, and any money owed to you.

The purpose of the meeting is to find out what happened as well as what assets you own and what you owe.

You will also be asked about your income and your monthly outgoings. This will include your spouse. This is to establish if you can afford to make an Income Payments Agreement (this is a monthly instalment for up to three years) into the bankruptcy estate. This is used to pay back creditors and cover costs.

If the total value of your assets is inadequate for the payment of the minimum 10 percent of what you owe to your creditors, the application will be rejected. However, cash or asset donations from family and friends may be used to supplement the value of your estate in order to qualify for insolvency.

If the claim is approved, trustees appointed by the court become responsible for distributing your assets fairly among your creditors.

Advantages and Disadvantages of filing for Bankruptcy

Before filing for bankruptcy as a debt solution, you should consider the pros and cons.

Advantages are that:

  • filing for bankruptcy is the only debt remedy that can relieve you of up to 80 percent of your debt fairly quickly; other debt repayment programs can take upwards of 6 years
  • if you don’t have any debt that will survive bankruptcy proceedings – such as a mortgage – this is the quickest way to get rid of debt
  • once you’re declared insolvent, creditors are no longer able to pursue you directly for payment.

Disadvantages are that:

  • you may lose your assets other than certain assets you can show are necessary for your work
  • filing for bankruptcy will tarnish your credit rating for up to 10 years, making it difficult or very expensive to get traditional loans
  • some types of debt, like home and car loans, won’t simply go away; filing for bankruptcy will only eliminates your personal liability for secured debt, and won’t erase the creditor’s security interest in the asset.
  • you may not be a director in a company until the courts declare that you’ve been rehabilitated.
  • when you file for bankruptcy, and for the duration of your bankruptcy, you must declare accurate details of your debts, income and assets to your trustee, including if your situation changes. You may need to make compulsory payments if your income exceeds a set amount (which is determined by the number of dependants you have).


After a period of 10 years, you’ll automatically be considered “rehabilitated”, meaning you’ll be cleared of the legal implications of bankruptcy and you’ll be free to trade and contract again.

You can also apply for rehabilitation earlier than this – 12 months after the trustees’ first account is confirmed. If you were convicted of fraud related to insolvency, however, you can apply for rehabilitation only after five years.

Should you try to avoid Bankruptcy?

It depends on your circumstances.

Sometimes it is a really good way of clearing all your debts. Once you are annulled from Bankruptcy you are free of the old debts. For example, credit card balances, personal loans, council tax, income tax and VAT are all written off and they cannot pursue you.

You should try and avoid bankruptcy if you have a lot of assets as the costs of going bankrupt are quite high. You will lose control of them and there may be a better solution for you and your creditors.

A word of advice

It is very important to take proper professional advice before making yourself bankrupt or being made bankrupt (if you can afford it) just to make sure what the effect will be and get answers to the questions you have.

If you have any questions about bankruptcy, a good starting point would be to contact us for a Free no obligation chat.