If you’ve been part of a sequestrated estate and recently rehabilitated, you’re probably thinking about how to start building up your wealth again. One of the main concerns for rehabilitated insolvents, who most likely lost their home on the process, is how to begin the process of buying property with finance. The article below sets out the sequestration and rehabilitation process, as well as options for lenders for rehabilitated insolvents.

What is Sequestration?

Sequestration is a legal process whereby a consumer (natural person or Trust) goes bankrupt and their assets are placed under the control of a court-appointed trustee. This trustee will then sell all the assets to collect funds to repay the consumer’s creditors. This process is usually the last course of action that will be taken, when a consumer cannot repay their debts.

Under sequestration:

• the individual will no longer be able to take out credit;
• the individual will not be able to buy any more assets; and
• the individual will not be allowed to run a business.

Sequestration results in being declared insolvent, which severely impacts your credit record. The insolvent status can last for years unless the individual applies for rehabilitation. During this time, the individual cannot apply for credit or serve as a company director.

Sequestration vs Debt Review

An applicant who has been under sequestration is quite different to someone who has been under debt review. The key difference between sequestration and debt review is around the control the individual has over their assets and the process for repaying creditors:

• Debt review: the individual retains complete control over their assets throughout the debt review process; whereas:
• Sequestration: the debtor loses all control over their assets, which are sold off to repay creditors.

Debt review is for individuals who still have a regular income, want to keep control of their assets, and can see a pathway for repayment of their debts with a slightly more manageable plan and timeline. Sequestration is a more extreme measure reserved for individuals who truly are insolvent – e.g. current serviceability cannot repays debts within a reasonable timeline.

Sequestration Process

The sequestration process is quite simple, although can be very stressful for the individual. It basically involves:

1. An individual applying to the court to surrender their estate;
   • they may do this voluntarily; or
   • their creditors may have applied to make it compulsory;
2. The court appoints a trustee to manage the individual's assets, and any assets owned by their spouse, if married in community of property;
3. The trustee sells the individual's assets; and
4. The funds are used to pay the individual's creditors.

Trustees may set specific requirements to assist the insolvent in managing their finances during the sequestration period. Some trustees require monthly income and expenditure statements, others may require the individual’s attendance at a meeting. It is strongly advisable to adhere to all the trustee’s requirements to ensure a successful rehabilitation application, as the Trustee must approve the application.

What if the assets are not enough to cover the liabilities?

When the estate has been completely sold off and there aren’t enough funds available to cover administrative cost, there may be a shortfall amount remaining. In this event, each creditor who has proven a claim will become liable to pay a pro rata amount towards the administrative cost. The administrative costs that have been paid on the individual’s behalf will then be due by the individual when they bring their application for rehabilitation. The amount owing by the individual is called ‘consideration’.

Rehabilitation Process

A sequestrated insolvent individual has two options for rehabilitation:

1. They can apply for rehabilitation through a court process to be rehabilitated (application can occur 6 months of date of the Sequestration Order on condition that certain criteria are met, or alternatively 4 years after Sequestration Order); or
2. They can wait out a period of ten (10) years to be automatically declared as rehabilitated.

One of the more common reasons an individual would opt for the second option (wait it out) would be due to cost. There may be a ‘consideration’ amount mentioned above, as well as lawyer’s and court fees.

Before the application for rehabilitation can be submitted to the High Court the following needs to be done:

• the Trustee must draft a Liquidation and Distribution Account (L&D) that shows how the insolvent estate was administered;
• this L&D account is then submitted to the Master of the High Court for approval; and
• the L&D account is only complete after the Master of the High Court has given his approval (this process may take weeks or months).

In practise, once your rehabilitation is granted, the Registrar of the High Court is responsible for providing a copy of your order to the necessary Credit bureaus and request them to update their systems with your information. Unfortunately, these institutions don’t always fulfil their duties and follow up with the credit bureaus to ensure the credit profile has been updated. In this case it is advisable to utilise the services of an attorney to engage and follow up with the necessary bureaus to save time and frustrating calls to these institutions.

Upon rehabilitation by either method, all judgements and negative reflections on your credit profile will be removed and no record shall exist of any of these, if these were incurred before your sequestration.

Applying for a home loan after rehabilitation

Banks who lost money due to your sequestration would generally not assist you again, however applying for a home loan through a mortgage broker will allow you to apply to multiple other financial institutions.

All banks will require a previously sequestrated insolvent to complete the rehabilitation process completely before they can even legally consider the applicant. Each bank has a different view on when a rehabilitated insolvent individual can apply for a home loan:

Investec:

• typically don’t consider applicants who have been under sequestration /rehabilitated;

ABSA and FNB:

• require the individual to have been rehabilitated for a minimum of five (5) years;

Standard Bank:

• requires the individual to have been rehabilitated for a minimum of  twelve (12) months; and
• will consider a loan amount of 70 to 80% of the purchase price only;

Nedbank:

• will consider an application immediately after rehabilitation is confirmed.

The above guidelines outline current bank policy, however the banks will always assess a case for its merits, and out of policy motivations can sometimes result in approval. In saying that, it is also at the banks discretion whether they will be willing to assist, within their policy or without.

Use a reputable mortgage broker

A pre-assessment for a home loan with your mortgage broker should include a comprehensive discussion of your situation, including your rehabilitation status. Full disclosure is important for your broker to give you the most accurate advice – and remember, they work for you, not the banks!

Using a reputable broker will ensure you get more value out of this free service – including the full-scale service, professional advice, utmost confidentiality and respect with your personal information, speedy approvals and priority with banks.

Phoenix Bonds is a premium mortgage broker in South Africa, with a proven track record (check out our reviews on Google).  For expert advice and personalised service, fill in your details HERE and one of our experienced Consultants will be in touch.