The ability to file for bankruptcy is touted as one of the virtues of capitalism. It's the ability to wipe your financial slate clean and start again. But, ironically, many South Africans can't afford it.
My mission was to track down a rare breed of South African, a person both privileged and poor. A person who once knew wealth and then literally lost it all. Someone who had known the stomach-churning sound of a creditor's call. A person who had given it all up for the sake of a fresh start. A person who had gone bankrupt.
I tried everything to track one down. I asked colleagues and friends. Did a Facebook status update. Asked lawyers. Put out a questionnaire on the Mail & Guardian website. Searched chatrooms. Eventually, I got hold of two numbers. But every time I phoned, I was stonewalled. Phone engaged. "Number doesn't exist." Phone switched off. Or, "I'm just in a meeting. I will call you right back!" they would say. And invariably, they never would. I called. I SMSed. I called again. "Geez," said a colleague eventually. "Do they know you're not a creditor?"
Considering that more than eight million people — 46% of credit active consumers in South Africa — have impaired records, you would think these people would be a dime a dozen. But in reality, I found that this breed is not only elusive, it is also extremely rare.
Like so many others in the country, they have reached financial dire straits. But they have the distinguishing feature of owning assets, are able to pay at least 20c per rand to their creditors and can foot a R35 000 fee to kick off the bankruptcy process. And at the end of it, they can start afresh. Yes, these are the fortunate few who can afford to go bankrupt.
Last year, 2 994 people and partnerships in South Africa filed for bankruptcy. Compare that to an economically active population of 18-million, and it's about 0.02%. By contrast, the courts issued almost a million civil summonses for debt. A judgment was handed down in almost 500 000 of those.
The National Credit Regulator said last year that the "high proportion of consumers with impaired accounts at credit bureaus" was "a concern". Why, then, are so few of our citizens filing for sequestration? The answer, say practitioners, is that the process is lengthy, complicated and, for many, prohibitively expensive.
Not surprisingly, very few anticipate the need to file for bankruptcy. "In the old days, the banks were granting credit too easily, but the National Credit Act has ended that," said Werner Cawood, an attorney for liquidation law firm Cawood Attorneys. Nowadays, those who are sequestrated are just caught unawares by the twists of everyday life. "It's the escalation of everything: fuel expenses going up; unforeseen circumstances. It's retrenchments and divorce," he said.
Bernard Ndlovu (not his real name) outlined in an affidavit his reasons for filing for sequestration. His youngest daughter got pregnant and he was forced to support both daughter and grandchild. His second daughter's husband lost his job and they moved into the home, expecting Ndlovu to provide for their family. Shortly afterwards, his father had a heart attack and died. Ndlovu paid for the burial. His extended family came to visit for the funeral and many of them were unemployed. Several stayed for three months, during which time he supported them all. Eventually, he had to ask them to leave and pay for transport to send them home. And then, restructuring took place at the mine where Ndlovu worked. He was retrenched.
"There was just no way he could recover from that," said Rohan Lamprecht, the owner of Bankruptcy24, which handled Ndlovu's sequestration. But, said Lamprecht, the solution for Ndlovu was not necess- arily sequestration. The route he took would depend on how much he owed and the assets he owned.
"If you owe R50 000 or less, the best option for you would be to go under administration," he said. (See "Options for getting out of the red".) "It's a nice process; you don't lose your house or car. There are talks about lifting the administration order [threshold] to R100 000, which would be a wonderful thing."
For a person owing between R50 000 and R80 000 "it's a grey area", said Lamprecht. He or she could consider bankruptcy, but it might be cheaper to try and pay off the debt over time. But for those owing more than R80 000, bankruptcy is a serious option.
When Ndlovu decided that sequestration was the way to go, though, there was a significant caveat. "The court will accept an application for sequestration only if a person can afford it," said Lamprecht. "South Africa is one of the few countries in the world where people can be too poor to file for bankruptcy."
And, added Yunus Siddiqi, a liquidation consultant, one needs to own an asset, such as a car or house, in order to be sequestrated. Ndlovu was one of the lucky ones, being rich enough to qualify. And so, he began the long process of applying for sequestration under the Insolvency Act of 1936.
How to go bankrupt
It began with an application.Lamprecht's firm carried out an assessment to ensure that the sequestration order would be "beneficial" to the creditors. After that, an attorney published Ndlovu's intention to be declared insolvent in the Government Gazette.
As soon as the notice was published, all creditors were put on a "moratorium". For Ndlovu, this meant no more phone calls and letters from angry creditors.
"Creditors are relentless. They phone our clients 24/7; they pitch up at their houses," said Cawood. "That situation will never stop if you don't do something about it."
An application to declare insolvency was then made to the high court. But at this point, the banks often step in. "The banks have started to vigorously oppose applications for sequestration," said Lamprecht. "They say it is not beneficial to creditors."
Some feel this is the reason for the drop in the number of sequestrations over the past four years. While there were almost 6 000 sequestrations carried out in 2009, the number decreased by about 30% in each of the two years following it. In 2012 the number was almost as low as it was in 2007.
But according to Richard Angus, a banking consultant and chief executive of Onward and Upward Business Consulting, the hard stance of the banks is a reaction to people abusing the sequestration process. "Many people think sequestration is almost like a get-out-of-jail-free card that you can play with financial institutions," he said. "They think: 'Let's incur the debt and if it all goes pear shaped, we can just get sequestrated'."
Once the sequestration process is initiated, the applicants can continue to use their cars and houses without making payments, said Angus. "In the time they drag this process out they are living in the house rent free. The bank could have realised the asset within 90 days, but instead, the people hold onto their assets for years. The interest is clocking up on the account in the interim, but guess what? They won't be paying this interest because they have initiated sequestration."
Most banks are becoming increasingly wary of unsecured lending. Shares of the continent's largest unsecured lender, Africa Bank, fell 22% in the past week on the news that its market capitalisation had plummeted by R5-billion.
In Ndlovu's case, the bank's opposition was overturned. The master of the high court accepted the application and appointed a trustee to sell off all of Ndlovu's assets.
The money made from such a process is divvied out hierarchically. First, the "secured" lenders are paid — the banks owed for houses and cars. Then the South African Revenue Service is paid, first for value added tax, then for other tax fees. Last in line are the unsecured lenders such as cellphone, clothing and furniture accounts.
"The banks are insured for every kind of scenario. The only ones really suffering at the end of the day are the smaller creditors," said Cawood. Smaller debtors notwithstanding, Ndlovu's debts were considered paid up. The pay-off? Ndlovu was marked as insolvent at credit bureaus.
A clean slate — for some
And thus begins a process of rehabilitation, one that typically takes four years, but that can be as quick as a year or take as long as 10. During this time, Ndlovu can apply for a new bank account. Lamprecht said the majority of his clients move to Capitec Bank, which has a "no-questions asked" policy for its savings accounts. Ndlovu can get a pay-as-you go cellphone, but not one on contract.
In theory, no bank would offer loans to Ndlovu while he is under rehabilitation. Amazingly, though, many begin to offer credit cards to people about 14 months after they are sequestrated. "People will start to use them sparingly to get their credit record up again," said Lamprecht.
After four years, Ndlovu's attorney will apply to the high court for a rehabilitation order. Once it is granted, he is free to participate fully in the economy once again. And even if no application for rehabilitation is made, Ndlovu will automatically be considered rehabilitated after 10 years. He can apply for home loans and buy cars on credit.
But the vast majority of South Africans shy away from the option. "They will simply surrender their assets and won't apply for any court process because it's too expensive," said Cawood.
And that portion of the population is at the mercy of an unending spiral of credit, said Lamprecht. "At one stage, people were afraid of communism," he said. "We have it now. It's just that instead of working to pay the government, people are working to pay the banks."
Options for getting out of the red
If you cannot pay your debts, a number of options are available to you, depending on the extent of your liability:
• Debt counselling: If you are struggling with short-term financial difficulty, you can appoint a third party debt counsellor. The counsellor negotiates lower interest rates and payment terms with your creditors. Debt counsellors deduct a fee for their services, but it is supposed to be capped at 5% of your monthly payment. It is advised for people who foresee that their difficulties will be temporary;
• Administration: This is available only for people who owe R50 000 or less. A lawyer arranges to pay off your debts in smaller portions over a longer period of time. The lawyer takes an administrator's fee, which is capped at 12.5% of the monthly payment;
• Sequestration: This is for people who have a substantial amount of debt, own assets and do not anticipate being able to pay it off in the foreseeable future.