Some people are of the opinion that the term ‘Bankrupt’ originated from the Italian term ‘banco rotto’, which means ‘broken bench’, as it was common for the bankers of that time to use a bench in public places such as markets to do business, count their money and to write bills of exchange on.
Whenever a banker failed, he broke his bench in order to inform the public that his “bank” was no longer in business, as he was bankrupt.
The word ‘Bankruptcy’ was actually derived from the ancient Latin term ‘bancus ruptus’ which also means ‘broken bench’, where this practise originated amongst the first bankers.
Definition: Insolvency vs. Bankruptcy
The term insolvency is commonly confused with bankruptcy and is often used incorrectly as a synonym for bankruptcy. Although both insolvency and bankruptcy deal with liabilities exceeding assets, insolvency refers to a financial state and bankruptcy to a distinct legal concept, a matter of law.
Insolvency is defined as a financial condition or state experienced when:
A legal entity* or a person’s liabilities (debts) exceeds their assets, commonly referred to as 'balance-sheet' insolvency; or
When a legal entity* or person can no longer meet their debt obligations on time as they become due, commonly referred to as 'cash-flow' insolvency.
Upon becoming insolvent immediate action must be taken to rectify the situation as soon as possible in order to avoid possible bankruptcy, by generating cash, minimizing overhead costs, cutting back on living expenses and settling or renegotiating current debts and debt repayments.
Bankruptcy is defined as a successful legal procedure that resulted from:
An application to the relevant court by a legal entity* or a person in order to have themselves declared bankrupt; or
An application to the relevant court by a creditor of a legal entity* or a person in order to have the legal entity* or person declared bankrupt; or
A special resolution which a legal entity* files with the Registrar of Companies in order to be declared bankrupt.
(* legal entity : Close Corporation or Company )
A state of insolvency can lead to bankruptcy but the condition may also be temporary and fixable without legal protection from creditors. Insolvency does not necessarily lead to bankruptcy, but all bankrupt debtors are considered insolvent.
Purpose of Bankruptcy
If a state of insolvency cannot be rectified, creditors will eventually begin legal proceedings in order to:
- Attach a portion of the debtor’s income in terms of a court order, subject to legal fees, collection commissions and interest;
- Attach the debtor’s assets and sell it on forced auctions, where the assets usually fetch poor prices. The proceeds of such an auction will be diminished even further by the deduction of removal and storage fees, sheriff’s fees or auctioneer’s commission, legal fees of the relevant creditor and collection commissions charged by attorneys or collection agencies;
- Attach debts due to the debtor (accounts still payable by the debtor’s clients) in terms of a court order, subject to legal fees, collection commission and interest.
- Creditors will usually keep instituting legal proceedings until the debt has been settled in full, including the interest on the capital amount, all legal fees, collection commissions and disbursements.
The purpose of bankruptcy is to give an honest debtor a "fresh start" in life by relieving them of their debts. If a debtor becomes insolvent, they might consider filing for bankruptcy as a debt solution in order:
- To stay legal proceedings and end the harassment by creditors, their attorneys and debt collectors;
- To stop paying creditors for years to come, moneys first utilized for the legal fees of the creditors’ attorneys, collection commission and interest, before a set-off against the capital debt occurs;
- To solve a debt problem where creditors are uncompromising or unwilling to accept alternative options in order to restructure the debt repayment in affordable instalments;
- To have an impartial person liquidate assets and distribute the proceeds amongst creditors in an orderly fashion, without undue preference;
- To avoid paying unjustifiable amounts for bad business decisions, mistakes or economical changes over which the debtor had no control, ultimately resulting in a state of insolvency;
- To enable a insolvent person to make a clean break and to afford them the opportunity to start rebuilding their financial life anew.
Bankruptcy should be considered as the final solution to debt eradication. Any other alternative options should be considered first and only once these options are exhausted or found to be unviable, should bankruptcy proceedings be initiated.
Bankruptcy : An overview
Once thought of as something that happened only to businesses, bankruptcy is an option that has become increasingly popular for individuals. More and more people are using bankruptcy as a way of eliminating unmanageable debt. In the last few years the number of individuals filing for bankruptcy has grown considerably worldwide.
Bankruptcy in South Africa can be obtained in more ways than one, depending whether the Debtor is a natural person or a legal entity.
The term ‘Natural Person’ includes a single male or female, a couple married in community of property, a person married out of community of property, a sole proprietor and a partnership, while the term ‘Legal Entity’ includes a Close Corporation, Private Company, Public Company, etc.
Bankruptcy means that a debtor was either successfully sequestrated as a natural person or liquidated as a legal entity. All assets of the bankrupt debtor will be realized and the proceeds distributed amongst the creditors in terms of the Insolvency Act, thus resolving the debtor of all debts and financial obligations that has accumulated, even if the debts have not been paid in full.
This supervised division also allows the interests of all creditors to be treated with some measure of equality. After the commencement of bankruptcy proceedings, creditors may not seek to collect their debts outside of the proceedings and the debtor is not allowed to transfer any property that forms part of his estate. Pre-proceeding transfers of property, secured interests, and liens may be delayed or invalidated.
Although bankruptcy may provide the debt relief you require and effectively allow you to rid yourself of all debts, it also harms your credit rating and your chances of obtaining future credit or finance to buy vehicles or property. It adds a serious black mark against your credit report that will follow you for some time to come. Bankruptcy as a form of debt relief should only be used as a last resort.
In the long run, it is not really to your creditors' advantage to have you declared bankrupt, as they may have to wait a very long time until they receive any money, usually only a fraction of what was due to them. Bearing this in mind, there are some bankruptcy alternatives you may wish to explore first, before filing for bankruptcy.
Filing for Bankruptcy
We trust you’ve obtained at least some of the information you needed from this article. Before you proceed any further we would suggest that we compile a debt profile (free of charge) to establish whether any alternative options are perhaps more viable.
In order for us to do this, we will require some information from you. Please take note that all information and communications received from you will be protected by attorney - client privilege, and will be treated confidentially. It may not be divulged to a third party without your consent.
We will e-mail you an excel spreadsheet at your request, or you can download it now by clicking in the icon below:
The spreadsheet must be completed and e-mailed back to us. As soon as we receive the spreadsheet we will contact you and arrange a free telephonic consultation at your convenience, to advise you on debt repayment vs. bankruptcy and the implications thereof.
Should Bankruptcy be your chosen debt solution, we will inform you of all costs involved and advise you how to file for bankruptcy in South Africa.
Thank you for taking the time to read this article. We would also appreciate any comments or suggestions you might have regarding our website, approach and service in order to enable us to render a better service to future potential clients.
Please do not hesitate to e-mail us or phone Rohan Lamprecht on (014) 592 9217 (office hours).