Page 1 of 2 12 LastLast
Results 1 to 10 of 11

Thread: What is Bankruptcy?

  1. #1
    Suspended
    Join Date
    Nov 2007
    Location
    South Africa
    Posts
    180
    Thanks
    10
    Thanked 29 Times in 21 Posts

    What is Bankruptcy?

    What is Bankruptcy?
    History
    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:

    1.A legal entity* or a person’s liabilities (debts) exceeds their assets, commonly referred to as 'balance-sheet' insolvency; or
    2.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:

    1.An application to the relevant court by a legal entity* or a person in order to have themselves declared bankrupt; or
    2.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
    3.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:

    1) 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;

    2) Attach a portion of the debtor’s income in terms of a court order, subject to legal fees, collection commissions and interest;

    3) 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:

    1) To stay legal proceedings and end the harassment by creditors, their attorneys and debt collectors;

    2) 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 setoff against the capital debt occurs;

    3) 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;

    4) To have an impartial person liquidate assets and distribute the proceeds amongst creditors in an orderly fashion, without undue preference;

    5) 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;

    6) 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.



    Alternatives to Bankruptcy
    Debtors in a state of insolvency may choose the following alternatives to bankruptcy in order to remedy their financial status.

    Debt Payment on Credit: This is merely a short-term solution and should only be used if the insolvency is temporary of nature. Existing lines of credit are used to borrow money or to free up other funds to pay off overdue creditors in order to avoid bankruptcy. Although it creates new liabilities, new extended payment deadlines are obtained.

    Debt Consolidation: One big loan is used to pay off many others and the one loan is the repaid over a long-term period. This is usually done to secure a lower interest rate and for the convenience of having to pay only one creditor, thus saving on administrative and finance costs.

    Debt consolidation can simply be from a number of unsecured loans into another unsecured loan, but more often it involves a secured loan against an asset that serves as collateral, most commonly a house. In this case, a mortgage is secured against the house.

    Debt consolidation is often advisable in theory when someone is paying credit card debt. Credit cards can carry a much larger interest rate than even an unsecured loan from a bank. Debtors with property such as a home or car may get a lower rate through a secured loan using their property as collateral. Then the total interest and the total cash flow paid towards the debt is lower allowing the debt to be paid off sooner, incurring less interest. In practice, many people are in credit card debt because they spend more than their income. If that habit continues, the consolidation will not benefit them much because they will simply increase their credit card balances again.

    Rescheduled Debt Payment: This option requires the consent and cooperation of creditors and is usually considered a medium to long-term strategy. Creditors are informed of the situation and requested to reschedule the debt repayment over an extended time in lower monthly instalments. The lower monthly repayments will lessen monthly expenditure, but will result in extended repayment periods, which usually results in more interest payable.

    When approached creditors might also refuse and initiate legal action to recover the money due to them, in anticipation of a possible bankruptcy. This option should be handled very delicately, and creditors should be assured of the debtor’s intention to avoid bankruptcy.

    Liquidation of Assets: Selling off assets is also a common hedge against insolvency in order to generate immediate cash for timely debt repayment, especially amongst businesses. If this options fails, the Debtor might not have enough assets to file for bankruptcy, or if declared bankrupt, face charges in terms of the Insolvency Act for preferring certain creditors to others, etc. It should not be attempted without legal council.

    Another option for legal entities to avoiding bankruptcy is acquisition by a larger corporation. It is not unusual for major conglomerates to seek out small but commercially viable companies for acquisitions or takeovers. Even if the smaller company is currently flirting with insolvency, the rights to its signature product lines may prove valuable enough to save it from financial ruin.

    Administration Order: If a person’s debts do not exceed R50,000 an application can be made to the relevant magistrate's court for an administration order. This gives you a degree of breathing space by allowing you to pay off your debts in fixed monthly instalments that will not exceed the difference between your income and reasonable expenditure.

    Once an order has been issued for the administration of your estate, you may not incur further debts, or raise credit, without explaining to the other party that you are under an order of administration. While an administration order is in force, no creditor has any legal remedy against you or your property for collecting money owing, subject to some exceptions (for instance, a mortgage bond), without the permission of the court.

    Your creditors are entitled to attend a hearing of an application for an order of administration and may question you on matters such as your assets, standard of living and the possibility of cutting down on expenses. The order may specify that certain assets should be sold.

    Judicial Management: This option is only available for companies. An application is made to the relevant court, in order to have the company placed under judicial management. A Judicial Manager is appointed to run the company and to pay off the company debts as and when money becomes available for this purpose, subject to certain conditions.

    Once an order has been issued, no creditor has any legal remedy against the company, save for some exceptions.

    Compromise: An agreement is reached between the debtor and the creditors that certain assets will be liquidated subject to terms and conditions. The proceeds will then be accepted as full and final settlement of the debts, once again subject to certain terms and conditions.

    If you are thinking of bankruptcy as a possible solution let me refer you to "in my opinion" SA's leading expert. Your consultation will be FREE

  2. Thank given for this post:

    Dave A (03-Jun-09), wynn (03-Jun-09)

  3. #2
    Site Caretaker Dave A's Avatar
    Join Date
    May 2006
    Location
    Durban, South Africa
    Posts
    20,979
    Thanks
    3,055
    Thanked 2,462 Times in 2,067 Posts
    Blog Entries
    12
    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.
    Not much measure of equality in reality. There will be secured creditors, preferred creditors and then the rest who tend to get crumbs from the table if they are lucky.

    I've been tracking the winding up of a debtor company that owes us a measely R2000.00. It is damned frustrating because:
    • winding up proceedings started out 3 years ago, and
    • concurrent creditors are yet to see a cent.


    But that's not the worst of it. The company was wound up due to a "cashflow" insolvency. However, it doesn't take much of a study of the documents issued to date to see that there were more than enough fixed assets to cover all creditors without the massive admin fees that go with this sort of thing.

    After these winding up costs (about 20% of moneys handled) most of the secured creditors got their full owing and a few had only a small portion go to the concurrent creditors pool. All the preferred creditors will get a full pay out by the looks of things. And concurrent creditors might end up with 5c in the Rand.

    Some measure of equality indeed!
    The trouble with opportunity is it normally comes dressed up as work.

  4. #3
    Bronze Member
    Join Date
    Mar 2009
    Location
    Johannesburg
    Posts
    175
    Thanks
    7
    Thanked 88 Times in 58 Posts
    Is it worth it to pursue debtors, legally for amounts below R10 000, when the legal cost alone would be more than the R10K?
    Sean Goss We all are scared, but only few are brave.
    www.sgafc.co.za

  5. #4
    Site Caretaker Dave A's Avatar
    Join Date
    May 2006
    Location
    Durban, South Africa
    Posts
    20,979
    Thanks
    3,055
    Thanked 2,462 Times in 2,067 Posts
    Blog Entries
    12
    Well, in this case no legal action required. Unfortunately I have to just sit back and watch the show

    But the question is interesting. I know we do hand over matters for substantially less than that from time to time. But then I do a heck of a lot of business in the approx. R500.00 range. If I ignore collecting it, it really adds up!
    The trouble with opportunity is it normally comes dressed up as work.

  6. #5
    Suspended
    Join Date
    Nov 2007
    Location
    South Africa
    Posts
    180
    Thanks
    10
    Thanked 29 Times in 21 Posts
    Dave you should have a look at my black listing offer.
    It might pay you to use this method before you instruct attorneys or debt collectors

  7. #6
    Site Caretaker Dave A's Avatar
    Join Date
    May 2006
    Location
    Durban, South Africa
    Posts
    20,979
    Thanks
    3,055
    Thanked 2,462 Times in 2,067 Posts
    Blog Entries
    12
    Yep, filed away as an option, Quinn. Not much use as a threat if the client is already blacklisted, though. Those are the ones that we seem to be having trouble with at the moment.
    The trouble with opportunity is it normally comes dressed up as work.

  8. #7
    Suspended
    Join Date
    Nov 2007
    Location
    South Africa
    Posts
    180
    Thanks
    10
    Thanked 29 Times in 21 Posts
    I know this guy that will pay your client a visit............

  9. #8
    Bronze Member Sieg's Avatar
    Join Date
    Oct 2006
    Location
    Durban
    Posts
    126
    Thanks
    0
    Thanked 52 Times in 30 Posts

    Insolvency

    Technical insolvency, in its basic form is when liabilities exceed assets and there is an inability to pay the debts. So, commercial insolvency can lead to legal insolvency (where the debtor is declared insolvent in terms of the Insolvency Act or a legal entity [company or close corporation or other type such as a co-operative] is liquidated [such as the recent case of Edwafin, where the Court granted a "provisional liquidation order" [and not a "provincial" liquidation order as a local drop en deur die wind verwaai broadsheet explained].

    So, as an example: South African Airways is at most times "technically insolvent - its liabilities far exceed its assets and it has a real inability to pay and service its debts. But it does not get declared legally insolvent / liquidated. Why? Simply because your money keeps it floating. Government is the sole owner of SAA and when the crunch comes (and this happens with regular monotony), Government puts your money into this ailing beast. If SAA was a "normal" company, it would have been liquidated and gone long time ago, just like Vernon's Nationwide.

    Sieg

  10. #9
    New Member Steven's Avatar
    Join Date
    Jun 2009
    Location
    Hoedspruit
    Posts
    5
    Thanks
    0
    Thanked 1 Time in 1 Post
    Quote Originally Posted by Dave A View Post
    But then I do a heck of a lot of business in the approx. R500.00 range. If I ignore collecting it, it really adds up!
    In that price range, I'd ask for upfront payment. If you spend a few hours chasing up R500, it quickly becomes unprofitable. We have a lot of clients who don't want to pay upfront, and that's fine. We don't try to convince them either - it's up to them to take it or leave it. No payment is no service.

    Sometimes it's entirely the company's fault though if they get into cashflow problems. We got a plumber round the other day and we had to ask them to please submit an invoice - they still hadn't sent us one 2 weeks after they'd finished the job. If I was them, I would've asked for payment on the day itself.

  11. Thanks given for this post:

    Dave A (05-Jun-09)

  12. #10
    Site Caretaker Dave A's Avatar
    Join Date
    May 2006
    Location
    Durban, South Africa
    Posts
    20,979
    Thanks
    3,055
    Thanked 2,462 Times in 2,067 Posts
    Blog Entries
    12
    Good advice, Steven

    And welcome to TFSA
    The trouble with opportunity is it normally comes dressed up as work.

Page 1 of 2 12 LastLast

Did you like this article? Share it with your favourite social network.

Did you like this article? Share it with your favourite social network.

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •