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072 855 8106 nanika@nanikalaw.co.za

There are legal ways to get out of debt.

Not being able to pay debts can cause a company or a person to shut down. This is not good for the economy as the economy always needs people and companies to participate in it. If too many people or companies are removed from the economy, it will eventually collapse.

For this reason, the legal system provides mechanisms to companies and people to get out of debt, while you stay on your feet so that you can keep on playing your part in the economy.

Perhaps your company is your very source of income and you cannot afford to get rid of the company. This places you in a “stuck” position where you cannot get rid of the company or the debt but at the same time, the company and the debt are paralyzing you. Or maybe you are already under debt review (as an individual) or business rescue (as a company) but the debt does not seem to be reduced or settled. This is an untenable position. Whatever the situation, you are certainly not alone. A big number of people know what it is like to live with the dead weight of dead that paralyses everything and causes a big struggle to sustain your equilibrium.

 There are ways to get out of debt, and here are 2 keys for how to get rid of debt

1. A company or close corporation can liquidate

In terms of the Companies Act/Close Corporation Act, a company or close corporation must liquidate when its liabilities exceed its income or when it cannot pay its debt. The director or the member will, therefore, adhere to the law if they liquidate the entity when the time is right.

Liquidation will get rid of the debt and the company will deregister after liquidation. Liquidation will give a structured process of dealing with creditors and assets, if there are any, after liquidation. This will leave the directors or members free to pursue other business interests as opposed to being paralyzed by the bad debt of a company or close corporation.

It is especially important to liquidate sooner rather than later in the case of a company or close corporation that cannot pay its debt, because if the directors/members continue for too long with an insolvent business, it can trigger a shift of the debt of the business to that of the director/member, because the Companies Act places a duty on the director/member to liquidate the entity when it cannot pay its debt.

When it comes to being afraid of liquidating the business because it gives you your income, some common issues may be getting in the way. The main issue is a lack of knowledge. Most directors do not know what they can and cannot do. It is therefore important to consult with a professional to get the knowledge to know what you can or cannot do. We specialise in insolvencies therefore contact us for a consultation and we will fully advise you on your rights and the effect of insolvency.

Continue trading while liquidating

You can indeed continue with the same business whilst you are liquidating the company or close corporation that is riddled with debt. In that way, you will be able to still earn an income. This process must be structured and if done correctly, it is very possible to legitimately get rid of debt (even SARS debt) whilst you continue with your business. Each business is unique therefore writer can unfortunately not give a general discussion of how it will work, but it is indeed possible to keep assets, and clients, and contracts and intellectual property and staff if there is a liquidation.

For businesses that are under business rescue, liquidation is still a better and faster option than business rescue. Business rescue is expensive and 9 times out of 10 (n the writer’s opinion) a waste of good money. Liquidation will get rid of the problem much faster and cheaper and it will sort the problem almost immediately as opposed to going through a 6 month period that usually ends in liquidation in any case.

In order to get rid of the debt of a company or close corporation, we need to remove the obstacles of the emotional director or member and overcome the fear and the attachment, consider the legal options that can contribute to getting rid of the debt over-eating and then set in place the restructuring mechanisms that are available to restructure the business so that you can do business freely, without the debt and the fear and the worry.

2. An individual can sequestrate

Here are some of the top reasons why sequestration is by far the best solution to get rid of debt that can help revive your financial freedom:

• Sequestration is available to every individual over 18 years: If you want to live a financially free life and turn your finances into your benefit, you are going to need to sequestrate as soon as is possible, because every month that you pay debt that you cannot afford, you are throwing good money after bad, plus you are taking food out of your own mouth to pay creditors.

• You should pay yourself first and your creditors last. Even the Consumer Protection Act wants you to eat and live first and then pay your creditors, that is why the Debt Review Process was brought into law.

Debt Review Process

The Debt Review Process is the mechanism that was put in place by the Government to protect individuals of using all their money to pay the debt and then have nothing left for themselves. Although I am not in favour of the debt review process, it is a good mechanism to use for people who experience temporary financial problems. The Debt Review process means that you pay one monthly amount to a Distribution Agent who then divides that one payment up to all of your creditors as part of a payment plan that your debt review counsellor would have calculated and arranged for you.

The Debt Review Process works great if your debt is smaller and you experience financial problems for a short period of time, but if your debt is high and you will need to be under debt review for a long period of time, then debt review is not for you. If you have to be under debt review for longer than a few months to one year, you will find that your debt increases and that you will owe more at the end after 7 years than you did before, because you will be paying a smaller installment and then the interest and cost will grow because of that. Rather then sequestrate.

There are other ways to get out of debt, but we will not discuss it here for the purposes of this article. Also, read more about liquidation here and sequestration here.