Automatic and Non-Automatically Dischargeable Debts in the Context of Insolvency

The South African law of insolvency is principally governed by the Insolvency Act 24 of 1936 (“the Act”). Simply put, the term “insolvent” refers to the inability of a person or entity to pay their debts as consequence of their total liabilities exceeding their total assets. When a person is sequestrated – a formal declaration of insolvency where such person’s estate is placed in the control of an appointed trustee – it is possible for such person to be “rehabilitated” and it is worthwhile to consider what debts might be automatically or non-automatically discharged in these circumstances.     

Section 127A of the Act is notable in this regard and makes provision for the automatic rehabilitation of an insolvent individual after the effluxion of ten years. In these instances (as with other means of rehabilitation), certain debts are automatically discharged too. There are, however, several important exceptions:  

1.       Maintenance and child support

As one might expect, the debts related to maintenance and child support are not automatically discharged. Given the significance of such debt, most especially insofar as minor children are concerned, there are very limited circumstances in which maintenance and child support obligations can be extinguished.

2.       Debts related to fraud or theft

The criminal element relating to any given debt is significant. As a matter of public policy, a debt arising out of or in relation to fraud or theft is not automatically discharged. 

3.       Tax

The South African Revenue Service (SARS) has stringent mechanisms in place to mitigate against the avoidance and evasion of tax liabilities. Accordingly, as a general principle, every person, whether a rehabilitated insolvent or not, is required to fulfil their tax obligations.

4.       Fines and penalties

Criminal fines, compensation and restitution orders, and penalties imposed by regulatory bodies are also considered to be non-dischargeable in the context of insolvency.

5.       Student loans

Perhaps more controversially, the liability in respect of student loans is generally not discharged on an automatic basis. That said, exceptions do exist (depending on, for example, the source of the loan).

Notwithstanding the automatic (or non-automatic) discharge of certain debts in the circumstances outlined above, importantly and in conclusion, individuals who are not formally declared insolvent may also have certain debts discharged, albeit on an application basis made to the National Credit Regulator (NCR) or a court of competent jurisdiction.

We trust that you found this article informative, please email info@hjwattorneys.co.za for assistance with your insolvency-related queries.

This article is provided for informational purposes only and should not be substituted for legal advice on any specific matter. Any opinions expressed herein are subject to the law as at the time of writing and will change in accordance with any change in the law. We recommend that you contact HJW Attorneys at info@hjwattorneys.co.za directly for advice applicable to your specific matter.