What happens if your client goes insolvent?

Financial pressure is a reality in South Africa. It is possible to have a client who once was wealthy, but as a result of a divorce, or bad business decisions or other factors is suddenly not anymore. What are the consequences of the client’s policies and investment if the worst should happen and your client goes insolvent?

The solution

The first step is to advise your client to take the best solution. Depending on the level of financial pressure, insolvency is nearly always the best step to take. This propels a person very fast to a fresh start without the burdens of debt which, if the person does not take the insolvency route, may paralyse him/her for the rest of his life.  With a well-structured and right-timed insolvency process, it is possible to keep your client on her feet, so that she can recover financially and be set on the road to become a client who can re-invest again.  If not, the client is lost to the economy for a very long time or for the rest of their financial lives.

Liquidation

If the client is a Company or a Close Corporation or a Trust, it is possible to liquidate the entity while it continues with trade.  A specialist hand is necessary to facilitate this process. If done correctly, there is no need to lose a client who can be a valuable asset in the future. It is possible to structure an entity in such a manner that a client can lawfully get rid of the problems of the entity while it continues to trade.

Sequestration

If the client is an individual, sequestration is an excellent route to help the person get rid of the debt in a structured manner. As soon as there is a sequestration, the client can apply his funds for himself and money is not tied up in paying creditors, freeing funds up for better investments or policies.  So many people who go insolvent cancel all policies, thinking they are either not allowed to keep it or are not disciplined enough after sequestration to put money aside to start again.  After sequestration, a person will have no debt to pay so most of the time sufficient funds become available for a small policy or unit trust.

Education

Clients unfortunately do not have the knowledge of how important it is to own life policies or save up for unforeseen circumstances, especially if there is financial pressure. If clients that have financial problems contact you to cancel their premiums, the financial planner can use the opportunity to convert the client to someone with knowledge who understands finances better and who can then be steered towards a liquidation or sequestration. They can be educated on how better one can use finances after insolvency to one’s benefit.

Insolvency the beginning

Insolvency is not the end of the road, but the beginning to growing a client that can become a good potential client in the future. It just depends on how well informed the financial planner is about the options.

This article was written by Nanika Prinsloo of Prinsloo & Associates Attorneys, the Chambers, Niblick Way, Somerset Business Park, Somerset Mall, Somerset West