It’s not uncommon to hear about creditors harassing debtors regarding their late payments. But since the establishment of the debt review process in 2007, SA citizens have been protected from unethical practices that debt management companies do to their clients. Through this law, the National Credit Act (NCA) can shield those who are under debt review from creditors who pester and threaten customers for repayments.
What is Debt Review?
Debt review, also known as debt counselling, is the solution recommended under the NCA to over-indebted individuals in SA. The rehabilitation program helps those who are struggling to keep their finances afloat by giving them professional help from debt counsellors. These counsellors are tasked to help consumers avoid personal administration which has a negative long-term effect on finances.
Debt review is the better option over debt administration or sequestration.
Debt administration is enforced only on unsecured debt, which means home loan and vehicle finance are to be paid separately. Only debts up to R50 000 can be put under debt administration and repayments can only be done every quarter, so it will take a long time before full repayment is fulfilled. Additionally, the cost of the process is more expensive compared to a debt review plan.
Sequestration is even worse. Your assets will be liquidated to cover outstanding debts and you won’t be allowed to apply for credit up to 5 years after being sequestrated. Record of sequestration will also stay on your credit history for up to 30 years.
When you’re under debt review, the debt counsellor will first assess your ongoing debts. Then, they’ll structure a debt repayment plan suited to your finances. All your debts will then be consolidated into a single loan for easier management.
Back then, even when you’re already under debt review, your outstanding debts can still grow bigger. The growing concern of citizens on this matter led to the implementation of the 2011 debt counselling rules which eliminated the possibility of your debt growing when you’re already under a debt review program.
ALSO LEARN: The Advantages and Disadvantages of Debt Review
The Debt Review Process
Here are the actions that will take place when you’re placed under debt review.
Debt counsellors will conduct a credit check and notify creditors and credit bureaus of your application for debt review. Your over-indebtedness will be assessed along with instances of reckless credit and unlawful interest.
If the debt counsellor finds that you’re not over-indebted as you claim to be, your application will be rejected. You might be given advice, though, on how to reorganize your budget and lifestyle because this might be all you need to do to get your finances in order.
It’s also possible that you’re not over-indebted, but you’re finding it hard to pay your debts due to unforeseen circumstances. You may be short on cash because of medical needs, vehicle breakdown, or house repairs. This is a temporary problem, so you don’t need to be put under a debt review program.
However, debt counsellors can still be tapped for assistance in negotiating with your creditors regarding the situation. Short-term arrangements can then be made to fix your cash flow issues that will enable you to repay debts on time.
Drawing up the plan
The biggest responsibility of your debt counsellor is to come up with a plan on how you can repay the loan and how you can adjust your lifestyle according to your financial capability.
Debt counsellors can negotiate with your creditors on your behalf to bring down the monthly repayments to a rate low enough for you to commit to. However, this is not required by law, so it’s not their default course of action. You must mandate your debt counsellor first to allow them to engage creditors in your stead.
In rearranging debt repayments, neither the debt counsellor nor anyone representing you as their client has the right to force creditors to recalculate loan agreements. Proposals may only suggest ways to reduce monthly instalments by extending the credit terms. It’s under the discretion of the creditor if they want to reduce the interest rates on your credit. Regardless of what you and your creditors agree to, the changes in the contract must be put into writing.
Not every credit agreement is required to be included under the restructuring program. Debt restructuring plans must also be approved by the court for them to take effect and be acknowledged by creditors.
Undergoing debt review
When you sign up for debt review, debt counsellors will notify all your creditors that you’re under the program. Credit bureaus will then flag your account as ‘under debt review’, preventing you from taking any loan or credit than what you already have. This is a sensible restriction since taking more debt will only be detrimental to your current situation.
Under the debt review program, repayments will be directed to one collection agent which will be responsible for distributing the sum to your creditors. This makes it easier for you to manage your debts since you’ll be dealing with one agency instead of multiple credit providers.
When you’re under debt review, you’ll be obligated to distribute your recurring earnings accordingly among all creditors you’re indebted to. The amount that can be redistributed is the money remaining after essential living expenses and statutory deductions have been accounted for. This is another safeguard of debt review so you won’t be robbed of a decent living condition just to pay your obligations.
Undergoing debt review generally shouldn’t have any impact on your employment opportunities. However, if you’re applying for a position that requires money management or handling of financial products, you may have a hard time defending your credibility since you weren’t able to manage your finances in the first place. It’s a good thing to know that most debt counsellors assure would-be employers of your trustworthiness by informing them of the debt review process.
Debt counsellors don’t do the hard work for free. Their fees are regulated by the NCR, though, so you don’t have to worry about being scammed.
Here’s a summary of what you should expect regarding the cost of undergoing debt review:
- By law, a non-refundable fee of R350 (exclusive of VAT) is expected for the application and administration process.
- The cost of debt assessment and restructuring of your loan can reach up to R9 500 (exclusive of VAT). The fee for this will vary depending on the size of your account.
- There are also legal fees involved in the debt review process.
- Recurring monthly fees can reach as high as 8% of your repayments, up to a maximum of R950 (exclusive of VAT).
Debt counsellors won’t ask for an upfront payment. If you encounter one who asks for outright payment before they provide their service, ignore them and look for another provider.
Debt review can be costly, but it’s better than having your assets repossessed for being unable to repay your loans. Moreover, with sequestration or administration, you’ll have a harder time repairing your credit history as these options can have lifelong effects on your finances.
Exiting the debt review
The debt review is completed once all creditors have been paid as per the credit contract. It’s possible to repay one creditor earlier than the other, but this won’t make you eligible to get out of the debt review program right away. You must repay all outstanding debts on all creditors to clear the program.
Still, you can complete the debt review program ahead of the expected schedule by making extra payments. In case you manage to pay everything before a court order is granted, you must submit proof to your debt counsellor showing you no longer need to be under debt review.
Once you’ve paid off all your debts, your debt counsellor will send a clearance certificate to your creditors and notify the credit bureau that you’ve completed the program. The ‘under debt review’ tag will then be removed from your profile, allowing you to take credit again like you used to. You’ll be free from taking loans to purchase a house or a car or continue using your credit card without any problem.
How Long Does Debt Review Last?
The length of the debt review process will depend on the size of your debt and your capacity to pay. It may take 3 to 5 years, although you can shorten this by making additional repayments. It’s recommended that you put any extra money you won’t be using into debt repayments to save on interests and get out of debt earlier.
Going by your everyday routine without using your credit card or getting quick loans can be challenging, especially if you’ve made it a habit to borrow money for your daily expenses. The trick here is to live below your means to ensure your expenses stay within budget.
Debt Review Loans
The only loan you can get when you’re under review is a special case of a debt consolidation loan. This type of loan is designed to make it easier for over-indebted individuals to repay their loans.
Different credit contracts have varying interest rates and repayment terms. Monitoring each one can be challenging and repayments can be costly because of the difference in rates.
When you’re under debt review, all your debts will be combined into one big loan. This means you’ll only have to monitor and deal with one agency to repay all your credit obligations.
Your debt counsellor can negotiate with creditors to get you longer terms with lower monthly repayment costs. This is to ensure you can repay all debts within your budget.
Taking a Loan When Under Debt Review
What if you really need cash and you don’t have any other choice but to borrow even when you’re under debt review? Is this even possible?
It’s against the law to grant you a loan while under debt review. Creditors caught giving loans will be punished and you’ll also be tagged for reckless lending.
Still, some non-traditional lenders offer loans to those under debt review. These creditors are often not registered with the National Credit Regulator (NCR) and they usually charge very high fees, which is why it’s not recommended to go this route.
If you really need to get a loan for emergency purposes, it’s possible to get out of the debt review program prematurely. However, this will hurt your credit history for a long time.
When you undergo debt review, it’s best to stick with the program designed by your debt counsellor. In exchange for giving you more viable repayment terms, you’re expected to commit to monthly repayments without missing one. Breaching the agreement will result in heavier sanctions.
Debt review is designed to avoid repossession of your assets. It gives you another chance to rehabilitate your finances and get out of debt safely. Along with the process of repaying your debts, you’ll also learn to be more responsible with your finances.
Being free from debt obligations doesn’t mean you can immediately go back to your old ways. Remember that taking too much credit is what made you over-indebted in the first place, so be careful in choosing when to take a loan or to swipe that credit card.