Understanding debt review & debt counselling in South Africa

When payments for home loans, car loans, student loans, groceries, and utilities pile up, sometimes people become overwhelmed, miss a few payments and now find themselves in a lot of debt with no idea how to get out of it.

When we consult family members, friends or even the internet we will find answers such as debt consolidation or debt review and debt counselling; yet we have no idea what these entail.

Debt review vs debt consolidation

Therefore, let us discuss these terms or options, yet more specifically debt review.

Debt consolidation in short – is the process of taking out a personal loan with the intention of consolidating your debt (taking on debt in order to pay off other existing debts that have fallen behind on repayments).

A debt consolidation loan, allows one to restructure their debt profile and pay off multiple debts at once, leaving the consumer to focus on only repaying one debt at a lower interest rate than what the consumer was paying on their other combined debts.

In short debt review is a process whereby a debt counsellor will assess a person’s outstanding debts and formulate and implement a restructured debt repayment plan.

This new plan will be formulated through a process whereby the debt counsellor will contact your credit providers and renegotiate interest rates in order to reduce them and establish an extended repayment term for the person under debt review.

A little more information on debt consolidation 

While debt consolidation is generally seen as a solution for those struggling with debt it is in fact not a viable option for those who are in severe debt situations. 

You will need to have a fair credit score to be able to secure a debt consolidation loan and the better your credit score the better the interest rate that you're offered will be.

Is debt consolidation the right option for me?

Debt consolidation is likely to be the right option for you only if the majority of your debt lies in short-term, high-interest debts such as credit cards, store cards and short-term loans. 

The primary issue that debt consolidation is able to solve is that it can help people who are struggling to manage their debt repayments from a management and affordability perspective.

In terms of management a consolidation loan will have you focused solely on one repayment which will be easy to manage. With regard to affordability, you can opt for a longer loan term to reduce your overall monthly repayments. 

If you have so much debt that you cannot afford the repayments and have already been handed over for collection, chances are that debt review will be a more suitable option for you.

How does debt review work?

In essence, debt review enables you to consolidate your debts without having to take out a loan. Your debt repayments will be consolidated into one affordable monthly repayment, which will be paid to National Credit Regulatory (NCR) regulated payment distribution agency who will ensure each of your creditors get paid every month on your behalf.

As you continue to make monthly repayments your bad credit record will become better and rectified once all debts are repaid. There are great advantages and a few disadvantages associated with being under debt review.

The benefits of debt review

When you’re in debt your creditors could claim or repossess your assets in order to recover the money that you owe to them.

However, when you are under debt review your assets, such as your home or car, are protected and cannot be repossessed and auctioned off to pay off outstanding debts.

Therefore, it’s easy to see why this is a good option for consumers who are deeply indebted. Additionally, consumers learn to live in a better, more financially responsible and viable manner. Debt review fosters better spending habits and money management for persons who previously had little to no control over their budget and other finances.

In summary the befits of debt review are: 

• Protection from the loss of assets 
• Creditors cannot contact you 
• Debt review is a legal process 
• Forces clients not to take on any more debt
• Can be used in severe cases
• Will help the client better manage their finances
• Reduce repayments and interest on some credit agreements
• Free up some income for day to day living 

The disadvantages of debt review

While under debt review you are unable to apply for any new credit. Persons under debt review have all of their existing accounts flagged so they are no longer able to purchase things on credit and they are unable to apply for any new line of credit while under debt review.

This process usually goes on for a few years and can be a big adjustment to persons who are used to living off of credit to survive. Additionally, the only way to get out of debt review is to settle all outstanding debts and get a clearance certificate.

Overall, undergoing debt review can be a difficult and lengthy process, however, ultimately, it is very much worth it for most people who find themselves drowning in debt and for whom a debt consolidation loan or other alternatives were not a viable option or solution.

The disadvantages associated with undergoing debt review are a small price and inconvenience to pay when it could be much worse.

While under debt review one’s credit provider could demand an order against your salary which would claim a large portion of your salary, making it even harder to survive and pushes one into more debt or repossess and auctions off your assets.

In summary the disadvantages of debt review are: 

• You will not be able to take on any new credit 
• The process, once started cannot be reversed 
• The process will be lengthy 

This way you are protected from incurring more debt while paying off existing ones, your assets are safe and your credit providers happy that they are being repaid, even if it takes longer for them to receive the money owed to them. Irrespective of what your situation is, there are always options and solutions available that can assist you with your given circumstances.