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Debt Review (Debt Counselling) Explained

Debt Review Explained

Poor lending practices, unemployment, poverty, and even corruption are all factors that contribute to South Africa’s household debt crisis. The government’s misallocation of resources, South Africa’s unstable economy, and the unequal distribution of income left many South Africans drowning in debt and struggling to make ends meet. The implemented lockdown due to the COVID-19 pandemic has only exacerbated these issues. 

Debt review may be the best option for people facing serious financial challenges. However, it is not an immediate solution and there are certain requirements consumers need to be aware of. The aim of this article is to provide a brief explanation of debt review, who qualifies, the debt review process and both its advantages and disadvantages. 

What is debt review?

Debt review also referred to as debt counselling, is a formal rehabilitation program for consumers struggling to meet their debt obligations. The aim of debt review is to assist individuals who are over-indebted to regain control over their finances. This is generally achieved through a structured repayment plan and/or suspension of credit agreements. With the assistance of a debt counsellor, the consumer pays a fixed monthly amount towards a debt counselling organisation. This amount is distributed between the consumer’s creditors. 

Debt review should not be confused with debt consolidation. The latter is a loan that consists of consolidating your debt to repay all or some unsecured loans from various creditors. The aim of debt consolidation is to pay all high-interest loans, leaving the consumer with only the debt of the creditor who granted the consolidation loan. 

When is a consumer “over-indebted”?

Only a consumer who is over-indebted may undergo debt counselling. According to section 79 of the National Credit Act (NCA), a consumer can be regarded as over-indebted if that individual is unable to satisfy all debt obligations in a timely manner under the credit agreements the consumer is a party to. The Magistrate’s Court has the authority to declare a consumer over-indebted and is required to consider the consumer’s financial means, financial prospects, obligations, and history of debt repayment when doing so.

The debt review process

The most common way to initiate debt review is to approach a debt counsellor registered with the National Credit Regulator (NCR) and apply in the prescribed manner. A debt counsellor will assess the consumer’s financial situation and account statements received from creditors to determine whether the consumer is over-indebted and whether the credit agreements were entered into recklessly. This assessment must be done within 30 days of the consumer’s application for debt review. 

The debt counsellor is required to inform all relevant creditors and credit bureaus of the consumer’s application for debt review in the prescribed manner. If the debt counsellor, following the assessment, concludes that the consumer is over-indebted, the relevant prescribed form will be completed and sent to creditors and credit bureaus confirming that fact. 

The debt counsellor will create a structured repayment proposal with consideration to the consumer’s expenditures. This payment proposal will be provided to all creditors for consideration. The matter is then referred to the Magistrate’s Court for an order declaring the consumer over-indebted and for the restructure of debt repayment.

Who qualifies to undergo debt review?

As mentioned before, only consumers who are over-indebted may apply to undergo debt review. However, a consumer is not permitted to apply for debt review in respect of a credit agreement where a creditor has already taken steps in terms of section 130 of the NCA. Thus, it is important to apply for debt review prior to receiving a summons from a creditor. A consumer may apply for debt review if a notice of default in payment, in terms of section 129 of the NCA, is received from a creditor. The consumer must apply for debt review within ten business days after receiving the notice of default.

Advantages and disadvantages of debt review

Being placed under debt review has many advantages. It is the first step to financial freedom. However, becoming debt-free is not easy. There are many restrictions that come with being under debt review.  Firstly, the consumer is prohibited from applying for loans or credit while under debt review. Secondly, the process can be lengthy. It can take around three to five years before all debt is settled in accordance with the repayment plan.

Lastly, debt review is not free. There are fees involved for the services debt counsellors and the Payment Distribution Agency provide. However, these fees are structured within the repayment plan and are usually low. These fees are also regulated by the NCR.

The benefits of debt review far outweigh the disadvantages thereof. The debt counsellor will advise the consumer on where to cut costs and ensure that the consumer is able to reasonably afford the monthly payment. Only one payment is made to the debt counselling organisation, and the PDA distributes the money to all creditors. 

Furthermore, creditors are prohibited from taking legal action against a consumer under debt review. All assets are protected, and creditors are prohibited from repossessing any property. A consumer placed under debt review must comply with the debt-rearrangement order. Defaulting on payments will put the debt agreement at risk and creditors will immediately institute legal action. Legal protection is only guaranteed if the consumer under debt review complies with the debt agreement. 

When a consumer no longer needs to be under debt review or has settled all debts, a clearance certificate will be issued, and all credit bureaus notified. There will be no record of the consumer ever undergoing debt review. It is also not necessary to repay all debts while under debt review. However, all smaller debts need to be settled prior to leaving the process.

Conclusion

Debt review is not a quick and easy fix. It is a long-term commitment and may not be a perfect fit for everyone. If put under debt review, it is crucial to never default on your monthly payments. Defaulting can lead to creditors instituting legal action against you. If you remain committed, you will eventually regain control of your finances. 

Undergoing debt review has provided genuine relief for many South Africans. If you are facing serious financial issues, consider contacting a debt counsellor for advice.


Chane Henney

Chane holds an LLB and is currently in the process of completing an LLM. She has in-depth knowledge of the debt review processes, debt consolidation, and applicable legislation such as the National Credit Act.