Debt review
Learn more about what the debt review process entails.
Terrence is unable to make payments on all his debts every month. His monthly expenses exceed his income. He is under serious financial pressure and knows that he has to take some action.
What are Terrence’s options?
- Option A – Terrence should consult a financial wellbeing consultant for budget assistance. The consultant will analyse Terrence’s budget and spending patterns to determine his monthly payments and establish where changes can be made. If Terrence acts quickly, he may be able to avoid debt review. The onus is on the consumer to act before creditors begin legal action.
- Option B – If Terrence continues to ignores his financial situation and falls further behind on his payments, creditors may initiate legal action against him. If Terrence is concerned that he is over-indebted, he should consult a debt counsellor for a debt review assessment prior to legal action by creditors.
What is debt review? The National Credit Act (NCA) came into effect in 2007 and with it came the introduction of debt counselling, a process that South Africans can follow if they cannot meet their debt obligations. The aim of debt review is to determine if you are over-indebted in terms of Section 86(6) of the NCA, if creditors were reckless in giving you credit and to enable a Debt Counsellor to help you to restructure your debt payments so that you can meet the obligation within your current financial means. You can pay off your unsecured debt within 60 months, while a house and car payment may be extended for a longer period.
Important points
- Debt review is not an instant solution – it is a process. If you keep up your payments the result is debt-free status.
- It provides a way for you to repay your debts – so you must be employed and earning an income. If you cannot pay your debts then debt review is not an option for you.
- If you are married in community of property, a joint debt review in compulsory as you have a joint estate with your spouse.
- If you have an antenuptial contract, a joint debt review is recommended – or at least a joint review of income and expenditure.
- In order to restructure your budget and payments, you may need to adopt some changes to your lifestyle.
- The process is not free. You need to make a payment to the debt counsellor to initiate the review and if you continue with the process, initial payments (as part of the order) will be paid through your first and second month’s instalments. The initial payment is R57-00. Not everyone is accepted for debt counselling. If you are rejected, you will need to pay R342-00 to the company.
How does the debt review process work?
Debt counselling takes 60 business days from the time you apply for debt review until the time the consent order is granted by the court. During this period, no creditor may initiate legal action against you. If a creditor has already taken legal steps against you, this debt cannot be included in the review and that legal process will continue separately.
Once the process is underway, the credit bureaux will be notified that you are under debt review, after which you will no longer be able to obtain credit.
Step 1: See a debt counsellor
Take along your Identity Document, payslip and account information, details of all short term loans, as well as house and car payments. Complete the necessary forms. The debt councillor will assess your financial situation to determine whether you are over-indebted and a candidate for debt review or not. This is called an Affordability Assessment.
Step 2: Debt review – first steps
If the debt councillor determines that you qualify for debt review, he or she will let your creditors know. They must provide an account balance and interest details, called a Certificate of Balance.
The debt councillor will determine an Affordability Amount – how much you can afford to pay off on your debts every month. All debts are structured into one monthly payment. The debt counsellor will negotiate with creditors on the balance of the account, as well as a reduced interest rate. These are called fee and rate concessions. This alone can improve your cash flow by up to 39%. All creditors receive the proposal and can either accept or reject it.
Step 3: The application goes to court
In order to obtain a legal agreement between yourself and the creditors, the debt review application must go through a court of law. This is a legal agreement between yourself and your creditors and will state how much you will pay back per month and the repayment period. The debt counsellor hires an attorney to complete all required legal documents.
Once all creditors accept the proposal, the application will be presented to a magistrate for a consent order. Only the attorney goes to court – you don’t have to appear. If the magistrate accepts the application, he or she will make the application an order of court. A payment distribution agency (PDA) will be appointed to handle your payments and pay them over to your creditors.
If creditors do not accept the agreement and further legal proceedings are required, you will need to cover all legal costs incurred.
Step 4: Pay off your debts
Once the agreement is in place you must stick to the terms of the repayment. If you don’t, the credit provider may terminate the agreement and proceed with legal action against you.
Step 5: Final step
Once all your debts (excluding a home loan) are paid off, the debtor counsellor will request paid-up letters from your creditors and issue a clearance certificate. The credit bureaux will be notified and the listing removed. If you have a home loan, the interest rate will revert back to the original rate but the term agreed in the debt review stays in place. A final benefit of debt review is that as long as you maintain the home loan payment you are protected by the NCA.
Resources
- Paul Slot – director at Octogen