The household debt to income ratio in South Africa is amongst the highest in the world at approximately 72%. This means that, on average, 72% of the monthly take-home pay that South African households earn goes towards paying debt. Debt review, also known as debt counselling, is a formal legal process regulated by the National Credit Act (NCA) and enforced by the National Credit Regulator (NCR). Debt review was introduced to help over-indebted consumers to restructure their debt and negotiate with creditors on their behalf to make debt repayments more manageable and sustainable.
Through debt review, a new, more affordable monthly budget and payment plan are drawn up by the debt counsellor, showing a clear picture of the consumer's household spending vs. income and a detailed plan on how they will pay up their debt commitments. A debt counsellor then approaches the consumer's credit providers with a manageable monthly payment plan to be paid within 60 months maximum, i.e. five years.
What does the Debt Review Process look like?
Here's a general outline of how the debt review process works:
- Application: The consumer applies for debt review with a registered debt counsellor. A consumer approaches the debt counsellor and completes a Form 16 application form for debt review. The debt counsellor informs the consumer's credit providers that they have applied for debt review through Form 17.1.
- Financial Assessment: The debt counsellor then assesses the consumer's financial situation to determine whether they are over-indebted. Credit providers furnish the debt counsellor with certificates of balances of the consumers’ debt commitments. The debt counsellor completes the financial assessment using these balances.
- Notification: If the consumer is found to be over-indebted, the debt counsellor will notify the credit bureaus and the consumer's creditors that the consumer is under debt review. The debt counsellor informs the credit bureaus through the National Credit Regulator Debt Help System (DHS) by sending Form 17.2, advising them that the consumer is over-indebted.
- Repayment Plan: The debt counsellor then draws up a restructured monthly budget and repayment plan and negotiates with the consumer's creditors on behalf of the consumer for reduced payments. Within 30 days of the consumer's application, the debt counsellor submits a suitable repayment plan. If accepted by credit providers, the consumer will start paying in line with this negotiated payment plan.
- Court Order: Once all parties agree to the repayment plan, it can be made an order of the court. This provides legal protection to the consumer (i.e. protecting their assets like a house and car) and ensures that the terms of the agreement are adhered to. The debt counsellor will approach the courts on behalf of the consumer to obtain a debt review court order which makes binding the rearranged payment plan.
- Payment: The consumer makes regular payments as per the restructured plan. These payments are usually managed by a Payment Distribution Agency (PDA), which distributes the payments to the creditors as per the plan.
- Completion: Once the consumer has finished paying off their debt, the debt counsellor issues a Form 19. This is known as a clearance certificate and is issued to a consumer after he/she has satisfied all obligations under every credit agreement. At this stage, the consumer is removed from debt review and is declared to no longer be over-indebted.
What are the Benefits of Debt Review?
1. Debt Review Improves your Money Habits
This is arguably one of the most important benefits of debt review compared to other forms of debt relief like debt consolidation. Most of the time, after someone consolidates their debt, the debt grows back. Why? Because they don’t have a game plan to pay cash and spend less. In other words, they haven’t established good money habits for getting and staying out of debt and building wealth. Their behaviour hasn’t changed, so it’s extremely likely they will go right back into debt. Debt review, on the other hand, targets behavioural change with money. You learn to pay cash on all purchases, spend less, and draw up a budget that is realistic. Debt review stops one from borrowing and focuses on debt elimination.
Read more about the differences between a debt consolidation loan and debt review.
2. Debt Review is Flexible
Your debt counsellor won't hold you back if you can settle your loans faster than anticipated in your repayment plan. Should you run into some money, e.g. an inheritance, and you want to pay off all your accounts and get off debt review, you can. In fact, we encourage our clients to pay extra when they can so that they can come off debt review as quickly as possible and realise their financial goals (e.g. buying that dream house).
3. Legal Protection for your Assets
Your assets, e.g. your home and car, are protected while under debt review and cannot be repossessed by your credit providers. This is one of the most important benefits of debt review, especially compared to a debt consolidation loan. When the debt counsellor approaches the courts to obtain a court order, the rearranged plan is made an order of the court. This means that credit providers agree to the rearranged plan and your assets are protected. Creditors cannot take legal action against a consumer once the debt review process has started and before the debt has been settled, provided the consumer follows the repayment plan.
4. Consolidates and Simplifies Payments
Consumers make one consolidated payment that is distributed to all creditors, which simplifies their finances. This achieves the same effect as a debt consolidation loan, but with more benefits.
5. Reduces Your Interest Rates
The debt counsellor will negotiate with your credit providers to reduce the interest rates on your debt commitments. The savings from reduced interest rates reduce your total obligations.
6. Affordable Monthly Payments
You pay one reduced monthly manageable amount that pays all your accounts. Your debt counsellor works with you to decide on an amount that is sustainable.
How Long will Debt Review Last?
Typically, the debt review process can last between 3 and 5 years, but this is not a fixed period. Some individuals can be under debt review for a shorter period if they have a relatively small amount of debt or if they come into additional money (like an inheritance or a bonus at work) that they can use to settle their debts sooner. Conversely, if the debt amount is substantial, the period could be longer.
The length of time that debt review lasts is not one-size-fits-all; it varies from person to person based on several factors, including:
- Amount of Debt: The more debt you have, the longer it may take to pay it off, even with renegotiated terms.
- Income and Expenses: If you have a stable income and can allocate a reasonable amount of your income to debt repayment after essential expenses, you may be able to complete the process faster.
- Interest Rates and Charges: The interest rates and charges that your debt counsellor can negotiate with your creditors will affect the duration of the debt review process. Reduced interest rates can result in a shorter debt review period.
- Adherence to the Payment Plan: How strictly you adhere to the revised payment plan will impact the duration. Missing payments can extend the process.
Once a consumer completes the process, the debt counsellor will issue a clearance certificate indicating that the consumer has satisfied all the requirements under the debt review and is no longer over-indebted. This certificate is then sent to all credit bureaus and creditors to remove the debt review status from the consumer's credit profile. There is no permanent record of having applied for debt review once the Debt Counsellor removes you from debt review.
Do you need Debt Review?
The process has proven to be a useful mechanism for those unable to meet their debt obligations, giving them a chance to regain financial stability without resorting to more drastic measures like insolvency or bankruptcy. If you are really stretched and struggling to service your debt every month, it can be hard to know where to turn. Read more about the signs you might need debt review.
Our experts at Debt Sage are available to help you in a way that’s best for you. We will guide you through the entire debt review process and help you deal with your debts and become debt-free. Get started today.