Is Debt Review the Right Solution?

The New Year often brings plans for a fresh start, and for many South Africans struggling with debt, this may include a resolution to enter debt review to alleviate financial woes.

What is debt review?

Debt review is a legal process designed to help over-indebted consumers to attain financial freedom. It involves the assessment of the applicant’s financial situation by a registered debt counsellor, negotiating with their creditors for reduced monthly payments, and restructuring the applicant’s debt into a more manageable repayment plan.

The plan is then made a court order, mitigating legal action by creditors against the person undergoing debt review.

Advantages of debt review

• Reduced monthly payments: Debt counsellors negotiate with creditors to lower your monthly instalments, making the debt payments more affordable. This can free up much-needed cash flow, especially after the festive season spending.
• Protection from legal action: Debt review lowers the risk of legal action by creditors, thereby protecting the assets of the indebted person. It is important to note, however, that creditors are not always legally obligated to halt their pursuit of repayments during the debt review process, especially in cases where legal action has commenced before the debt review started. Adherence to the repayment plan is, therefore, crucial.
• Single monthly payment: Instead of juggling multiple payments to different creditors, you make one consolidated monthly payment to a payment distribution agency (PDA), which then distributes the funds to your creditors.
• Lower interest rates: In some cases, debt counsellors can negotiate lower interest rates with creditors, which can result in great savings in the long run.

“Before taking the plunge, though, there are several factors to consider,” cautions Lebo Gaoaketse, Head of Marketing and Communication at WesBank.

Disadvantages of debt review

• Impact on credit record and credit score: Entering debt review will negatively impact your credit record and credit score. You will be listed as under debt review with credit bureaus, which may make it difficult to obtain new credit in the future and may also affect the interest rate charged by creditors.
• Additional fees: Debt counsellors charge a fee for their services, which can add to your overall debt.
• Lengthy process: Debt review can be a lengthy process, sometimes taking several years to complete, depending on the amount owed.
• No new credit: While under debt review, you cannot enter into any new credit agreements, except for a consolidated loan under specific circumstances.
• Court order: The repayment plan becomes a court order, meaning you are legally bound to adhere to it. Failure to do so can result in further legal action.

“Considering debt review at the start of the New Year can be advantageous,” says Gaoaketse. “By addressing your debt problems early, you can avoid further financial stress and start the year with a more positive outlook. At this time of the year, people are also more motivated to make big changes in their life.

“But debt review is a serious decision and should not be taken lightly. It is crucial to seek advice from a registered debt counsellor to assess your individual circumstances and determine if it is the right solution for you,” he says.

Alternatives to debt review

Before considering debt review, explore other options such as:

• Budgeting and Financial Planning: Creating a realistic budget and sticking to it can help you manage your finances and pay off debt.
• Debt Consolidation: Consolidating your debts into a single loan with a lower interest rate can simplify your payments and potentially save you money.
• Negotiating with Creditors: You can try negotiating directly with your creditors for lower interest rates or more manageable payment plans.

“Debt review can be a lifeline for over-indebted consumers in South Africa, offering a structured way to regain control of their finances. However, it is essential to weigh the advantages and disadvantages carefully and seek professional advice before making a decision,” says Gaoaketse.

Visit the WesBank Talks Finance podcast for more information on managing your finances, including managing your debt and avoiding missed payments.