Debt Review: All you need to know

The debt review industry is one where many consumer’s sounds South Africa still look at with doubtful eyes. Scandals and scams of people claiming to be registered debt counsellors have all been too common in recent times. Most consumer’s still don’t have a full understanding of what it means to be under debt review and how this whole process is carried out. This article will hopefully shed more light on this matter.

Debt Review came with the introduction of the National Credit Act in 2007. It is simply a process of helping over-indebted consumers to become debt free by restructuring their debt commitments to an affordable amount. Once all restructured short-term debt is settled, a clearance certificate is issued and the consumer is debt free.

Being over-indebted is where a consumer’s net income is not enough to cater for all their living expenses and monthly debt repayments. This, therefore, means, one is in a negative cash flow position and are therefore unable to either cover all of their living expenses or they are unable to pay all of their monthly debt instalments.

What happens when we run out of money? We run to the bank and take out a loan so that we can make it through the rest of the month. Come to the end of the month, we had all the debts we initially had and an added loan that we just took to be able to make it the end of the month. Our monthly debt repayments have now increased and because our net income and living expenses are still the same, we run out of money even quicker. What do we do when we run out of money? We run to the bank and take a loan….and the cycle just repeats itself and their debt situation just gets out of control.

It is because of this situation elaborated above that the National Credit Act introduced debt counselling as a way of helping over-indebted consumers. A consumer would approach a debt counsellor, the debt counsellor will give them an application form, often referred to as a Form 16 and the debt counsellor will proceed to notify all concerned credit providers of the consumer’s application for debt review.

Credit Providers, having received the notification that a consumer has applied for debt counselling, have 5 business days to furnish the debt counsellor with a certificate of balance. The certificate of balance will contain the total outstanding amount of the credit agreement, the inception date, interest rates and detail whether the consumer might have added products on the credit agreement, such as credit life insurance.

The debt counsellor will then evaluate the consumer’s financial affairs, determining whether the consumer is financially stable or whether the consumer is over-indebted. Where a consumer is financially stable, a debt counsellor may only accept the consumer’s application if it is likely that the said consumer will become over-indebted in the near future, otherwise, the application for debt review has to be rejected. Here a consumer is over-indebted, the application for debt review is approved and the consumer’s debt obligations start being restructured.

Debt Obligations are restructured through a negotiation process, starting with an initial proposal sent by the debt counsellor to credit providers. Credit Providers will evaluate the initial proposal received and either accept or reject the proposal made to them. The debt counsellor will be informed in writing whether the initial proposal has been accepted or rejected. The debt counsellor will then send out a final proposal, taking into account all accepted and rejected initial proposals and meeting rejected proposals were possible, to all concerned credit providers.

Credit Providers will respond to the final proposal made by the debt counsellor, also either accepting the final proposal or rejecting it. The debt counsellor will then compile all information, including all accepted and rejected proposals if any, and refer the matter to court for a court order. Once a court order has been issued, all accounts are restructured as per the court order, even if a creditor may have rejected the initial or final proposal made by the debt counsellor.

In other circumstances and only if all credit providers have accepted the proposals made by the debt counsellor, the debt counsellor may refer the matter to a Tribunal for a consent order. This option is less costly than referring the matter to court, however, some attorneys charge the same rate whether the matter is referred to a Tribunal or court.

Once a court order or a consent order has been granted, all concerned credit providers and credit bureaus are duly informed. The court or consent order is binding on all credit providers to restructure the accounts as ordered by the court or the Tribunal, on the consumer to make payment as ordered by the court or the Tribunal and for the debt counsellor to monitor the said consumer’s debt obligations regularly.

The consumer will continue to make this single reduced payment based on their affordability until they have settled all short-term debt, i.e. all debts except a mortgage agreement. Once all short-term debt is settled in full, the debt counsellor is required to issue a clearance certificate to all registered credit bureaus and concerned credit providers advising that the said consumer is debt free.

The credit bureaus will then adjust the said consumer’s records accordingly and the consumer may start being credit active again. It is hoped that once debt free, the consumer will have learnt the lesson of not taking up unnecessary debt and will be rehabilitated, as opposed to going back to credit providers and repeating the cycle again.

Therefore, if you are over-indebted, debt counselling is certainly a good option to consider to help you become debt free. Do understand that you will not be able to take out credit while you are under debt review, however you need to equally accept the fact that debt counselling is meant to help you become debt free and this will never be realized if you were taking out debt while the debt counsellor is working on getting you debt free. As soon as a clearance certificate has been issued and the credit bureaus have updated your information accordingly, you may be credit active again. So, contrary to what most people believe, you will be able to take out credit again in the future, just not while you are still under debt review.