Too many people turn to debt review as a solution to their financial problems. However, applying for debt counselling should be carefully considered as there are both advantages and consequences to this debt relief option.
“We have noticed that there has been an increase in customers applying for debt review, year-on-year relative to customers following our normal collections process,” says Jonathan de Beer, Head of Collections at FNB Credit Card. “However, customers need to be aware of the restrictions as well as the likely costs before automatically turning to the debt review as a solution.”
Debt review was introduced in 2007, with the National Credit Act 34 of 2005, and allows consumers who are over indebted a process of re-structuring and managing their debt over a period of time.
“The main reason was to help over-indebted customers who may have encountered life changes such as a reduction in salary or income,” says Jonathan.
The Advantages
“There are advantages to going into debt review,” says Jonathan. “One of the major advantages is that a debt counsellor can, on behalf of the customer, negotiate with all their creditors a repayment amount the customer can actually afford.”
Through this process, the credit bureaus are advised by the debt counsellors that the customer has applied for debt review and the customer’s credit profile will be updated accordingly, instead of credit providers pursuing with summons and judgements, which negatively affects the customer’s credit rating.
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The Consequences
“Initial costs of debt review can be high,” warns Jonathan. “There are once-off upfront fees and monthly after-care fees.”
A consumer who, for example, has an initial balance going into debt review of R54 452.38 with an installment of R971.88 over a 60 month period, the debt review fees can amount to R11 300* over the course of the debt review period.
Consumers are advised to discuss the entire process with the debt counsellor and to also consider restructuring options other than the formal legal process through the courts. It is possible to get a consent order through the National Credit Tribunal at lower fees.
It is difficult to withdraw from debt review, once a consumer has entered the process. Should they want to withdraw, they would need to go to court to get an order stating that they are no longer over indebted or they will be required to settle all outstanding unsecured debt. There would also be a withdrawal fee payable by the consumer, prior to a clearance certificate being issued
While under debt review, customers can’t incur any further debt, so no further credit may be granted, and they also can’t make use of any of their credit cards, store cards, overdraft facilities or even purchase a vehicle.
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The other alternatives
Managing financial matters and borrowing responsibly should be the first priority for all consumers.
“Taking on too much debt, particularly for non-essential or luxury items is not wise,” says Jonathan. “Saving for such items is not only cheaper in the long run, but also ensures that consumers avoid falling into a debt spiral.”
Consumers are encouraged to enquire about the total cost of the credit over the full term in order to understand the costs and obligations associated with taking credit.
There are other alternatives that consumers can consider before choosing to go the debt review route.
“One of the most common problems when it comes to customers in debt is that they avoid the issue, instead of talking to the financial institutions,” says Jonathan. “It is usually in the best interest of both the creditor and the customer to make an arrangement.”
Most creditors are open to discussion and agreeing to repayment arrangements.
“Another alternative, and one that customers are often not willing to consider, is a change in lifestyle,” says Jonathan. “Selling unnecessary movable assets and cutting down on luxury expenses, as well as budgeting effectively, will not only help pay up debt, but will also prevent the same issues coming up in the future.”
In some instances, going through debt review is a sensible way of getting back in control of finances. If deciding on this route, consumers should do lots of homework and are encouraged to shop around for experienced, reputable and effective debt counsellors with a track record of serving consumers well.
“Customers that find themselves in financial difficulty should remember that whatever option they choose, getting out of their debt is not a sprint but rather a marathon,” concludes Jonathan.
