What is a Debt Review?
Debt review, also known as debt counselling, is a process introduced by the National Credit Act of South Africa to assist consumers who are experiencing significant financial difficulties and are unable to meet their debt obligations.
Debt review involves the restructuring of debt in a manner that allows the consumer to meet their living expenses and distribute the remaining available funds amongst their creditors in a fair manner. The process is undertaken by a registered Debt Counsellor who assesses the debtor's income and expenses to ascertain their debt repayment capabilities. Here is a step-by-step breakdown of the process:
Application
The consumer applies for debt review with a registered Debt Counsellor.
Assessment
The Debt Counsellor conducts an extensive review of the consumer's income, expenses, and debt obligations to determine whether the consumer is over-indebted.
Notification to Credit Providers
If the Debt Counsellor finds the consumer to be over-indebted, they will notify all credit providers and credit bureaus that the consumer has applied for debt review.
Restructuring of Debt
The Debt Counsellor proposes a restructured payment plan to all credit providers, which ensures that the consumer can afford their monthly debt repayments.
Approval or Negotiation
The credit providers can either accept the restructured plan or negotiate with the Debt Counsellor for changes. If an agreement cannot be reached, the matter can be referred to a magistrate for final determination.
Payment Distribution Agency (PDA)
Once the repayment plan is agreed upon, the consumer makes a single monthly payment to a Payment Distribution Agency, which then distributes this payment to all the credit providers as per the agreed plan.
Clearance Certificate
Once all the debt is paid off, the Debt Counsellor issues a clearance certificate and notifies the credit bureaus to remove the debt review status from the consumer's credit profile.
While under debt review, the consumer is legally protected, and creditors cannot pursue legal action to reclaim their debt. However, it's important to note that during the debt review process, the consumer cannot incur any further credit until all restructured debt is settled. This process is aimed at responsible financial management and ultimately leads to financial rehabilitation.
Which are the loan options for South Africans under debt review?
The National Credit Act of South Africa introduced debt review, or debt counselling, as a helpful measure for consumers struggling to meet their financial obligations. Being under debt review can bring much-needed relief, but it also presents unique challenges when seeking additional credit or loans. In this blog, we'll explore viable loan options for South Africans under debt review.
The Challenge of Accessing Loans Under Debt Review
It's important to note that while under debt review, the National Credit Act prohibits individuals from taking on additional credit. This includes all forms of credit such as loans, credit cards, and overdrafts. The aim of the process is to assist over-indebted consumers to manage their debt responsibly and regain financial stability. Consequently, traditional banks and most licensed credit providers will not grant loans to individuals under debt review.
Possible Loan Options
However, emergencies and unforeseen expenses can arise during the period of debt review, leaving individuals in a situation where they need additional funds. Here are some options to consider:
1. Loans from Friends and Family
In dire situations, one might consider approaching a close friend or family member for a short-term loan. This option can be beneficial as it often doesn't involve interest rates and can be more flexible regarding repayment terms. However, it is essential to treat these loans as formally as you would with any other lender to prevent damaging personal relationships.
2. Employer Advances
Some employers offer salary advances to their employees. This means an employee can get part of their monthly salary early to meet an urgent financial need. It's crucial to understand the terms of such an advance, including how it will affect future paychecks.
3. Sale of Assets
If you have assets like extra furniture, jewelry, or a second car that you no longer need, you might consider selling them to raise the funds you need.
Staying Financially Secure During Debt Review
While the options for loans are limited during debt review, it's crucial to remember that the process aims to bring financial rehabilitation. Once you complete your debt review and settle all your restructured debt, you'll be in a much stronger position financially, and the restriction on accessing new credit will be lifted.
Conclusion
Navigating the financial landscape while under debt review in South Africa can indeed be a challenging journey. The restrictions on additional credit are designed to foster responsible financial behavior and to facilitate the route towards becoming debt-free. Nevertheless, unexpected financial needs can still arise during this period, necessitating a need to explore alternative loan options.
While traditional lenders and most licensed credit providers are not an option due to the provisions of the National Credit Act, other potential avenues like borrowing from friends and family, obtaining an advance on your salary from your employer, or even selling unneeded assets can provide a financial reprieve during challenging times. Each of these options comes with its own set of considerations and potential complications, so they should be approached with caution and forethought. Creating an emergency fund during this period is another crucial strategy. It provides a financial buffer to meet unexpected expenses, reducing the need for additional loans.
Keep in mind that the primary purpose of debt review is to assist over-indebted individuals in managing their debt, restoring their financial health, and regaining control over their financial lives. It's not a punishment, but rather a helping hand towards financial freedom. After the completion of the debt review process and the settlement of all restructured debt, the restrictions on credit will be lifted, opening the door to more traditional credit and loan options.
Through patience, discipline, and responsible financial practices, you can navigate the path of debt review successfully. Remember, each step you take is a step closer to financial stability and independence. Always consult your debt counsellor or a financial advisor when making significant financial decisions, to ensure they align with your long-term financial goals and your journey towards financial freedom.
Disclaimer
This blog post is for informational purposes only and should not be taken as financial advice. Always consult with a registered Debt Counsellor or financial advisor before making financial decisions.