How does debt relief work?

Taking care of your monthly debt payments can cripple your financial power and, during tough economic times, make you struggle to make ends meet.

If you find yourself in this position, how can you lift this burden? We found out which debt relief options are available and whether you can request assistance from your creditors.

Tip: Apply for debt counselling today by clicking here and filling out the form.

Can you avoid your debt payments?

According to Simon Stockley, co-founder and former chief executive of SA Home Loans (SAHL), as a general rule, if you’ve borrowed money you have a contractual obligation to repay that money, plus interest and certain approved charges incurred by the lender in recovery of the money advanced.

“This obligation can be enforced in a court of law. But note that you cannot go to jail for unpaid civil debt, save in respect of maintenance payments and tax defaults,” says Stockley.

That being said, it’s never wise to stop meeting your debt payments. If you’re struggling to make ends meet, get in touch with your creditors and see whether you can negotiate different rates with them. However, if this does not work, you may need to consider debt relief options.

What is debt relief?

According to Annelene Dippenaar, chief legal and compliance officer at Experian Africa, debt relief refers to a mechanism that allows the debt of a consumer or business to be reorganised. This is done to provide some financial ease, or where the debt is reduced or restructured.

“During challenging economic times, government or companies may help consumers or companies by providing alternative debt relief options,” says Dippenaar.

She outlines the following examples of the most common debt relief types:

• Debt counselling: In this process, a debt counsellor will negotiate a new repayment plan with your credit providers.
• Debt consolidation: Debt consolidation involves taking out one big loan to pay off all your other debt, negotiating a lower interest amount and limiting the monthly credit costs payable. You do need to ensure you’ll be able to afford the new payment agreement.
• Debt administration: A debt administrator applies to the court to have some of your income set aside for basic living expenses while the rest is used to pay off debt. This is only an option when your total outstanding debt is less than R50,000.
• Voluntary sequestration: Sequestration is adopted when a consumer has too much debt and where the debt has very little chance of being paid back. In effect, the consumer is declaring themselves bankrupt. Liquidation is the equivalent process for legal entities.
• Payment holidays or extended payment terms: This is where you and the credit provider agree to, for example, postpone the payment date of the next instalment or to reduce the instalment amount and pay the loan back over a longer period.

But what if you’re not struggling with debt personally, but rather your business is struggling? Dippenaar explains that there are similar or equivalent debt relief options for companies.

“The complexity of the process will depend on the type of legal entities – close corporations versus companies – and the type of debt relief option. For example, a consolidation loan for a business is more straightforward than liquidation,” says Dippenaar.

What is the downside of debt relief?

According to Christopher Rey, business restructuring professional at BDO, debtors should also consider the downside of debt relief.

“An individual under debt counselling will not be able to apply for credit and will be listed on the credit bureaus as being under debt counselling. The individual is also liable for paying debt counselling fees and the individual will still need to pay the relevant instalments whilst under review,” says Rey. 

“Debt restructuring processes are important procedures to assist individuals and companies with financial distress. However, as with anything in life, it’s important to seek professional advice before any decisions are made to enter into a debt restructuring process,” Rey cautions.

He warns that the success of any debt restructuring process is often dictated by the competence of the trustee, debt counsellor, business rescue practitioner, or liquidator, as the case may be.

What is debt relief through voluntary sequestration?

According to Arthur Hlubi, executive of legal compliance at Bayport Financial Services, if a debtor is overindebted, the courts may be approached to declare the debtor bankrupt. The courts will write off some debt and the debtor’s assets must be sold to settle the remainder.

“The assets in the debtor's estate must be sold and the proceeds of the sale on auction must be sufficient to pay for the sequestration process and to ensure that the creditors receive the minimum benefit,” says Hlubi.

He explains that if not all the debt is covered with the sale of assets, the debtor will have to pay in the remainder, either in a lump sum or by agreement through down payments. However, the interest rate will be frozen.

Hlubi adds the following points regarding this process: 

• The debtor will not be able to enter into new credit agreements during the process as it’s a criminal offence to do so.
• The debtor’s employer and the credit bureaus will be notified that the debtor has been declared insolvent. The debtor will not be able to qualify for new credit without a court order stating that the debtor is no longer insolvent, or for at least 10 years.
• There is no minimum or maximum amount of debt needed to qualify for voluntary sequestration.
• The court may decide not to declare the debtor bankrupt. In that case, the debtor must find an alternative way of dealing with the debt.

“Although some or all the debt may be written off, voluntary sequestration is an expensive form of debt relief. Not only will the debtor have to pay legal fees, but the debtor’s assets will be sold,” says Hlubi.

Sort out your debt by filling in the form on this page. A debt counsellor will call you back and help.