The advantages and disadvantages of going under debt review

Consumers often turn to debt review as a solution to their financial problems. Experts warn that applying for debt counselling should be carefully considered as there are both advantages and disadvantages.

First National Bank (FNB) stated that it has seen a spike in customers applying for debt review, year-on-year relative to customers following its normal collections process. “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,” said Jonathan de Beer, head of collections at FNB Credit Card.

Debt counselling was introduced in 2007, with the National Credit Act 34 of 2005. South Africa’s largest debt management company, Debtbusters, said that the service was designed for consumers that are over-indebted. It affords them the opportunity to re-structure and manage their debt over a reasonable period of time.

De Beer added: “The main reason was to help over-indebted customers who may have encountered life changes such as a reduction in salary or income.”

Handy tip: Are you in need of debt counselling? Fill out the form and a consultant will be in touch with you.

Advantages of debt review 

One of the major advantages is that debt counsellors can, negotiate with the customers’ creditors to restructure an affordable repayment amount.

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.

Consequences of debt review 

De Beer cautions that initial debt review costs can be high as there are once-off upfront fees and monthly after-care fees (see our case study example below).

FNB advised customers to discuss the entire process with the chosen debt counsellor as well as consider restructuring options rather than formal legal processes through the courts. It’s possible to get a consent order through the National Credit Tribunal at lower fees.

Once a consumer as entered the process, it’s very difficult to withdraw from the service. Should they want to withdraw, they would need to go to court to get an order stating they are no long over indebted or they will be required to settle all outstanding unsecured debt. This would also include a withdrawal fee payable by the consumer, prior to the clearance certificate being issued.

DebtBusters added that while under debt review, customers can’t take on any further debt. They will not be able to make use of credit cards, store accounts, overdrafts, loans, or any type of new or existing credit agreements. 

Other alternatives to debt review 

There are other alternatives that consumers can consider before heading towards 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,” said de Beer. “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 agreements. 

Alternatively customers should consider changing their lifestyle. “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.”

Keep a budget

DebBusters stated that consumers should learn to budget in order to avoid over spending and finding themselves in tight financial situations. It is easy to get into debt but to exit is not always easy. With the festive season fast approaching, there are always pressures to overspend on gifts and holidays.

De Beer concluded: “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.”