Is debt review key to a fresh financial start?

Is debt review key to a fresh financial start?

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Many will agree that when the new year begins, many South Africans make big plans for the coming year. Among other plans, these can include entering debt review to ease any financial difficulties for those struggling with debt. That said, many people enter debt review without actually understanding what it is or whether it’s the ideal solution for a fresh start in the new year.‍

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What is debt review?

One commonly used method of alleviating financial woes is debt review, a legal process aimed at assisting over-indebted consumers in achieving financial freedom. A registered debt counsellor assesses the applicant’s financial situation and negotiates with creditors on behalf of the client for reduced monthly payments. This restructures the applicant’s debt into a more manageable repayment plan. Given that it is a legal process, a court order is issued to protect the person in debt review from legal actions taken by creditors.‍

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Advantages of debt review

Reduced monthly payments: In this case, debt counsellors work with creditors to reduce monthly payments, easing financial burdens. This adjustment can provide crucial cash flow, particularly after holiday expenses.

• Protection from legal action: Debt review reduces the likelihood of legal action from creditors, safeguarding the assets of the applicant in debt. However, creditors may not always be legally required to stop pursuing repayments, especially if legal action began before the debt review. Therefore, it's crucial to adhere to the repayment plan.
• Single monthly payment: Instead of making multiple payments to creditors, debtors can therefore make a single consolidated monthly payment to a payment distribution agency (PDA).
• Lower interest rates: Where possible, debt counsellors can also negotiate lower interest rates with creditors, which can help with savings in the long run.

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There are a number of things to consider before choosing the debt review route.‍

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Disadvantages of debt review

• Impact on credit record and credit score: Debt review can negatively impact your credit record and credit score as you will be listed as under debt review with credit bureaus. This, in turn, may make it harder for you to obtain new credit in the future. Also, this may affect the interest rate charged by creditors.

• Additional fees: Another aspect to take note of is that debt counsellors charge a fee for their services, which can add to your existing debt.
• Lengthy process: Depending on the amount owed, debt review can be a long process, sometimes taking several years to complete.
• No new credit: When you are under debt review, you cannot apply for new credit, except for a consolidated loan under specific terms.
• Court order: Since the repayment plan is a court order, you are legally bound to adhere to it. Further legal action can be taken against you should you fail to adhere to the payment terms.

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While debt review can be advantageous, especially at the beginning of the year when finances may be tight, it’s better to deal with debt problems early to avoid further financial stress. That said, considering debt review is a serious decision and should not be taken lightly, hence it’s important to seek professional advice from a registered debt counsellor who will then assess if it’s the right solution for you.

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In case you don’t want to go the debt review way, there are other options such as:

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• Budgeting and Financial Planning: This can help you manage your finances and pay off any existing debt.
• Debt Consolidation: Consolidating your debts into one loan with a lower interest rate can simplify payments and save money.
• Negotiating with Creditors: You might consider directly negotiating with your creditors to secure lower interest rates or more manageable payment plans.

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Debt review helps over-indebted consumers in South Africa regain financial control. It's important to weigh the pros and cons and seek professional advice before deciding.

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