Debt Review: The good, the bad and the ugly

Although debt review can be a lifesaver for consumers drowning in debt, it is not a one-size-fits-all solution and not a decision that consumers should enter into lightly. The best advice is to approach it cautiously and understand the implications fully.

“Understanding debt review and loan consolidation is important. For many, a consolidation loan might be a better solution. We have seen a significant increase in cases where consumers are unaware of the full implications of being under review,” says Niresh Gopichand, finance risk director at Atlas.

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Concern about rising number of debt reviews

Leonie van Pletzen, CEO of MicroFinance South Africa (MFSA), echoes this sentiment.

“I am deeply concerned about the rising number of individuals placed under debt review without their knowledge or when it is not necessary.

“This troubling trend highlights significant gaps in consumer awareness. Many consumers are unaware that they have been placed under review, which can have a long-lasting effect on their financial stability and creditworthiness.”

In response to this issue, the National Credit Regulator (NCR) issued a circular emphasising the importance of fully informing consumers about the debt review process and their rights, Van Pletzen says.

Gopichand says there are various options for debt management:

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Debt consolidation vs review

For consumers juggling multiple credit payments, debt consolidation offers a lifeline by merging them into one loan, potentially with a lower interest rate. This simplifies repayments and might ease your burden.

However, he says, if your credit score has taken a hit due to high debt levels, qualifying for a consolidation loan might be difficult. That is where debt counselling or review comes in.

Debt counselling: a helping hand

Debt counselling assesses your financial situation, Gopichand says. If you are declared over-indebted, you might be placed under review. This is where a debt counsellor steps in to:

• Negotiate with creditors on your behalf
• Craft a personalised repayment plan
• Offer ongoing guidance and support.

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Qualifying for debt counselling – here is the catch

While debt counselling offers assistance, there are hurdles. You will need to prove you cannot meet current debt payments and there are costs involved which include:

• an application fee for debt counsellors to conduct an assessment
• a rejection fee if your assessment shows that you are not over-indebted
• a debt counsellor’s fee paid once you are accepted and
• ongoing monthly fees until your debt is paid up.

Debt review offers a structured approach

Gopichand says debt review is a regulated programme designed to make debt repayment easier. It offers several advantages:

The good

• It combines debts into one manageable payment
• It extends repayment periods for better affordability
• It protects you from legal action while you regain your financial footing
• Completing the programme can leave you debt-free with a healthier credit record.

ALSO READ: Leaving debt review too early could come back to bite you

The bad

• Taking out new loans or credit is off-limits during debt review
• Your debt review status stays on your credit report until all debts are cleared.

The duration varies depending on your financial situation. It typically takes 12 to 60 months (one to five years) to be removed from your credit record after the debt is paid in full, Gopichand says.

“There is a strict legal constraint in the National Credit Act (NCA) that prohibits consumers under debt review from incurring any further debts. This means that for the duration of the review period, which can be up to five years, consumers under review may not take out new loans.

“This works to ensure that individuals focus on repaying their existing debts rather than accumulating additional financial obligations. Debt review aims to help consumers regain financial stability. Taking on more debt would dilute this goal.”

The ugly

“Any organisation offering loans to people under debt review are doing so illegally. Added to that, borrowing more money while under review only digs a deeper debt hole,” Gopichand says.

“Unscrupulous debt counsellors can ill advise consumers into debt review. It is imperative that all consumers, particularly those facing financial difficulties, first reach out to their credit providers to explore available solutions before resorting to it.’