Leaving debt review too early could come back to bite you

It is short-sighted and risky to leave debt review early, but it does happen when people use this tool that the National Credit Act introduced to protect consumers when borrowing money from financial service providers, to quickly get a reprieve from debt collectors.

Many South African consumers are battling to stretch their income to cover all their expenses and get to the end of the month. Many turn to debt counselling and it has been a much-needed lifeline for many people. 

Under debt review a qualified debt counsellor negotiates a single, low monthly instalment that covers for all your debt obligations and this new repayment structure considers all existing household expenses, such as transport, rent, household utilities and groceries, while allowing you to pay off your debts and still comfortably paying your monthly living costs.

A large majority of consumers who leave the debt review programme, often return. “Many people enter the programme seeking immediate relief from debt collectors and creditors, only to exit before their debt is successfully repaid,” Charnel Collins, CEO of National Debt Advisors (NDA), says.

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Stay until your debts are paid off

“The ultimate goal of the programme is to help you reach a stage where you have paid off all your debts and can leave the programme with a fresh start in the credit world. However, it can be short-sighted and possibly risky to leave early, as it leaves you vulnerable to legal action from creditors and possibly even the repossession of assets via the courts.

She says a popular question from consumers in the programme is when can they leave. “To understand leaving debt review, you need to first understand the processes involved in entering a programme.

“According to the definition of debt review, it is a legal, regulated process by the National Credit Regulator (NCR) ordered by a court of law and leaving the programme is also channelled through these same avenues.”

The NCR outlines these guidelines for leaving debt review:

• Everything is done through the magistrates court.

An order declaring an overindebted consumer under debt review cannot be granted by a High Court and similarly it cannot process any pronunciations on whether the consumer should be removed from debt review either. All proceedings for debt review are done at the magistrates court.

• Before a court order is granted.

As with all legal proceedings, a court order for declaring a consumer under debt review may take time. In the meanwhile, a qualified debt counsellor can already declare a consumer over-indebted and proceed to restructure their repayment terms, together with their creditors.

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Where a court order has not yet been granted and your debt counsellor is convinced that you are fit to manage your debt obligations, the debt counsellor can present the facts to the court and ask for the order to be rejected.

This can, for example, happen in cases of increased income, or a windfall of cash that assists in settling a large portion of your debts, Collins says.

• After a court order has been granted.

According to the latest NCR regulations released earlier this year, the only way consumers can exit debt review after a court order has been granted is if they have settled all their debts as per the restructured agreement, with the exception of a home loan.

“Remember that while the restructured agreement is meant to assist you at the beginning of your debt review journey and if your financial circumstances improve you can inform the debt counsellor that the process of debt review could end sooner than initially agreed.”

Once you have settled all your debts, the debt counsellor issues a clearance certificate within seven working days and submits it to all the credit bureaus that then remove the debt review flag and set your credit score back to zero. With a clean slate you are now free to re-enter the credit market, Collins says.

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When you cannot apply for more credit

“An important aspect of the debt review programme is its rejection of consumers to accumulate further debt while paying off their existing debt. This trains you to adopt healthier financial management habits, such as saving and budgeting.”

Collins explains this is especially important because as consumers re-enter the credit market with a credit score of zero, they have to gradually build it up again by adopting wise credit management habits, such as only spending money on things that are affordable and strictly sticking to a budget.

“This is where you have to be careful to ensure you do not end up in debt review again,” she says.

Debt review can be a lifeline for consumers who are overwhelmed by their debt obligations and can provide breathing space to cover household expenses, protect them from creditor harassment and protect their assets from repossession.

“One of the greatest gifts that debt review offers consumers is the financial education to better manage their personal finances. With this knowledge, they not only become debt free, but they can also achieve financial freedom.”