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It can be stressful when you find yourself overwhelmed with debt. Your options become very limited, and you must navigate your choices carefully. Here, we will explore the disadvantages of Debt Review (also referred to as Debt Counselling and No-Loan Debt Consolidation) so that you can make an informed decision that is right for your circumstances and long-term financial goals.
Debt Review is a legal process that helps individuals struggling with severe over-indebtedness manage their debt and become debt-free. It’s important to understand that it’s not a quick fix. Paying off severe debt requires commitment and a structured approach to achieve long-term financial stability.
Disadvantages (and their impact):
No access to new credit.
During Debt Review, you cannot access new loans or credit cards. While this helps break the borrowing cycle, it can restrict your financial flexibility.
This is a big ask for most people. And understandably so, stepping away from the dependency on credit is a big hurdle. Even though this is the hardest part of the Debt Review process, it is essential for the fairness and effectiveness of the process, and here are the key reasons why:
Prevention of Further Debt Accumulation: Granting you access to additional credit would defeat the purpose of Debt Review. Acquiring more credit would lead to more debt, making it impossible to meet your repayment obligations. One of the essential reasons for Debt Review is to ensure that you can afford your repayments while having sufficient funds for your daily expenses.
Court Order or Legal Agreement. When you enter into Debt Review, you receive a Court Order. This legally binding agreement outlines the terms of the debt repayment plan, which is the reduced repayment plan, making your debt affordable. It also provides you with legal protection against repossession. Part of this court order includes restrictions on obtaining new credit, which brings us to the following reason:
Protection of Creditors’ Rights. Creditors agree to participate in the process, expecting you to follow the repayment plan agreed upon in the Court Order. If you take on new debt while under Debt Review, it essentially breaks that legal agreement and jeopardises the creditor’s ability to recover the amount you legally owe them.
Regulatory Compliance and Fraud Prevention. The Debt Review process is regulated by laws (the National Credit Act) and strictly governed by the NCR (National Credit Regulator). This is to protect South African consumers like you, ensuring fair treatment by creditors. Also, restricting access to new credit helps prevent individuals from engaging in fraudulent behaviour, such as taking on additional debt without the intention of repaying it, which could harm creditors and the integrity of the debt review process.
Extended Repayment Plan
Your debt payment period will be extended to lower your monthly instalments drastically. This means it will take longer to pay off your debts, and you’ll continue to accrue interest on the outstanding balance, leading to higher overall interest payments.
This might feel like a raw deal, but remember, this process is for individuals facing extreme financial hardship and unable to afford their monthly financial obligations. The legal framework surrounding debt review takes this into account. And the only way to get the creditors to ease their repayment requirements is by extending the repayment period.
The duration of your Debt Review will depend on your unique situation. Request a free, no-obligation quote to get a better idea of the repayment period.
You can view it as the middle ground, where creditors still get their dues, and your financial strain is lifted, permitting you that much-needed breathing space to afford your debt repayments and your family’s essential living costs.
When your financial circumstances improve – like a new, higher-paying job – you can always pay off your debt faster, speeding up the process.
Impact on Credit Score
While Debt Review is not a blacklisting, it is flagged on your credit report for the duration of the process.
Credit reporting agencies and creditors are typically subject to regulatory oversight, which includes requirements for accurate and transparent credit reporting practices. Including Debt Review status on credit reports helps ensure compliance with these regulations. This pertains to the first disadvantage mentioned earlier. Creditors must make responsible lending decisions, and granting credit to individuals who cannot afford their current obligations will be considered reckless lending.
It’s important to note that being over-indebted for an extended period negatively impacts your credit score. Individuals seeking a solution like Debt Review are most likely behind on some of their payments, meaning their credit record is already flagged from those overdue payments.
After the Debt Review process is completed, a Clearance Certificate will be sent to the credit bureaus and your creditors. This legal document requires them to remove the Debt Review flag, allowing you to start rebuilding a healthy credit score.
The Advantages of Debt Review
- Reduced monthly payments: Debt counsellors negotiate with creditors to lower interest rates, resulting in a single, more manageable monthly payment.
- Legal protection: Debt Review shields you from creditor harassment, legal action, and repossessions while you make repayments.
- Focus on debt elimination: The program encourages you to stop borrowing and prioritise paying off existing debt.
- Structured plan for a debt-free future: Debt Review provides a framework and support to achieve your goal of becoming debt-free and financially stable in the long run.
Choosing Debt Review
- This program is best suited for individuals with severe over-indebtedness who need help to meet minimum monthly payments.
- Carefully weigh all aspects before deciding, including the pros, cons, and potential financial sacrifices.
- Seek guidance from a reputable debt counsellor who can assess your specific situation and advise if Debt Review is the right option for you, considering both your current financial needs and long-term financial plans.
DebtSafe is here to support your journey. Our team of experienced Debt Counsellors understands your challenges and can guide you through the Debt Review process. We prioritise transparency, ensuring you make informed financial decisions that align with your long-term goals.
Remember: Taking control of your finances involves commitment. DebtSafe is dedicated to supporting you on your journey towards financial stability and a brighter future. Still, it’s essential to know all the potential consequences of any debt management decision.