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Is debt review for you? When you are overindebted it may seem like the best option to help you pay outstanding loans and accounts. But before you sign up, make sure you understand the process, the benefits it can bring and the challenges you will face!
What is debt review?
Debt review is also known as debt counselling and is a formal legal process that allows you to pay off your debts. A registered debt counsellor will negotiate payment terms with creditors for instalments you can afford so that you can pay your debts as well as your expenses such as housing, food and transport. You can read more about debt counselling on the National Credit Regulator’s website.
Debt review has many benefits. It will relieve your immediate financial stress, giving you peace of mind and a better night’s sleep! But it could place additional demands on you and your family. These are the hard truths you need to know before agreeing to enter debt counselling.
You won’t have any access to credit when you are in debt review
This includes store cards, personal loans, overdrafts, any hire-purchase agreement – all formal lines of credit. If credit has been your financial lifeline, you need to know that it just won’t be available during debt review. Be sure you can live with this before signing up!
The benefit: you will learn to live without debt and within your means. Living a lifestyle your income allows will help you avoid “keeping up with the Khumalo's” on credit in future.
Your budget will be basics only
Your debt counsellor will draw up a debt repayment plan that you can afford that also gives you money for your daily living expenses. But this won’t include any luxuries or treats. It will be a necessities only budget so that you can pay as much as possible towards your debts. If you have been used to an occasional treat, this will be hard.
The benefit: you can learn to live frugally – a habit you can keep for life!
Debt review can take years to complete
The latest report from the National Credit Regulator includes the stories of South Africans who completed debt counselling. A key takeout is that the process takes years! Jean Linde spent 9 years under debt review and Shaun Goorahoo spent around 8 years in debt review. This is a long time to be in debt review, without access to credit and living on a basics-only budget.
The benefit: tough times can give you the chance to re-evaluate your life so you can identify what is most important and focus on it, such as spending time with family.
You may not be a good fit with your debt counsellor
There are around 1 500 registered debt counsellors in South Africa. You will be a better match with some than others. Shaun shared how his first debt counsellor was “lacking” but the second “rose to the occasion” to help him. Your debt counsellor will be in your life for many years, so make sure they will offer you the service and assistance you need.
- Always check that your debt counsellor is registered with the
- Get to know your debt counsellor before formally entering debt review to understand how they work and what they can do.
- If you feel your debt counsellor isn’t taking enough time with you, listening to you or suggesting a budget you cannot live with, find another!
- Ask what fees your debt counsellor charges and make sure these are within the maximum regulated costs.
- Make sure they use a registered payment distribution agent, who receives one monthly payment from you and distributes it to your creditors as per your payment plan.
The benefit: registered, trained debt counsellors can help you develop good money management skills and will help you get out of debt!
Staying out of debt when you are out of debt review can be a challenge
When you complete debt review you can once again apply for credit and afford a few extras! After living on a minimalist budget for years, the temptation to spend and use credit is very strong and you could easily find yourself with too much debt once again. There are people who can help! Ask your debt counsellor for their tips on how to avoid becoming overindebted again and/or set up some time with a financial adviser to draw up a realistic, easy to follow budget.
Top tip: use the discipline and budgeting expertise learnt in debt review to buy what you can afford and set aside any extra funds for savings and wealth creation!
Debt review can dent your money confidence
You may feel ashamed at being overindebted and having to enter debt review. Don’t. Anyone and everyone can land up with too much debt at any time. For example, you may be encouraged to apply for multiple credit cards without being given enough information on how much the total amount could be that needs to be repaid. Or, you could lose your job and have to take a new job with a lower salary. And like many South Africans, the higher cost of living and/or higher interest rates can be more than your salary or increases allow for. You could even land up with debt due to personal circumstances such as a death in the family or divorce.
Although you will need to face the facts of your debt problems, don’t wallow for too long! Use debt review as an opportunity to talk openly about money and what you can afford, say no when your budget requires it, and develop good money habits.
Top tip: take the time you have when in debt review to learn more about how to manage money well and share your money journey with your family so your loved ones learn from your experience. Truth About Money, a 1Life Insurance initiative, offers free online financial education courses for you and your family to help you manage money wisely.
Take control of your finances
You can take charge of your finances and get out of debt, starting with learning more about money. Truth About Money offers free online financial education courses to help you become a better money manager, beat the cash crunch and ditch debt!
If you opt for debt review to manage and clear your debts, make sure you understand the process, the benefits and the realities. Debt review may present some challenges, but many who have completed the process say it allowed them to take control of their finances and manage money better in the future. Proceed with caution and use debt review as an opportunity to learn to live within your means and build wealth for you and your family.