Consumers should only consider debt review as a last resort

Following the introduction of the debt review process by the National Credit Regulator in an attempt to assist the surge of over-indebted consumers who cannot meet their debt obligations, Kirsten Reynolds, Marketing Executive at online lender GetBucks, a leading responsible lender of credit in South Africa, says while debt review may seem any easy way out of a tight financial situation, consumers should be aware of the process, duration, and costs involved. 

“Despite credit bureau, Compuscan’s, statistics indicating that of the 19 273 105 local credit active consumers, 532 718 of these are currently under debt review and 87 706 in the process of applying for debt counselling, many are still unaware and therefore often surprised when it comes to the costs associated with the debt review process. Here, in addition to their debt restructuring fee, debt collectors are within their rights as per the NCR’s counselling fee guidelines to charge for a range of services.”

Some of the service costs consumers may not be aware of include:

  • a restructuring fee to the maximum of R6840.00 (incl VAT) is payable in your first month, 
  • an application fee of R57 (incl VAT),  
  • a credit check fee of R57 (incl VAT), 
  • a rejection fee of R342 (incl VAT) should the debt counsellor not consider your application, 
  • a monthly after-care fee for 24 months equal to 5% of the monthly  instalment on the payment plan, to the maximum of R456 (incl VAT)
  • a monthly after-care fee for the remaining period equal to 3% of the monthly  instalment
  • a legal fee of R855 (incl VAT) (for a consent order) or whatever the debt counsellor pre-agrees with the consumer for non-consent orders, 
  • a sundry fee is due in your second month of rehabilitation, this is a once off fee equal to your rehab payment (a minimum of R2000 ad a maximum of R4500.)
  • Payment Distribution Agency (PDA) fee – 3% of your monthly rehab payment (to the maxiumn of R570 incl VAT) each month 

“In additon a withdrawal fee equal to 75% of the restructuring fee should you choose to end the debt review,” she comments.

Apart from the costs involved, Reynolds says opting for debt review includes a restriction on obtaining further credit as well as increased interest as a result of the extension of the repayment term.

“Debt review requires adherence to a very strict monthly budget requiring consumers to drastically cut down on their spending habits. With debt review statuses only removed from the database once a clearance certificate is issued, Compuscan data suggests that a person can potentially remain on the database in excess of ten years. This means that the consumer in question will have to stick to this limited budget for this period, which is understandably often easier said than done. 

“In addition to this, many consumers often try to access additional credit during the debt review process, as they are unaware that by ignoring this restriction, the debt review process will in fact be terminated,” she stresses. 

For Reynolds an additional area where awareness is lacking is the fact that the reduced monthly instalments will result in the repayment term being extended. 

“This in effect means that they will end up paying more interest on their debt as they are paying it back over a longer period of time. This is something that many consumers are often unaware of, and are mistakenly under the impression that no interest is levied during the debt review process,” she explains.

Reynolds says another common mistaken impression is that the debt is written off under debt review when this is not the case. “Debt review is a process that assists over-indebted consumers by restructuring their debt and ensuring they are able to meet their monthly financial obligations and still manage to stay on track with their debt repayments. 

“It is important to understand that even though you are under debt review, you are still responsible for your debt. Debt counselling does not imply that your debt will disappear and someone else will take it over and pay it for you,” she emphasises.

With Compuscan figures indicating that 7179 debt review assessments have resulted in rejection, Reynolds believes debt review is something that consumers should only consider as a last resort. “It’s essential that consumers take a realistic look at the process before deciding whether it is something they are willing to undertake. 

“Here it should be remembered that merely applying for debt review as a means to manage debt will not necessarily guarantee your application will be granted. Consumers should first rather contact their credit provider to make an alternative payment arrangement,” she advises.

However Reynolds also says that for the 127 578 consumers whom after assessment are considered over-indebted, debt review may be their only foreseeable option.  

“Although debt review is something that should only be considered in direst of circumstances, Compuscan stats show it is a process that does work when followed through correctly. Here 9275 consumers having completed debt counselling and declared no longer over-indebted,” she concludes.