Debt review: there is no turning back

Consumers need to think carefully about their outstanding debt before they enter debt review.

The varying degrees of lockdown have wreaked havoc on millions of people’s monthly income. While debt relief might seem like a perfectly viable solution to getting you back on your feet, a recent High Court ruling has confirmed that once the court institutes your debt restructure status, you are committed to the process until the very last repayment to settle your debt – no matter the time frame.

Debt review was introduced as part of the National Credit Act to provide debt relief measures for over-indebted consumers. Essentially, it is intended for consumers who have more monthly expense commitments than income due to a partial or temporary loss of earnings, or the taking on of additional non-credit commitments such as a 15% increase in utility charges without a corresponding increase in earnings.

When a loss of income no longer fully supports a consumer’s monthly expenses, debt review may seem to be the only solution. However, those eligible for debt review should not be confused with those who have accumulated debt because of reckless lending – the latter is the case when credit is extended to a consumer who does not have the income or the available disposable income after existing expenses to service the new debt.

It is important to know exactly what you are getting into and to fully understand the debt review process. Once an application has been made, a debt counsellor is appointed to review the budget which is submitted to the Magistrate’s Court as a proposal for restructuring the consumer’s credit repayments to make the monthly commitment affordable. When the court makes the debt restructure plan an order of the court, it is at that point that the consumer is only required to settle the more affordable monthly commitment.

The catch for the consumer is that during the debt review and debt restructure process, no credit provider may grant new credit to the consumer for as long as it takes to settle the debt given that it would be considered reckless lending.

The exception to this is home loans, rent and non-credit agreements which do not form part of the debt review or restructure process. Landlords can enter into lease agreements with tenants undergoing debt review or debt restructure and existing home loan agreements must continue to be paid as usual.

Interestingly, 5% of residential lease agreements are with tenants involved in debt review and tenants in the affordable market, valued between R3 000 and R7 000, the most likely to be under review (5%). The tenants who are hardest hit are those in the R7 000 to R12 000 bracket at 5.24%. In the R12 000 to R25 000 high-end rental segment, only 3.24% are under debt review with 2.41% of tenants in the above R25 000 luxury-rental market currently in debt review. 

The age factor is significant with consumers over the age of 26 more likely to be in debt review. Up to the age of 50, there is a steady increase in consumers who are under debt review. In the 18 to 21 year old group, 0.09% are in debt review; in 21 to 25 year olds, 1.13%; 26 to 30 year olds: 3.33%; 31 to 40 year olds: 5.52%. Which age bracket has the highest percentage in debt review? The 41 - 50 age group at 6.46%, the number drops to 4.7% in those older than 50.

So, what happens if you get promoted or find a better-paying job? Consumers then find themselves desperate to revert to pre-debt review payments and their freedom to enter into a new credit agreement. The answer is that they cannot because the National Credit Act does not allow for the scenario. 

Despite guidelines previously being published to create a workaround solution, the High Court recently ruled that neither the debt counsellor, Magistrate’s Court or even the High Court itself has the authority to pronounce that you are no longer over-indebted. Once you are in debt review, it continues for as long as it takes to settle the debt under the debt restructure arrangement.

The only way to end or exit debt review is through the issuance of a clearance certificate by a debt counsellor and only once all the debt has been settled. So, over-indebted and trapped in the debt restructure arrangement you must remain until then.

The lesson here is clear: although a change in lifestyle brought about by financial vulnerability is painful and the reassessing of priorities to make budget emotionally draining, cutbacks made sooner rather than later may mean that less drastic decisions need to be taken. Monthly monitoring of your personal financial well-being and the early detection of a creeping budget imbalance is critical to keeping your financial options open.