16/09/2024
10 Myths about Debt Review
Debt review, unfortunately, has quite a bad reputation, but when it is strictly administered correctly, it can genuinely be a life saver, as it protects people from the banks, providing them with time to address their financial affairs.
We are going to take you through some of the myths about debt review below.
Myth number 1 – It’s going to follow you around like a bad odour
The claim: “The problem with debt review, is that it will show on your credit report long after you’ve finished paying off your debt.”
The truth: Once you’ve paid off all your debts and your name has been removed from debt review, no history of debt review will ever show up on your credit profile. In fact, a great way to check if your name has been removed is to request a credit check.
Myth number 2 – Debt review offers no real legal protection
The claim: “A friend of mine had his car repossessed while on debt review. Debt review doesn’t really protect you from your creditors.”
The truth: If you are in debt review you are absolutely protected from creditors because of the National Credit Act. If someone says to you that their car was repossessed while under debt review, they are not being completely honest with you. A credit provider must issue what’s known as a section 129 letter (you might know it as a final demand) giving you 10 business days to approach a debt counsellor. Ignoring the letter isn’t an option because that then allows them to issue a summons and proceed with legal steps that will lead to repossession of any secured assets.
Myth number 3 – The industry is run by a bunch of sharks
The Claim: “These guys charge a huge upfront fee and then run off with your money.”
The Truth: In the good ole days it might have worked like that but those days are long gone. First off, debt counsellors go through a rigorous accreditation process and are registered with the National Credit Regulator. The Regulator then issues them with an NCRP number. You can verify your debt counsellors NCRP number by clicking here. Secondly, debt counsellor fees are regulated by law and are clearly shown in the debt restructuring proposal. Third, debt counsellor fees are usually collected by a third-party payment distribution agent (PDA) who also has to be registered with the National Credit Regulator. Neither your debt counsellor nor the payment distribution agency is willing to risk losing their licence by ripping you off!
Myth number 4 – It pays to shop around at a couple of debt counsellors
The Claim: “Don’t go with the first debt counsellor you talk to. Shop around for the one offering the best deal.”
The Truth: Debt counsellors don’t get to make deals – they facilitate deals between you and your creditors. Creditors stand to lose money if you don’t repay your debts, so they get to decide on what you owe. But creditors, if they had their way, would want full repayment. So the debt review and credit industry got together and set up some rules around what would be accepted by a creditor. For instance, when it comes to a home loan a maximum discount of 20% is offered. Anyone offering you more than this is not ethical. Having a reliable debt counsellor is more important since your relationship can last for 5 years or more. You want someone who has your best interests at heart and not their own pocket.
Myth number 5 – It will prevent me from being able to buy a new car next year
The claim: “If I go on debt review then I won’t be able to buy a new car next year.”
The Truth: Even if you are not on debt review, you will not qualify for a car loan if currently over indebted. A credit provider must carry out an affordability assessment to determine if you qualify for additional credit. Lending money to someone who cannot afford to repay is known as reckless lending and has dire consequences for the creditor.
Myth number 6 – I can stop/start my debt review as we go
The Claim: “If I fall behind on my debt review payments, I can always restart once I’m back on my feet.”
The Truth: Debt review can be seen as a last-ditch attempt to prevent a debtor from losing their assets. The ‘old’ credit agreement is torn up and a ‘new’ agreement is made between the debtor and creditor. The creditor agrees to extend the term of the loan and slash the interest being charged if the debtor promises to keep up with their new instalment. When the debtor does not keep their end of the bargain, the creditor tears up the ‘new’ contract and reverts to the ‘old’ credit agreement. Summons can be issued and assets attached.
Myth number 7 – You can exclude certain debts from debt review
The Claim: “I will exclude my home loan from debt review.”
The Truth: All debts must be included. Excluding debts would be unfair to all your other creditors who are forced to abide by the debt restructuring plan. And how would your creditors know if you did not disclose a debt? Your debt counsellor will request a credit report showing all your credit providers. This is then shared amongst your creditors.
Myth number 8 – I can enter into debt review without my partner’s consent
The Claim: “I’m married in community of property. My partner isn’t interested in debt review so I’m going to do this without them.”
The Truth: Marriage in community of property means a community of assets and liabilities. Both parties share in the community of profit and loss which means debts cannot be divided. Both parties must enter in debt review. On the other hand, marriages out of community of property will allow the one partner to enter debt review without the other.
Myth number 9 – I have negotiated an even better deal with my creditors
The Claim: “I made an agreement with a debt collector to repay my debt and they are a far cheaper option than debt counselling.”
The Truth: It is true that some agreements can be reached which seem far cheaper than debt counselling, but all is not as it seems. Usually a very low instalment is proposed which covers only the interest repayment. The debtor ends up paying for years and years without ever getting out of debt. Debt review on the other hand, offers a low monthly instalment and a guaranteed end date.
Myth number 10 – A debt consolidation loan is far better than debt review
The Claim: “A debt consolidation loan works out cheaper than debt review.”
The Truth: Where do we even start to answer this claim?
Why would any company offer to consolidate your existing debt into a new loan if you are currently struggling to repay your existing loan?
If you are already at risk of default on your existing debt, why would another loan company take on the higher risk at an even lower interest rate? Usually, the higher the risk, the higher the interest rate charged.
In the current economic environment, it’s almost impossible to get a loan unless your credit record is squeaky clean and you pass the affordability test. If you’re currently over indebted, the debt consolidation company could face a charge of reckless lending by granting a further loan.
Companies advertising debt consolidation loans are usually looking at small amounts such as R10 000 to R50 000. Good luck with that million Rand loan.
Debt consolidation will never be able to compete with debt review when it comes to affordability. With debt consolidation you might drop a few percentage points on the interest repayment, but with debt review repayments can be slashed by as much as 50%.
We hope you’ve enjoyed this article.
If you would like a quick, free debt review assessment, don't hesitate to contact us for expert debt advise.
