Understanding what debt review is, why it exists, and when you should consider it
Last week we looked at What Debt Review Is. This week addresses some of the common misconceptions around debt review and what debt review is NOT.
What debt review is NOT …
Debt Review is not Sequestration (bankruptcy)
When you are under financial pressure bills may go unpaid. If these are bills on a mortgage (home) loan, personal loans, credit cards, car payments, or store accounts you may be at risk of being sequestered (being placed in bankruptcy).
Sequestration (or going bankrupt) is a process where your creditors (banks, credit providers, and retailers who you owe money) legally apply (sequester you) through the court process to hand you over to debt collectors to force you to pay your debts.
A court-appointed trustee takes control of your assets, which can be sold to settle your debts. This process can involve your home, cars and furniture being repossessed, especially if you still owe banks and financing companies money for these items.
By contrast, debt review is a “softer and kinder” alternative to sequestration. In debt review your key assets are protected your family home and the car you use to get to work and earn a living will not be sold to cover your debts.
When sequestered one will have to rehabilitate. Until rehabilitation occurs the credit bureaus will list you as “insolvent.” Even once rehabilitated, credit bureaus will still list you as “rehabilitated” for five years, before taking the rehabilitated status off your credit record.
However, with debt review you are listed as being in “debt review” but as soon as you have paid off your debts your debt counsellor will issue a clearance certificate to the credit bureaus who must immediately remove the debt review flag, leaving you free to build a positive credit record once more. Therefore, choosing debt review is clearly an advantage over the sequestration process when it comes to managing your credit record.
Debt Review is not a debt or loan consolidation scheme to optimise the interest rates payable on your debts
While it is true that debt review does result in reduced instalments, with lower interest rates from credit providers, and that all the different repayments to credit providers are consolidated into one single payment, debt review remains a solution for the over-indebted individual. In some cases, it is also possible to end up paying more interest under debt review. This is because although the interest rates are lower, paying off the debt over a longer time even at those lower interest rates, can result in more actual interest being paid.
You will also need a debt counsellor to first assess whether you are indeed over-indebted. Finally, going into debt review indicates that you have had trouble managing your debt and you will be listed as under debt review at the credit bureau, and you will be unable to borrow (including taking out new credit for a house or car) until you have paid off your debts.
Only Credit Providers can issue true consolidation loans
Credit providers can consolidate a number of different loans and the resulting interest may be lower. The consolidation loan may or may not involve taking out additional credit. If there is a choice for more credit the interest rate will probably be more expensive. However, even if you decide not to take additional new credit, and you just want to consolidate everything into one loan, take care, not all credit providers are transparent when it comes to telling you if the consolidation loan will actually optimise interest rates and save you money.
Unfortunately, debt review has been sold by some profit-hungry debt management companies as a debt consolidation solution rather than as a debt relief solution. This resulted in consumers being placed (unknowingly) in debt review as they were not given all the facts and later finding out that they could not borrow as they were listed as being under debt review on the credit bureau.
Let’s stop here. In our next and final blog in debt review series, we will be looking at a number of other important concepts you need to understand to have a well-rounded, basic understanding of debt review.
If you are struggling with too much debt and believe Debt Review may be for you, call us at 087 183 5012 or WhatsApp us at 076 451 6944 or email us at info@zenmunni.co.za. We are registered with the National Credit Regulator and we will partner with you in the debt review process and help you to graduate from debtor to investor, so that together we can improve your finances.
And even if you are not struggling with debt review but want to increase your level of investing and need solid advice on that, contact us.
Comentários