Legal options for handling debt

Here are the legal options to consider when you’re overburdened by debt.

You’re drowning in a sea of unpaid bills and your level of debt is reaching disastrous proportions. Instead of falling further into the monetary danger zone, consider your legal options and their benefits and pitfalls. We chat to Amos Khumalo, an attorney at Amos Khumalo Incorporated about two different debt repayment options, debt consolidation and debt review, and the implications of each.

1. Debt Consolidation
“Debt consolidation is the arrangement where a debtor takes out a large loan in order to settle a number of smaller loans so that the debtor has to pay only one creditor over a longer period, but at (hopefully) a lower rate of interest,” explains Khumalo. “Other than the capital and interest on the consolidated loan, there should not be any ongoing cost to the debtor.”

Pros
• You pay one creditor, hopefully at a lower rate of interest.
• The consolidation does not get recorded against your credit profile at the Credit Bureau.

Cons
• You could be paying more in the long term, because the interest and capital is repaid over an extended period.
• You must be creditworthy to get a loan consolidation.

2. Debt review
“Debt review refers to the process created under the National Credit Act in terms of which an over-indebted consumer is protected from legal action to enforce any of his debts based on credit agreements, provided that the debtor adheres to the debt repayment plan prepared by his debt counsellor and made an order of court,” says Khumalo. However, he warns that “incidental credit agreements”, such as debts for doctor’s bills, cellphone contracts and so on are excluded from the debt review process.

You will need to contact a debt counsellor to apply for a debt review at a application fee cost of R57 and if your application is denied, you’ll be liable for a R300 rejection fee. “You’ll also have to pay a once-off counselling fee of not more than R500 and an aftercare fee of no more than R500 per month for the duration of the debt review process,” Khumalo continues. “In addition, the monthly instalment as per the consent order issued by the magistrates court must be paid.”

Pros
• You pay what you can truly afford, taking into account your basic needs.
• You may be able to get certain costs waived by the creditors, such as admin fees, and possibly save on interest by getting a lower interest rate.
• Although the fact of the debt review is recorded under a debtor’s credit profile, it is not reflected as an “adverse listing”. The endorsement must be deleted once the debt counsellor issues a clearance certificate at the conclusion of the debt review process.
• You’re protected from any debt enforcement by your creditors, as long as you adhere to the debt repayment plan.

Cons
• The debts must be settled in full.
• May only be resorted to before a creditor has taken steps to enforce repayment of the debt.
• The debtor must be employed or have regular income that enables him to honour the repayment obligations.
• Creditors have to agree to the debt repayment plan as proposed by the debt counsellor, failing which the debt counsellor would have to approach the magistrates court for an order.
• Creditors may still sequestrate the debtor’s estate, especially if they are dissatisfied with a consent order imposed on them by the magistrate.
• The eventual amount repaid on the debt could be quite high, taking into account the duration of the debt review and the fees of the debt counsellor.
• While the debtor is under debt review, he can't take up any further credit.

Next week we’ll be discussing two more legal debt repayment options.