If you ever found yourself deep in debt and then turned to the internet for a solution, you’d find much information on a service called debt counselling. Otherwise known as debt review, this process is designed to help over-indebted South Africans regain control of their finances by restructuring their debt according to a legally approved plan. But debt review is not the only game in town, and many people will ask “What about debt consolidation?"
Both debt consolidation and debt counselling can be used to help you get out of debt. But they do so in very different ways, and the best solution for you will depend largely on how deep in debt you are and what options are available to you.
Debt consolidation works by pulling all your debt (credit cards accounts, store accounts, personal loans, and payday loans into a single loan. Usually this debt consolidation loan will have a longer loan term, which brings monthly installments down, making them more affordable. This a good option if you are struggling to make minimum payments and just want a little breathing room (a lower monthly instalments), but it requires you to have a credit score still good enough to qualify you for a debt consolidation loan.
If you are seriously deep in debt and have been missing payments for some time already, your credit score might already be too low to qualify you for a debt consolidation loan. In this case, debt counselling may be your only option.
The debt review process starts with you choosing and contacting a debt review company, but let’s assume that you have already approached a company and are about to start the debt counselling process.
The first thing you are going to do is provide your debt counsellor with details of your income, monthly budget and debt commitments.
To qualify for debt counselling, you need to be deemed over-indebted. So, in step 2, your debt counsellor will assess your total debt to determine if it is serious enough for you to need debt counselling.
Once it is clear that you need help with your debt, you’ll have a consultation with your debt counsellor. In this meeting, you’ll be given a new budget designed around a new repayment plan. Once you have agreed to this, your application will be accepted.
Next, your counsellor will contact your creditors to negotiate a repayment plan on your behalf. This plan may make use of negotiated fees, rate concessions and an extension of terms to put you in the best position to pay back all your debt.
Debt review is a legal process, and in this step the contract makes the new payment plan binding. This protects you from potential increases in monthly instalments and commits you to meeting the new repayment plan.
You will start making payments according to your new repayment plan from your very first payday. Only one payment is made every month to the debt review company, who then pays your creditors.
Once you have repaid your debt, you can request a Clearance Certificate. Even though this allows you to apply for credit again, think twice and remember what got you into hot water in the first place.
If you are still able to apply for a consolidation loan, you might want to consider debt consolidation first. You can learn more about this option in our article How debt consolidation works. Alternatively, for general money-related tips, sign up for our Money Mailer. In this free monthly newsletter, we serve up articles on topics ranging from credit scores to saving and everything inbetween. If you've ever wanted to know how to save a nest egg, how to reduce your living expenses, or how to get a better interest rate on a loan, the insights in these articles can help guide you towards financial freedom and success.