Okay, so solving your debt problem is never going to be as black and white as “good” or “bad” solutions. There are only solutions that are right or less right for your specific situation. We want to help you make an informed decision about what the right solution looks like for you. In order to do that, we’re going to be talking about a few scary debt solutions, namely debt review (AKA debt counselling), debt consolidation, administration and sequestration. These are the big four debt solutions if you are beyond the point of conventional debt repayment methods. That means you’re either unable to afford your monthly repayments, or creditors have started threatening legal action. If neither of these have happened, consider starting with some more straightforward methods for getting rid of your unhealthy debt. But before we go further, we need to address the myth of “blacklisting”. We’ll only say it once: there is no secret credit “naughty” list that forever prevents you from accessing credit if your name appears on it. What people think of as blacklisting is really just a negative credit score. Sure, this makes you less appealing to creditors, but this can be reversed! Okay, now that that’s out of the way, let’s get into the real deal.
1. Debt review/debt counselling
This is when a debt counsellor decides that you are officially over-indebted, and helps by negotiating on your behalf with your credit providers to reduce your monthly instalments and lower your interest rates. It is a paid service, but the cost will be factored into your new monthly instalment. This method will extend your repayment plan, but ensure that it is more manageable, which can offer great peace of mind. Your assets will be protected, and your dependants’ essential expenses will also be covered. This method will also teach accountability, because if you miss even one of your newly reduced monthly payments, the agreements your debt counsellor made with your creditors will fall away, and you’ll be back in trouble. During this process you obviously won’t have access to new credit, but at the end you will receive a clearance certificate that will require the credit bureau to remove any information about the debt review, and your previous unpaid debts, from your record. Gotta love a clean slate!
2. Debt consolidation
This one is a little trickier. Debt consolidation is when you take out one massive loan in order to pay off all your other loans. This can be a good way to go only if the interest rate on the loan you’re taking is lower than that of the various sources of debt you’ve gathered. But don’t see this as a quick fix if you’ve not addressed the bad spending habits that got you into this mess in the first place. And since a newly reduced, single monthly payment could give you more breathing room, you might be tempted to fill that room with more reckless spending. Working on developing good habits is ultimately the only real solution to avoiding further unhealthy debt.
To start this process, a court will appoint a debt administrator to you. At this point, you hand over control of all your finances, including your income, to the administrator. They will then set aside a portion of your income that will cover your basic living expenses, and negotiate with your credit providers for a reduction of your monthly instalments and interest. All your income, except the portion allocated for your monthly expenses, will go towards paying this new instalment every three months (obviously this means your debts will take longer to pay off). There are also costs involved, which will be factored in to your instalment. This method will prevent creditors from taking legal action against you, and it will also prevent you from taking any further credit during this time. It’s also only for unsecured debt less than R50,000. At the end of the process you’ll also get that coveted clean slate!
This is definitely something you want to avoid, and not often a method people will opt for willingly if they have another choice. We’re giving you the basic overview, but since it can get quite complicated it’s best to discuss this option with a financial advisor before moving forward. Sequestration is when your debt situation is so dire that you may need to apply to a court to be declared bankrupt. The court then appoints someone to manage your money in order to repay your debts. Your assets will be sold in order to repay some of your debts, and you will not be allowed to take credit for up to 5 years after the process. This process will also cost you money in legal fees, and the emotional cost can be great too. Proceed with caution! If any of these solutions sound like the right path for you, talk to a financial advisor who will be able to help you get the ball rolling. Always go through trusted sources when it comes to your financial future, and most importantly, learn from your mistakes and don’t get into this situation again!