Debt is a normal and essential component of any modern economy. Most of us rely on it at some point, and when used responsibly, it can serve as a valuable tool to improve our financial position and create opportunities. However, there are times when individuals may overextend themselves in meeting their repayment obligations. In other instances, unforeseen life circumstances can arise, forcing one to take on debt that is ultimately unaffordable, or altering one’s ability to sustain existing commitments.
Debt review, (also called debt counselling) is a legal process created by the National Credit Act (NCA) to assist consumers who are struggling to meet their financial obligations. It is not simply a payment plan. It is a regulated legal mechanism designed to protect both consumers and credit providers while restoring financial stability where it is lacking.
This article explains the process step-by-step in plain language, grounded in the law.
What it means to be “over-indebted”
In terms of section 79 of the National Credit Act, you are considered over-indebted if you cannot satisfy your debt repayments on time, considering your total obligations under credit agreements, your financial means and prospects, and your budgetary obligations.
To simplify, if the money that you earn is not enough to cover all your debt obligations (after paying reasonable living expenses), you are generally considered to be over-indebted.
Applying for Debt Review
The process, as prescribed in section 86 of the National Credit Act, begins when you apply to a registered debt counsellor for them to assess your credit obligations and determine whether you are indeed over-indebted or not.
Following consultation, you will you complete a formal application, and the debt counsellor will immediately notify all your credit providers and credit bureaus that you have applied. Once you apply, you are legally protected from immediate enforcement action by your credit providers, subject to certain conditions and exceptions.
What is expected of you during the process
The law requires that you provide complete and truthful information about your financial circumstances. It is in your best interest to fully cooperate with the debt counsellor and to always act in good faith during the process. Failing to do this can affect your protection and outcomes.
You need to be honest about your obligations, and you cannot overstate your income to force qualification for the process. If it does not fit, it’s not right for your situation.
The assessment phase
Section 86(6) describes what the debt counsellor must assess upon application. They need to determine whether you are over-indebted and whether any of your credit agreements were extended recklessly.
A credit agreement may be reckless if the lender did not properly assess affordability, or if the loan was granted despite clear signs that you could not afford it. If proven, a court can suspend or set aside that debt completely.
However, if you had been dishonest in providing that credit provider with financial information pertaining to affordability, a finding of reckless credit will not be of much value as the court will see that you had contributed to the reckless lending.
Possible outcomes of the assessment (Section 86(7))
Section 86(7) provides for three legal outcomes of the assessment by the debt counsellor:
A. Not over-indebted
In this case, your application is rejected and the status of your application will be communicated to your credit providers and all credit bureaus. As soon as they have been notified, you will no longer be protected from enforcement action.
If you do not agree with the outcome, you may still approach the court directly and ask for a different order to be made.
B. Financial difficulty, but not over-indebted
In these circumstances, it is possible to negotiate a voluntary repayment plan with your credit providers to ease your financial burden, without necessarily being declared over-indebted. This could be where your financial situation is only temporary, or where a minor adjustment to payment terms would bring enough relief that you will be able to comfortably satisfy your obligations.
C. Over-indebted
In this instance, which is unfortunately the most common outcome, the debt counsellor will draft a formal debt restructuring proposal for consideration by your creditors.
The restructuring proposal
This proposal is the heart of debt review, and its goal is to make your debt affordable while ensuring you can commit to repayment over time. This will be achieved by proposing lower monthly instalments, extending repayment periods, requesting temporary payment relief and ultimately, recalculating your debt obligations. This proposal is shared with your credit providers for your acceptance or rejection thereof, and in case of the latter will be recalculated until it is acceptable, preferably by all or most of your credit providers whilst still manageable in terms of your affordability.
Making it legally binding: Court or Consent Order
Once finalized, the proposal becomes legally enforceable in one of two ways. If all parties agree, the agreement is filed with the court or the National Consumer Tribunal where it becomes binding without a hearing. This is referred to as a consent order.
If there is no agreement, or not all creditors have accepted the proposal, the matter may be referred to the Magistrate’s Court in terms of section 87 of the National Credit Act. The court may then approve the application for restructuring or reject the proposal. It may also declare any of the debts to be reckless lending.
Legal consequences of Debt Review
Once you have been declared over-indebted, the law restricts you from entering into any further credit agreements (subject to limited exceptions). This safeguard is intended to protect your financial position and ensure that you can meet your restructured repayment obligations consistently throughout the duration of the debt review process.
Section 88 of the National Credit Act also determines that once you are under debt review, credit providers may not enforce legal action against you for debts included in the debt restructuring plan and may not repossess your assets, unless you default on the new repayment plan, or the review is terminated lawfully.
Important legal timelines and risks
It is important to understand that both the application and restructuring phases are governed by strict timelines. For this reason, it is essential to cooperate fully and timeously with your debt counsellor throughout the process.
A credit provider is entitled to terminate the debt review after 60 business days if no court order has been obtained by that stage. If the review is terminated, the credit provider may proceed with legal enforcement action. However, the law provides an important safeguard: a court retains the discretion to order that the debt review continues, notwithstanding such termination.
In practice, there are instances where credit providers terminate the process without proper justification, or without the consumer being fully informed of the reasons. It is precisely for this reason that the law allows for continued protection through court intervention, ensuring that consumers are not unfairly prejudiced by premature or irregular termination.
The outcome: Financial rehabilitation
The debt review process remains in place until all obligations have been settled in accordance with the restructured repayment plan, whereafter a clearance certificate is issued in terms of section 71 of the Act. This certificate is granted once paid-up confirmations have been obtained from all credit providers.
Upon completion of the process, the debt review status is removed from your credit profile, and your ability to access credit is restored.
The legal purpose of Debt Review
The National Credit Act is designed to curb reckless lending by credit providers and, in doing so, promote a stable and sustainable credit market. Irresponsible lending practices ultimately undermine confidence in the credit system and reduce meaningful participation in the economy.
At the same time, the Act seeks to protect consumers from financial distress and potential collapse. It recognises that personal circumstances can change, and that such changes should not necessarily result in the loss of everything a consumer has worked hard to build.
Importantly, the Act also promotes responsible repayment. While consumers require protection from becoming overburdened, credit providers are equally entitled to protection against consumers who deliberately fail to honour their obligations.
Debt review should therefore not be viewed as a “loophole”, but rather as a legally recognised process of financial rehabilitation; one that supports consumers in regaining control of their finances while reinforcing the responsible use of credit.
Article by: Tanya Hugo from Gerstner Attorneys