Beyond debt review: Understanding the limits and consequences for your finances
Debt counselling can be a valuable tool for individuals struggling with debt in South Africa, providing a legal process for managing debt and making it more affordable.
However, it’s important to understand the limitations of debt counselling before entering into it. In this article, we’ll explore some of the key limitations of debt counselling in South Africa, including the exclusion of certain debts from the process, limited access to credit during the process, and potential damage to credit scores.
By understanding these limitations, you can make informed decisions about whether debt counselling is the right choice for you and your financial situation.
Which debts are included in debt review?
Debts that are covered under debt review include unsecured debts such as credit card debt, personal loans, and store accounts. These types of debts are typically included in the debt repayment plan and are paid off over a period of 3-5 years.
Types of debts that cannot be included in the debt review process
When entering into debt counselling, it's important to understand that not all types of debts are eligible for inclusion in the debt review process.
However, there are certain types of debts that cannot be included in the debt review process.
These may include:
- Secured debts such as a home loan, car loan or other secured loans: such as your ABSA home loan or your vehicle finance with MFC
- Student loans: like a loan with the National Student Financial Aid Scheme (NSFAS)
- Tax debts: if you owe money to SARS for income tax or have outstanding tax submissions
- Debt owed to the South African Revenue Service (SARS): if you owe money to SARS for income tax or have outstanding tax submissions
- Court fines and penalties: this includes traffic and parking fines
Debts incurred through fraud
Implications of excluded debts on the debt repayment plan
Excluded debts can have significant implications on the debt repayment plan. Since secured debts cannot be included in the debt review process, individuals may still be required to make their regular payments on these debts, in addition to their debt counselling payments.
This can place a significant strain on their budget and make it more difficult to keep up with the debt repayment plan. For instance, if a home loan is excluded from debt review, the individual may still be required to pay the full monthly installment to the bank.
Limited access to credit during the debt counselling process
One of the limitations of debt counselling is the restriction on taking on new debt during the debt review process. When you enter into debt review, you’re required to adhere to a strict budget that is determined by your debt counsellor.
This budget is designed to ensure that you can pay off their debts while still covering essential living expenses. As a result, you’re not allowed to take on new debt while they’re undergoing the debt review process.
This restriction on access to credit can pose a challenge for individuals who may need access to credit for emergencies or unexpected expenses.
For example, if a car breaks down and needs urgent repairs, an individual who is undergoing debt review may not have the funds to cover the cost of the repairs. Without access to credit, they may be left in a difficult financial situation.
Implications of limited access to credit on financial stability
Limited access to credit during the debt counselling process can have implications for an your financial stability. Without access to credit, it may be difficult for individuals to manage unexpected expenses or emergencies, which could lead to financial stress and potentially even more debt.
Furthermore, the inability to take on new debt can limit your ability to rebuild your credit score. If you’re not able to take on new debt and make timely repayments, they may not be able to demonstrate your ability to manage credit responsibly.
This can make it more difficult for you to access credit in the future, even after you’ve completed the debt counselling process.
How debt counselling affects credit scores
Debt counselling can have a significant impact on your credit score. While in debt review, the debt counsellor will inform the credit bureaus that you’re undergoing the debt counselling process. This means that your credit profile will be flagged as being under debt review.
As a result, you won’t be able to apply for new credit or take on any additional debt until the debt counselling process has been completed. This can be a challenging period for you if you rely on credit to meet your daily expenses or to pay for unexpected emergencies.
Implications of a damaged credit score on financial stability
A damaged credit score can have a significant impact on a person's financial stability. It can affect the ability to access credit, rent a property, or even get a job. This is because many employers and landlords check credit scores before making hiring or rental decisions.
A damaged credit score can also result in higher interest rates and fees when trying to access credit.
This means that the cost of borrowing money will be higher, making it more challenging to get out of debt. Additionally, a low credit score can make it difficult to obtain a mortgage or other types of financing, which can be a major setback for those trying to achieve financial stability.
It's important to understand the potential impact of a damaged credit score before entering into debt counselling. While the benefits of debt counselling can be significant, it's essential to consider the potential risks and make an informed decision.
Key takeaways on the limitations of debt review:
- Debt counselling is a process that provides you with a structured repayment plan to help you manage your debts and improve your financial stability.
- Debt review excludes certain types of debt, such as secured debts, student loans, tax debts, and debts incurred through fraud, which may still require additional payment.
- Limited access to credit during the debt counselling process can be challenging for you if you rely on credit to meet your daily expenses or pay for unexpected emergencies.
- Debt counselling can have a significant impact on your credit score, which can affect your ability to access credit, rent a property, or even get a job.
- A damaged credit score can also result in higher interest rates and fees when trying to access credit, making it more challenging to get out of debt.
- It's important to weigh the potential benefits and risks of debt counselling carefully and make an informed decision.
- Debt counselling can be a useful tool for you if you’re struggling with debt, but it's essential to understand the limitations and potential consequences. Working with a reputable debt counsellor and sticking to the repayment plan can help consumers achieve financial stability and peace of mind. Our collection of debt review companies in South Africa is an ideal starting point to make your decision. We’ve also covered the topic extensively in our blog and welcome you to make use of this information to make the best decision.