Are you struggling to keep up with your monthly payments on your various debts? You may have heard about debt review as a way to help manage and restructure your finances, but what exactly is it, and how does it work? In summary, debt review is a process in which an individual’s creditors are contacted, and payment plans are negotiated to help the debtor manage their debt more effectively. There are financial experts who specialize in debt review and can guide you through the process step by step. This article will discuss what debt review is, how it works, and some of the benefits associated with debt review. Let’s get started.
What Is Debt Review?
Debt review, also known as debt counseling, is a legal process designed to help individuals manage their debt. It’s offered to people who cannot pay their creditors on time or have become over-indebted due to several reasons, such as job loss, medical bills, business failure, or divorce.
The National Credit Act (NCA) provides for the process of debt review and is overseen by the National Credit Regulator (NCR). When someone is declared over-indebted by the NCR, they are eligible for debt review.
Under a debt review, creditors can’t take legal action against the individual, and all contact through letters or phone calls must be directed to their debt counsellor. The aim of debt review is to help individuals manage their debt and become financially independent.
Individuals on debt review go through many inconveniences, including getting loans. It is not easy to get loans for people under debt review because of the credit freeze. It will be more difficult to find a lender willing to approve their loan application because of the rules and limitations set. Moreso, if the loan is approved, it will usually attract high-interest rates due to the perceived risk.
How Does Debt Review Work?
The debt review process typically involves the following steps:
- Applying for Debt Review: The individual must fill out an application form and provide proof of their income and other financial statements to a registered debt counsellor. The debt counsellor will determine if the person is eligible for debt review according to the National Credit Act.
- Negotiating with Creditors: Once the debt review is approved, the counsellor will contact each of the individual’s creditors and negotiate a payment plan that works for both parties. This may include reducing or freezing interest rates, extending repayment terms, or even writing off some of the debt.
- Reviewing Monthly Payment Plans: The debt counsellor will then work with the individual to create a monthly payment plan that fits their budget. The payments must be made on time and in full each month, or else the creditor can take legal action.
- Making Adjustments: As life circumstances change, adjustments may need to be made to the payment plan. This could include increasing or decreasing the amount of a payment or extending repayment terms. The debt counsellor must be informed of any changes and will need to negotiate with creditors accordingly.
Advantages of Debt Review
Debt review offers several advantages for individuals struggling with debt. Below are some of the main benefits:
- Reduced monthly payments – Individuals can reduce their monthly payments to an amount they can afford. This makes it easier to pay off their debts while still being able to cover their living expenses.
- Protection from creditors – Creditors are legally prohibited from taking any action against anyone under debt review, including repossessing their property. This gives the individual time to sort out their finances without worrying about legal threats from creditors.
- Improved credit score – Once individuals have completed the debt review process and paid off all their debts, they will have a much better credit score. This makes it easier for them to get loans in the future.
- Consolidated Payment: The debt review process consolidates all the individual’s debts into one monthly payment. This makes it much easier to keep track of their payments and ensures that they don’t miss any payments.
- No permanent record of debt review status: The individual’s debt review status does not appear on their credit report and will not affect their ability to get loans in the future. This means that their financial life can resume normally once they have completed the debt review process.
- A regimented path towards debt freedom: The debt review process provides an organized and disciplined pathway toward becoming debt-free. This allows individuals to plan their finances better, so they can be in a better financial position in the future.
Disadvantages of Debt Review
Although debt review can help individuals become debt-free, there are some drawbacks that should be taken into account. These include the following:
- Credit freeze: The individual’s credit report will be frozen when under debt review, and they may not be able to get loans or other forms of credit during this time.
- Potentially high-interest rates: Creditors may negotiate higher interest rates to agree to the debt review arrangement. This could mean that the individual pays more for their debts overall.
- Lengthy process: The debt review process can take several months or even longer, depending on how much debt the individual has and how willing creditors are to negotiate. This means that the individual may have to wait a long time before their debts are paid off.
- Risks of Non-Payment: If the individual fails to make their payments on time and in full, their creditors can take legal action against them. This could result in the repossession of assets or even bankruptcy.
How to Get the Most Out of Debt Review
When considering debt review, there are some tips that can help individuals get the most out of the process. These include:
- Inform yourself – It’s important to educate yourself on the debt review process, so you can make an informed decision about whether or not it is right for you.
- Shop around – Different debt counsellors offer different services and packages. Do your research and shop around to find the best deal for your situation.
- Be realistic – Debt review isn’t a silver bullet; it will take time, effort, and discipline to become debt-free. Setting realistic goals and expectations is important for a successful outcome.
- Choose a reputable debt counsellor – Make sure the debt counsellor you choose is accredited and experienced in the debt review.
Debt review can be a useful tool for those struggling with debt, but it is important to understand the process and use it correctly. Consulting a professional debt counselor, tracking finances carefully, staying on top of payments, and reviewing credit reports regularly are all essential steps to getting the most out of debt review and successfully becoming debt-free.