Unable to Meet My Monthly Payments, What Are My Options?

Being unable to meet your monthly payment obligations is a nerve-wracking situation. If you’ve read the terms of your credit facility agreement, you know that under the National Credit Act, your creditors have the option to enforce your debts, be that via a judgment or involuntary sequestration if you miss payments. What are your options if you can’t afford to pay your lenders back?

We recommend debt review, debt mediation, or voluntary sequestration. This post will outline each of these options comprehensively: what makes you eligible, the legal processes, and how credit clearance works upon completion. We’ll also compare each option, helping you to make the most informed decision when deciding your next steps.

Debt Review

Debt review is a legal means of reducing repayments, lessening interest rates, and extending your repayment period while protecting yourself from legal action from creditors. It stops those pestering calls from debt collectors, prevents judgments, sequestrations, administration orders, and offers long-term financial freedom.

A debt negotiation professional called a debt counsellor will negotiate with your creditors for lower repayments and interest rates to get you out of over-indebtedness. By law, your creditors must comply with these efforts. Moreover, you’ll gain legal protection once your debt counsellor notifies your creditors you’re under debt review.

First, you’ll have to fill out an application form, called Form 16. Here, you’ll list your debts, expenses, and income so your debt counsellor can assess whether you’re over-indebted. If your debt counsellor declares you over-indebted, they’ll send a proposal to your creditors outlining how they propose your interest rates and repayments be reduced.

Then, once everyone has agreed to their proposal, your debt counsellor will submit it to the Magistrate’s court. The court makes the final call on whether you’re over-indebted and  your debt counsellor’s proposal is fair to everyone. If the court is happy, you’ll make payments with a payment distribution agency.

The payment distribution agency will distribute your payments fairly between creditors. After no more than five years (usually), your debt counsellor will grant you a clearance certificate (once everyone has been repaid), which you can submit to the credit bureaus to dispute every debt that led up to debt review and the debt review flag.

Eligibility

To be eligible for debt review, you must have a regular source of income. This is so you can make monthly repayments.

Effect on Credit Record

Once you’re under statutory debt review, various marks (called status codes) will appear on your credit profile under the public records section. This is so creditors can see whether you’re under debt review and not lend you money — you’re not allowed to incur further debt under debt review. If you do, you’ll lose the protection it offers.

Why We Recommend Debt Review

Under debt review, you gain legal protection from your assets being repossessed to cover your creditors’ debts. They can’t garnish your wages or declare you bankrupt. Additionally, there’s no limit for how much debt can be re-structured under debt review – you can have interest rates and repayments reduced on assets like your car, house, and other items of high value.

Furthermore, once you’ve completed payments, you’ll be able to expunge all records of debt review and the debts that necessitated it from your credit profile, as if it never happened. This means you can apply for credit again and begin rebuilding your financial track record.

If your debt counsellor decides you’re not over-indebted, you might consider debt mediation.

Debt Mediation

If you’re declared not over-indebted or would still like to access credit during debt re-structuring, use a debt mediator. A debt mediator will negotiate with creditors for lower interest rates, reduced repayments, and an extended repayment period, just as under debt review.

You’ll enlist a debt mediation professional, who will work with your creditor to make a repayment plan you can afford. Reduced repayments and interest rates completely depend on how willing your creditors are to negotiate – some might view other legal action as a better means of recovering their debts. They would be within their rights to sue you in consumer court since debt mediation is merely mentioned, not regulated, under the National Credit Act.

Why We Recommend Debt Mediation

We recommend debt mediation if you don’t meet the eligibility requirements for debt review and don’t want to undergo sequestration. Plus, you won’t have further late payments reported on your credit profile, boosting your score.

Voluntary Sequestration/ Insolvency

Voluntary sequestration is a drastic measure. We only recommend it if you don’t have the income necessary to afford debt review or no realistic way to pay your debts.

Declaring yourself bankrupt, or voluntary sequestration, is a legal process wherein you apply to the court to get 80% of your debt written off. Your assets are auctioned to cover the remaining 20%, whether that’s your house, car, or furniture. This is regulated under the Insolvency Act and known as a minimum benefit.

A trustee will be appointed to sell your assets.

You’ll gain legal protection once you’ve reported your insolvency to SARS, your creditors, the Government Gazette, and the Master of the High Court. This is because, under sequestration, you’re not allowed to pay one creditor and not others.

Eligibility

To be eligible for sequestration (personal liquidation), your assets must be of enough value to cover at least 20% of your outstanding debt.

Besides this, you must have enough money to pay for an attorney. Your attorney will draft necessary court documents, such as the sequestration application, disclosure of assets, and notices to creditors. They’ll also negotiate repayment plans with creditors and defend against any claims they may make. Moreover, they’ll ensure compliance with legal obligations, meeting deadlines, and reporting.

Additionally, you must have enough money to advertise your assets and must not have committed acts of insolvency.

What Are Acts of Insolvency?

If you’ve committed any of the following acts, your creditors can sequestrate you involuntarily. This may allow them to make claims against you, subjecting you to disastrous legal action.

Acts of insolvency include:

• Leaving South Africa or your domicile address without leaving a forwarding address and not making repayments.
• Writing an acknowledgement of the total amount of debt and that you can’t pay the debt.
• A written request to a creditor requesting that your debt be written off because of your inability to pay.
• Not satisfying a voluntary or default judgment because you couldn’t pay it.
• Selling assets to pay off specific debts.

If you’ve committed any of these acts, you may be declared insolvent without your consent.

Effect on Credit Record

A sequestration flag will appear under the public records section of your credit report. By law, you may not enter into any credit agreements without your trustee’s permission. You won’t be able to apply for credit until four years after you’ve finished the process.

Why We Recommend Voluntary Sequestration/ Insolvency

We only recommend voluntary surrender/sequestration if you have no other realistic way to pay your debts.

Debt Review vs. Debt Mediation vs. Voluntary Sequestration

Let’s compare each debt relief method.

Legal Protection

Debt review and voluntary sequestration offer protection from creditors, but debt mediation doesn’t.

Debt restructuring

Debt review and debt mediation reduce your repayments and interest rates. Voluntary sequestration writes off 80% of your debt — one of the effects of sequestration.

Management

Debt counsellors manage debt review, a mediator manages debt mediation. Trustees manage your assets and an attorney manages your defense and application forms under voluntary sequestration.

Taking out Credit

During debt review and voluntary sequestration, you may not take out credit. Under debt mediation, you can take out credit.

Do You Need an Attorney?

You need an attorney to appear in your capacity in Magistrate’s court during debt review and to defend you during voluntary sequestration. You don’t need an attorney when your debt is mediated.

Eligibility

Debt review, voluntary debt mediation, and voluntary sequestration have varying eligibility requirements.

• Debt review requires that you have a regular source of income and be assessed as over-indebted.
• Debt mediation necessitates that you need help negotiating reduced repayments, interest, and an extended repayment period to pay off your debts.
• Voluntary sequestration requires that your debts exceed your assets, your assets are of enough value to cover at least 20% of your debt (usually, you can apply to the High Court for sequestration without assets), and that you not have committed acts of insolvency.

All of them require that you struggle to make repayments and can afford professional help.

Effect on Credit Report

Debt review can be disputed with a clearance certificate after you’ve finished making repayments, sequestration stays on your credit profile for four years after you’ve completed it, and debt mediation ensures you don’t have late or missed payments, improving your credit report.

What Will You Choose?

In the end, the choice between debt review, debt mediation, and sequestration depends on your means, whether you would like legal protection from creditors, and whether you’re able to use your income to pay debts.

Speak to a Credit Rehab practitioner for advice on the option that may be best for you. Our team consists of debt counsellors, debt mediators, and attorneys – all experts in their fields and passionate about helping people regain control over their finances. Contact us today and take your first steps to financial freedom.