DINEO TSAMELA: If your finances have become a tangled mess, you can turn to debt relief
Many people turn to debt review when their debt has become unmanageable
When it comes to working your way out of debt, looking for immediate relief in the form of debt review is not uncommon. Many people turn to debt review when their debt has become unmanageable.
There are three forms of debt relief for people whose debt is simply too much to bear.
Debt review or debt counselling
The first, and perhaps most popular, is debt review or debt counselling.
Debt review is a legal process, facilitated by the courts. When going into debt review, you must consult a registered debt counsellor - first check that the debt counsellor you engage is registered with the National Credit Regulator.
Simply applying for debt review doesn't get you off the hook. On the recommendation of the debt counsellor, the court will decide on a repayment plan based on whether you are overindebted or merely experiencing problems meeting all of your debt obligations.
You must consider the cost of debt review before you choose this path. There are application fees, potential rejection fees, a restructuring fee and monthly "after-care" fees. You may also need to pay for the services of a payment distribution agency.
The second option is debt administration, which is also a legal process governed by the Magistrates' Courts Act. Administration is typically done by attorneys, although you can appoint anyone to be your administrator, as long as they have a trust account.
Administration is different from debt review. Your payment terms are extended, your instalments are reduced and, instead of paying your creditors monthly, you pay your administrator, who in turn pays your creditors every quarter.
Debt administration is only an option for people with debt of less than R50 000, and it can be very costly to you. Your administrator is allowed to charge a maximum admin fee of 12.5% of your quarterly instalment.
Not only do you need to monitor what you are being charged, you also need to keep track of what you have paid to your creditors. Administrators have been known to continue collecting on debt that has been paid off.
A criticism of debt administration is that administrators do not have to check whether you have been a victim of reckless lending, as some debt counsellors do.
Administrators generally prefer to be paid directly from your salary - via an emolument attachment order, so the likelihood of your employer finding out about your financial woes is high.
Sequestration can be a soul-destroying process as it requires the indebted person to sell their assets to pay off their debt. Many people tend to focus on the perceived upside: their debt is written off and their salary is theirs again, but the impact on their wellbeing can be devastating.
It's also not a clear-cut solution because your assets might not cover your debt. So, apart from having to sell your assets, such as your house, car or furniture, you may need to start thinking about making new living arrangements. If your assets do not cover the shortfall, you'll still be liable for making those outstanding payments.
In the process of sequestration, you essentially declare yourself bankrupt. You approach a court - through an insolvency attorney - to be declared insolvent. The court will use guidance from the Insolvency Act to determine whether this is a viable option for you. If it is approved, the court will appoint a trustee to handle your case and you won't deal with creditors directly.
Being under sequestration means you'll remain insolvent for between two and four years. You're also limited because you're prohibited from having a cheque account or credit facility. You're not allowed to access any form of credit. You can apply for rehabilitation after 18 months, but you're not entitled to it.
With sequestration, you must be prepared to fork out money upfront to cover your legal fees. In the process, your creditors and the South African Revenue Service are notified that you're applying for sequestration.
The costs vary, but be prepared to pay no less than R5 000 in the application stage. You will pay for adverts in the Government Gazette, the cost of the valuer who will assess your assets, and registered mail sent to your creditors.
• Tsamela is the founder of Piggiebanker.com. Follow her on Twitter @Piggiebanker