Two common options available to South African consumers for managing overwhelming debt are debt review removal and consolidation. While both approaches aim to alleviate financial pressure, they operate significantly differently and have varying long-term impacts on your financial health. Understanding the distinction between the two can help you make a more informed decision when trying to regain financial stability.

In this article, we’ll break down the differences between debt review removal and debt consolidation, explore how each process works, and help you determine which option may be the best fit for your unique financial situation.

What is a Debt Review?

Debt review, also known as debt counseling, is a legal process introduced in South Africa by the National Credit Act (NCA) in 2007. The purpose of the debt review is to help over-indebted consumers restructure their debt repayments in a way that makes them manageable while protecting them from creditors taking legal action.

When you enter debt review:

  • You work with a registered debt counselor who assesses your financial situation.
  • The counselor negotiates with your creditors to reduce your monthly repayments.
  • A new, consolidated payment plan is put into place, allowing you to pay a single monthly installment, which is then distributed to your creditors.
  • During the debt review process, creditors cannot take legal action against you, offering some protection and peace of mind.
  • Your credit profile is marked with a “debt review” status, preventing you from taking on new credits until you complete the process.

While debt review can provide immediate relief from overwhelming debt, it also has long-term implications for your credit score. Your ability to access credit is suspended while under review, and the process can take several years to complete, depending on your financial situation.

What is Debt Review Removal?

Debt review removal refers to the process of lifting the debt review status from your credit profile once you have successfully settled your debts or have been found capable of managing your debt without the need for further counseling.

There are three main ways to achieve debt review removal:

  1. Completion of Debt Review: The most straightforward method is to complete the debt review process by paying off all your restructured debts. Once this is done, the debt counsellor will issue a clearance certificate, which confirms that you are no longer under debt review.
  2. Court Application: If your financial situation has improved significantly, you may be eligible to apply to the court for the removal of your debt review status. This can happen if you can prove that you can manage your debt repayments without the need for a structured payment plan. A court order will be issued to remove the debt review status from your credit profile.
  3. Settlement of Outstanding Debts: If you have the means to settle your debts in full, you can negotiate with your creditors to make lump sum payments. Once all debts are settled, your credit profile can be updated, and the debt review status will be removed.

What is Debt Consolidation?

Debt consolidation is a financial strategy that involves taking out a single loan to pay off multiple existing debts. The primary goal of debt consolidation is to simplify your debt repayments by combining multiple smaller debts—such as credit cards, personal loans, and store accounts—into one larger loan with a single monthly payment.

Here’s how debt consolidation works:

  • You apply for a debt consolidation loan from a financial institution, such as a bank or a credit provider.
  • The loan amount is used to pay off your existing debts in full, effectively consolidating them into one loan.
  • You are then responsible for repaying the consolidation loan, which typically comes with a fixed interest rate and a set repayment term.

The key benefit of debt consolidation is that it simplifies your financial life. Instead of juggling multiple payments with different due dates, interest rates, and terms, you have just one loan to manage. This can reduce the likelihood of missed payments, which could further damage your credit score.

However, debt consolidation is not a magic bullet. While it can help make your debt more manageable, it doesn’t reduce the amount you owe. In some cases, if the interest rate on the consolidation loan is lower than the rates on your existing debts, you may save money over time. But if the loan comes with a higher interest rate or a longer repayment period, you could end up paying more in the long run.

Key Differences Between Debt Review Removal and Debt Consolidation

  1. Purpose and Process

Debt review removal is a process for individuals who have been under debt review and want to have that status lifted from their credit profile, either after settling all their debts or by proving their financial capability to the court.

Debt consolidation is a financial tool that allows consumers to combine multiple debts into one loan. This is not tied to debt review but can be used as a proactive strategy to manage and repay debt more efficiently.

  1. Impact on Credit

Debt review removal can positively impact your credit profile once completed, as the “under debt review” status is removed, allowing you to access credit again.

Debt consolidation may temporarily impact your credit score, as taking out a new loan can lower your score in the short term. However, if you make consistent, on-time payments on a consolidation loan, your credit score can improve over time.

  1. Legal Protection

Debt review offers legal protection from creditors while under process. During this time, creditors cannot take legal action against you for non-payment.

Debt consolidation offers no legal protection. If you fail to keep up with your loan payments, creditors can still take legal action, and you may end up with additional debt.

  1. Affordability

Debt review often involves renegotiating the terms of your debt to make payments more affordable, typically by reducing interest rates or extending repayment terms.

Debt consolidation does not involve negotiating with your creditors. Instead, you take out a new loan that may or may not have more favourable terms than your existing debts.

Which Option Is Right for You?

Choosing between debt review removal and debt consolidation depends on your specific financial circumstances.

Debt review removal is ideal for individuals who have been under debt review and want to clear their credit profile after settling their debts. This is often a good option for those who are ready to regain full control of their finances and access new credit.

Debt consolidation is a useful tool for those who have multiple debts with varying interest rates and want to simplify their repayments. It’s especially beneficial if you can secure a loan with a lower interest rate than your existing debts.

Final Thoughts

Both debt review removal and debt consolidation offer pathways to financial recovery, but they serve different purposes. Debt review is a legal process designed to help those who are over-indebted, while debt consolidation is a financial tool for simplifying debt repayment. If you’re struggling with debt and unsure which option is right for you, it’s advisable to speak with a professional who can assess your financial situation and guide you toward the best solution for long-term financial health.

VHT BIO

At VHT Attorneys, we specialize in debt review removal and can assist you in navigating the complexities of South African debt law. We are more than just a law firm—we are advocates for justice and fairness within South Africa’s legal system. Dedicated to representing the underrepresented, we strive to ensure that every individual, regardless of background, has access to high-quality legal services. With a mission to empower and engage our clients, we work collaboratively, competitively, and with a pioneering spirit to deliver impactful legal solutions.