How Does a Debt Review Payment Plan Work?

Understanding Payment Allocation, Cascading, Settlements and PDA Balances.

When a consumer enters debt review, one of the most common misunderstandings is how the monthly debt review payment is divided between credit providers.

Many consumers believe that once one account is paid up, they can choose where that money must go next. Others believe that if they settle a vehicle, bond, loan or credit card early, their debt review instalment must automatically reduce.

This is not how debt review works.

Debt review is not a month-to-month guessing process. It is a structured legal and financial process. The Debt Counsellor prepares a repayment proposal in the consumer’s best interest, based on the consumer’s affordability, the balances received from credit providers, the rules of the National Credit Act, industry guidelines, credit provider concessions, and the eventual court order or accepted repayment arrangement.

The proposal is designed from the first cent paid to the last cent paid.

It is important for consumers to understand this clearly, because misunderstanding the proposal can lead to frustration, wrong expectations and, in some cases, serious risk to the debt review process.

A debt review proposal is the repayment plan prepared by the Debt Counsellor after assessing the consumer’s income, living expenses and credit agreements.

The Debt Counsellor looks at what the consumer can afford to pay every month and then prepares a fair repayment proposal to all included credit providers.

This proposal usually deals with:

  • The total monthly amount the consumer can afford;
  • The balances of accounts received from credit providers;
  • The proposed reduced instalments;
  • The proposed reduced interest rates, where applicable;
  • The proposed repayment period per account;
  • Payment through the Payment Distribution Agent, also known as the PDA;
  • How the funds must be allocated;
  • How funds must move when one account is paid up, which is called cascading.

The proposal is then sent to the credit providers. Credit providers may accept it, reject it or provide a counter-proposal. If the proposal is accepted or granted by court, it becomes the plan that must be followed.

A consumer under debt review cannot decide which credit provider must receive more money and which one must receive less.

This is because debt review must treat credit providers fairly. It must also comply with the repayment proposal, the accepted arrangement and/or the court order.

When a Debt Counsellor prepares a proposal, the payment is not allocated randomly. It is calculated according to a debt restructuring system and the applicable industry rules. The proposal must be reasonable, fair and sustainable.

If consumers were allowed to choose their own allocation, several problems would arise:

One credit provider may receive preferential treatment while another receives too little. A credit provider who receives too little may terminate or enforce their rights. The court order may no longer offer legal protection to the consumer. Reduced interest rates and concessions may be placed at risk. The entire debt review process could become unstable.

Debt review is built on order, fairness and discipline. The consumer’s role is to make the agreed monthly payment. The Debt Counsellor and PDA then ensure that the money is distributed according to the repayment plan.

When one account is paid up, the money that was going to that account does not disappear and does not automatically reduce the consumer’s debt review instalment.

Instead, that released amount is redirected to the remaining debts according to the repayment plan. This is called a cascade.

For example:

A consumer pays R5,000 per month into debt review.

Account A receives R800 per month.
Account B receives R1,200 per month.
Account C receives R1,500 per month.
Account D receives R1,500 per month.

If Account A is paid up, the R800 does not become spare money for the consumer to use and it is not the consumers choice where the money gets paid to next. It is cascaded to the remaining accounts as per the court order/payment proposal agreed to with the credit providers so that those accounts can be paid faster.

This is one of the reasons debt review works.

The longer the process runs, the more accounts start paying up. As those accounts pay up, more money flows to the remaining debts. This speeds up the process and helps the consumer reach clearance sooner.

In simple words:

Cascade means the snowball effect inside debt review.

When one debt is finished, its payment helps finish the next debts faster.

Credit providers do not accept reduced instalments and reduced interest rates because a consumer personally requests how to pay.

They accept proposals because the industry has structured rules, systems and agreements in place to make debt review workable.

The Debt Counsellor must prepare a proper affordability assessment and a fair repayment proposal. Credit providers then consider the proposal based on the information provided, including the consumer’s income, living expenses, balances, repayment term, interest treatment and whether the plan is fair to all credit providers.

Where industry concessions apply, the proposal may include reduced interest rates or adjusted terms. These concessions are linked to the structured repayment plan. They are not open-ended favours. They are part of a regulated and negotiated process.

This is why consumers must not interfere with the allocation of funds. If the payment plan changes without proper process, the basis on which credit providers accepted reduced rates may be affected.

Paying extra money into debt review is a good thing. It can reduce your total repayment term, reduce the amount of interest you pay and help you become debt-free sooner.

However, settling one account early does not mean you can now decide where the normal monthly instalment must go.

The payment system is already structured to determine what happens once an account is paid up. The released amount will usually cascade to the remaining accounts according to the accepted repayment plan.

This is why we often tell consumers:

Trust the process.

If you settle an account early, it can help your debt review finish sooner. But it does not mean the debt review payment automatically reduces. It also does not mean you can choose to send the released money to a specific account of your choice.

For more information on settlements, click here.

Consumers should not pay credit providers directly unless they have received proper guidance from their Debt Counsellor.

A consumer may legally pay a credit provider directly. However, under debt review should normally go through the PDA. The PDA keeps an official record of payments and distributes funds according to the repayment plan.

When consumers pay credit providers directly, several problems can happen:

The PDA record will not reflect the payment.
The Debt Counsellor may not be able to confirm the allocation.
The credit provider may allocate the payment incorrectly.
Clearance may be delayed because paid-up letters and proof must still be obtained.
The consumer may believe an account is settled while the credit provider’s system reflects otherwise.

If you want to settle an account, always contact your Debt Counsellor first. The settlement must be handled properly so that your file remains accurate and protected.

If you pay credit proivders directly it is then your duty to provide the paid up letter to the debt counsellor for record purposes and for clearance issuing.
To understand more about settlements click here.

Selling a property while under debt review is a major financial change.

If your bond is settled because you sold your house or you won the lotto and decided to settle the bond, this does not automatically mean your debt review payment reduces immediately.

There are several reasons for this.

First, if there is already a court order, the court order still exists. The repayment plan remains in place unless it is properly amended, replaced or dealt with through the correct legal process.

Second, the bond payment included in debt review would have been part of the debt review assessment. And the payment towards same is part of the reason you were declared over indebted.
If you were living in the house and you sell it, your living expenses may change. You may now need to pay rent. Your municipal costs, insurance, travel costs and household budget may also change.

Third, the Debt Counsellor must reassess your financial position. It may be necessary to prepare a new assessment and possibly a new proposal to the remaining credit providers.

Fourth, depending on the stage of the matter and the court order, it may be necessary to approach court again or follow the correct legal process before the payment structure can be changed.

This means that settling a bond is not as simple as saying:

“My bond was R8,000 per month, so my debt review payment must now reduce by R8,000.”

The correct question is:

“What is my new household affordability after the property was sold, and what must legally happen to update my debt review plan?”

For more information, click here.

The same principle applies to a vehicle.

If you sell your vehicle or settle your vehicle finance while under debt review or it is written off and insurance pays out to settle the vehicle, it does not automatically mean your debt review instalment reduces.

A vehicle is often one of the larger debts in the debt review plan. If that account is paid up, the released affordability may need to cascade to the remaining debts.

Also, the consumer’s full financial situation must be considered.

For example:

Did the consumer sell the vehicle and now need to pay for transport?
Did the consumer buy another vehicle?
Did the consumer lose access to work transport?
Did the consumer’s petrol, insurance or maintenance costs change?
Are the remaining credit providers still being treated fairly?

The Debt Counsellor must look at the full picture. A paid-up vehicle is good news, but it does not automatically mean the monthly debt review payment can be reduced.

The aim of debt review is to pay all responsible debt obligations as efficiently and fairly as possible. Depending on the stage of the matter and the court order, it may be necessary to approach court again or follow the correct legal process before the payment structure can be changed.

The question to ask is:
“What is my new household affordability after the property was sold, and what must legally happen to update my debt review plan?”

For more information, click here.

A debt review proposal is based on the consumer’s financial situation at the time of assessment.

If something major changes, the Debt Counsellor may need to reassess the consumer.

Major changes may include:

  • Sale of a house;
  • Settlement of a bond;
  • Sale or settlement of a vehicle;
  • Loss of income;
  • Increase in income;
  • New rental expense;
  • Change in household expenses;
  • Divorce or separation;
  • Retrenchment;
  • Retirement;
  • Disability or illness;
  • Any material change affecting affordability.

A new assessment does not mean the consumer gets to decide the result. It means the Debt Counsellor must calculate what is fair, reasonable and legally correct.

Sometimes the payment may reduce. Sometimes it may stay the same. Sometimes the payment may even need to increase to keep the process protected.

Each case depends on the facts.
Some instances may be classed as a change of financial circumstances which may warrant a 17.3 notification to be sent to your credit providers, for more information on this click here.

A PDA distribution statement is a statement showing how the funds received by the PDA were distributed to credit providers.

It is not always the same as a final settlement balance from the credit provider.

This is very important.

The PDA statement shows payment distribution. It also shows estimated balances, but those balances are not always the final legal or settlement balances on the credit provider’s own system.

Consumers often look at a PDA statement and say:

“The PDA says I only owe R1100, so why does the credit provider say I owe R1,2500?”

This difference can happen for many reasons.
For a detailed breakdown of PDA Distribution statements and balance differences please click here.

PDA balances can differ from credit provider balances because:

The original debt review proposal is based on the Certificate of Balance received at the start of the process. The Certificate of Balance normally reflects the balance at that time and does not include all future interest. Credit provider systems may continue calculating interest, fees, insurance or adjustments depending on the agreement and the accepted proposal. Payments may be received late or allocated on different dates. Some credit providers update debt review balances differently. Some accounts may have insurance premiums or service fees. There may be arrears or legal costs not reflected in the PDA estimate. The credit provider may only provide final confirmation near the end of the debt review process. There may be timing differences between the PDA payment date and the credit provider allocation date.

This is why a PDA distribution statement should not be treated as a guaranteed settlement letter.

It is a payment record.

For settlement or clearance, the correct document is normally a paid-up letter or settlement confirmation from the credit provider.

For more information, click here

A proper debt review proposal is not designed to punish the consumer. It is designed to protect the consumer and bring order to a difficult financial situation.

The Debt Counsellor must consider:

  • The consumer’s income;
  • The consumer’s necessary living expenses;
  • The consumer’s family obligations;
  • The credit provider balances;
  • The type of debt;
  • Whether assets are financed;
  • Insurance obligations;
  • Interest rates;
  • Whether the debts can be repaid within a reasonable period;
  • The fairest way to distribute money;
  • The fastest reasonable route to full repayment;
  • The protection of the consumer against legal enforcement where possible.

The Debt Counsellor is not there to favour one credit provider over another. The Debt Counsellor is also not there to allow the consumer to manipulate the system.

The role of the Debt Counsellor is to act fairly, honestly, lawfully and in the best interests of the process.

Debt review is a structured repayment journey.

Your Debt Counsellor looks at what you can afford and prepares one full plan for all your debts.

Your monthly payment is not split according to what you feel like paying that month. It is split according to the proposal, the PDA plan, credit provider acceptances and/or the court order.

When one debt is paid up, that money does not automatically come back to you. It normally moves to the next debts. This is called cascade.

Cascade helps you finish debt review faster.

If you settle a debt early, that is good. But it does not mean you can choose where the money goes next.

If you sell your house or vehicle, your payment does not automatically reduce. Your Debt Counsellor may need to do a new assessment because your whole budget may have changed.

A PDA statement shows where your money went. It is not always the same as the final balance from the credit provider.

If you want to settle an account, sell an asset, change your payment or understand your balances, speak to your Debt Counsellor before taking action.

Debt review works best when the process is followed properly.

Final message to consumers

Debt review is a legal and structured process. It requires patience, discipline and trust.
DCGsa has been in the industry since 2010 we are very accustomed to the process and we have an excellent understanding of the system.

The proposal is not only about today’s payment. It is about the full journey from the first payment to the final clearance certificate.

When the process is followed correctly, every payment has a purpose. Every account that pays up helps the next account. Every extra payment can shorten the journey.

The goal is not simply to pay less today.

The goal is to become debt-free in the safest, fairest and most structured way possible.

If you are unsure about your proposal, your balances, your PDA statement or a possible settlement, we would love to help you understand more, that is also why we have taken the time to create the website resources for our clients.

We are here to guide you, protect the process and help you reach the finish line.