Can I buy a car or house while under debt review?

You cannot buy a car or a house on credit while you are under debt review. The National Credit Act 34 of 2005 prohibits a credit provider from entering into a new credit agreement with a consumer who is under debt review, and the debt review flag on your bureau record means a vehicle finance house or a bank will decline the application as soon as it checks you. The only lawful routes to finance are to complete the review and receive a clearance certificate, or to have a court end the review early. Buying for cash is not prohibited, but it has consequences of its own, which this guide explains.

The rest of this guide covers why the rule exists, what actually happens if you apply anyway, the exit routes, and how to plan a purchase properly on the other side of clearance.

How the rule works, step by step

The flag. When you apply for debt review, your debt counsellor notifies every registered credit bureau. The bureaus place a debt review indicator on your record. A credit provider that pulls your record sees the indicator before it sees your income or your score.

The prohibition. The Act treats the granting of credit to someone under debt review as reckless. A credit provider that does it anyway faces serious consequences, including the risk that a court sets aside the agreement. That is why no bank or finance house will knowingly do it.

The affordability problem. Even if the flag were not there, your application would fail the affordability assessment. Debt review is built on a finding that you are over-indebted. A new instalment of any size contradicts that finding.

The effect on your plan. Your own application for new credit is a breach of the rules you accepted. A credit provider under your plan can use it to argue that you are not co-operating, and in some cases to apply to have the review terminated on its account.

The exit. The prohibition ends when the review ends. The review ends when your debt counsellor issues a clearance certificate, which happens once every debt under the plan is paid, or once everything except an up-to-date home loan is paid. It can also end if a court sets the review aside or declares that you are no longer over-indebted.

A worked example

Take Thabo, who is two years into a five-year debt review plan. His plan covers a personal loan, a credit card and a store account. His car has failed and he needs transport to keep his job. He earns R22 000 a month after tax and pays R4 500 a month into his plan.

He walks into a dealership and is told "we finance anyone". The application goes to a finance house, the bureau check comes back with the flag, and the application is declined. The dealership then offers a "rent-to-own" arrangement with a high weekly payment. That arrangement may itself be a credit agreement under the Act, and if it is, it is subject to the same prohibition and the same affordability rules.

Thabo's counsellor works through the actual options. He has R38 000 left on the plan. If he redirects a bonus and increases his monthly payment, he could settle in eleven months instead of three years. Alternatively, he could buy a modest used car for cash, but his counsellor warns that a cash purchase of that size will have to be explained to the credit providers, because the money looks like income that should have gone into the plan. He chooses to accelerate the plan, buy a cheap car for cash using money he can show came from a family loan, and apply for proper finance a year after clearance. These figures are illustrative only and your own numbers will differ.

What to do this week

Do not apply for finance. Each application adds an enquiry to your record and can be used against you in the review.

Talk to your debt counsellor. Ask for a settlement figure on each account and a calculation of how much sooner the plan ends if you pay more each month. Ask whether a lump sum from a bonus, tax refund or family loan could settle the remaining accounts.

Decide whether you genuinely need the asset now. A car for work is different from a car you would like. A house is almost always a purchase that waits for clearance and a rebuilt record, because bond finance is scrutinised more closely than any other kind.

If you must buy, buy for cash and document the source. Keep proof of where the money came from and tell your counsellor before you spend it.

Documents to gather

• Your current plan and the latest payment distribution agency statement.
• Settlement figures from each credit provider under the plan.
• Your credit report from every registered bureau.
• Proof of any lump sum you could use to settle, such as a bonus letter or a signed loan agreement with a family member.
• Your budget showing how much extra you can pay each month.
• If you are buying for cash, proof of the source of the funds and the purchase agreement.

A realistic timeline

Now. No credit purchase is possible. Cash purchases are possible but need to be explained.

Settlement of the plan. Anything from a few months to the remaining term, depending on what you can pay. Our guide on getting out of debt review early covers the routes.

Clearance certificate. Issued by your counsellor once the accounts are settled. Allow a few weeks for the bureaus to remove the flag, and check each one yourself.

Rebuilding. Many people find that credit providers want to see a period of clean history after clearance before granting a large facility. Six to twelve months of a small account paid on time is a common starting point. A bond application is usually stronger after longer.

Application. Once the flag is off and your record shows a period of clean payments, you apply on the same footing as anyone else. Your prior defaults may still show for their retention period, and the credit provider will weigh them.

Common mistakes and what they cost

Fronting. Asking a spouse, parent or friend to take the finance in their name while you pay. If the credit provider was told the other person would drive and pay, the application was misleading. The other person is liable for the whole debt if you stop paying, and their record carries the account. If the vehicle is repossessed, it is their default. Some credit providers treat this as fraud. Do not do it.

"No credit check" dealers. Anyone offering a car on instalments without a bureau check is either not a registered credit provider or is not doing an affordability assessment. Both are warning signs. The agreement may be unlawful, the interest may be far above the caps, and you may lose both the car and the money.

Buying a large asset for cash without telling your counsellor. The credit providers see money that could have paid them. Expect a demand for an explanation, and possibly an application to terminate the review.

Leaving debt review informally. Stopping payments and hoping the credit providers forget is not an exit. The flag stays, the accounts fall into arrears again, and the protection is gone.

Applying for a bond in the first month after clearance. The application is likely to be declined and the enquiry is recorded. Rebuild first.

Your rights and the credit provider's rights

You are entitled to complete your plan, to receive a clearance certificate once it is settled, to have the flag removed from every bureau, and thereafter to apply for credit on the same terms as anyone else. You are entitled to a proper affordability assessment when you do apply, and to written reasons if you are declined.

A credit provider is entitled to decline you while the flag is on, and is obliged to. After clearance it is entitled to weigh your full history, including the restructured accounts and any defaults still within their retention periods, and to decline on that basis. It is not entitled to treat the removed flag as though it were still there, or to rely on information it knows to be out of date.

Our guide on how debt review affects your credit score explains what stays on your record after clearance.

If you cannot afford an attorney

Planning a purchase after debt review does not usually need an attorney. Your debt counsellor is the first port of call for settlement figures and the clearance process, and the counsellor's fees are regulated.

If your counsellor will not issue a clearance certificate you believe you are entitled to, complain to the National Credit Regulator on 0860 627 627. If a bureau will not remove the flag after clearance, or a credit provider declines you for a reason that appears to rest on inaccurate information, the Credit Ombud within the National Financial Ombud Scheme South Africa handles the complaint at no cost. If a dealer has sold you a car on an agreement that turns out to be unlawful, the National Consumer Tribunal and the National Credit Regulator both have a role. Legal Aid South Africa on 0800 110 110 can advise on whether you qualify for representation, and our legal aid page explains the means test. Our page on what debt and credit matters cost sets out the costs if you need a professional.

Frequently asked questions

People often ask whether they can keep the car they already have. Yes, if the vehicle finance is part of your plan and you are paying under the plan. The car is not affected by the prohibition on new credit, because it is existing credit.

They ask whether renting a car or renting a house counts as credit. A straightforward lease of a house is not a credit agreement, so it is not prohibited, though a landlord may still check your record. A long-term vehicle rental with an option to buy may be a credit agreement in substance, and you should ask your counsellor before signing.

They also ask whether a spouse who is not under debt review can buy a house. If the spouse applies alone, on their own income, and the credit provider knows the full position, that is a lawful application. If you are married in community of property, the joint estate is affected and the credit provider will want to see your position as well. Ask your counsellor.

Finally, people ask whether it is worth ending debt review early just to buy. Only if you can genuinely settle. Leaving without settling puts you back where you started, and the credit providers can enforce immediately.