What Happens to Your Debt If You Become Ill or Disabled?

Becoming seriously ill or disabled can change your financial circumstances very quickly. You may still have a home loan, vehicle finance, credit cards, personal loans and ordinary household expenses, but suddenly have a reduced income or no income at all.

The important thing is not to panic and immediately start selling assets, borrowing money from family or cancelling payments. Becoming ill or disabled does not automatically make your debt disappear. However, you may have insurance, employment benefits or temporary payment relief available that could substantially change how much debt you actually need to deal with. Before making permanent financial decisions, establish what protection you already have. Understanding what happens to your debt if you become ill or disabled starts with establishing what insurance, employment benefits and temporary financial relief may already be available to you.

First Determine Whether Your Income Loss Is Temporary or Permanent

There is a significant difference between being unable to work for three months and permanently losing your ability to earn your previous income. If your illness or disability is temporary, the immediate objective may be to protect your home, vehicle and essential living expenses until you can return to work.

If your earning capacity has permanently reduced, a longer-term assessment may be necessary to determine which debts remain affordable and which need to be resolved. You do not necessarily need to make that decision immediately. Start by establishing what income and insurance benefits are available.

Check Your Paid Sick Leave

If you are employed, establish how much paid sick leave you have available. Under the Basic Conditions of Employment Act, qualifying employees are generally entitled during each 36-month sick-leave cycle to paid sick leave equal to the number of days they would ordinarily work during six weeks. Your employment contract may also provide benefits above the statutory minimum. Paid sick leave may therefore provide valuable time to submit insurance claims and assess your financial position before your income reduces.

Check Whether You Qualify for UIF Illness Benefits

If your illness prevents you from working and your employer no longer pays your full income, you may qualify for illness benefits through the Unemployment Insurance Fund. UIF illness benefits are subject to qualifying requirements and available contribution credits. Medical documentation is required. If your employer continues paying part of your income while you are unable to work, UIF benefits may potentially supplement this, subject to the applicable benefit calculation and your eligibility. Do not assume that because your salary has stopped or reduced, there is no income assistance available.

Check Every Debt for Credit Life Insurance

This should be one of your first financial checks. Personal loans, credit cards, vehicle finance, home loans and other credit agreements may have credit life insurance attached to them. Depending on the policy and when the credit agreement was entered into, the insurance may provide cover for circumstances such as death, permanent disability, temporary disability or loss of income.

For certain regulated credit-life policies, permanent disability can result in the outstanding obligation under the credit agreement being settled. Older policies and different insurance products may provide different benefits, exclusions and waiting periods.

Ask each credit provider: Do I have credit life or disability insurance on this account, and what can I claim because of my illness or disability?

Do this before surrendering an asset or attempting to settle the debt yourself.

Check Your Disability or Income Protection Policies

You may also have disability or income-protection insurance that is completely separate from your debts. These policies may provide a lump-sum payment, monthly income replacement or another benefit where the policy requirements are satisfied.

Check insurance taken out personally, through your employer and through your retirement fund. If you have several policies, do not assume that a claim under one means there is nothing available under another. Establish what each policy covers and submit the appropriate claims.

Check Whether Your Medical Aid Premium Is Protected

Some insurance products provide medical scheme contribution protection following qualifying serious illness or disability. Depending on the particular policy, the insurer may pay or provide a benefit based on your medical scheme contributions for a specified period. This can be extremely valuable.

When income falls because of illness or disability, cancelling medical aid to save money may appear to be an obvious solution. But this may be precisely when continued medical cover is most important. Before reducing or cancelling medical aid, check whether you have any medical-aid premium protection through your insurer, employer, retirement fund or another policy.

Ask Your Home Loan Provider About a Payment Holiday

If your income reduction is temporary, speak to your bank before simply allowing your home loan to fall into arrears. Depending on the lender, your account and your previous use of payment-relief arrangements, a temporary home-loan payment holiday or repayment suspension may be available. Where available, you can ask whether the lender will consider a suspension of up to three months. This does not mean that the debt is written off. Interest may continue and the suspended payments may ultimately need to be dealt with under the bank's arrangement.

However, temporarily reducing the bond payment can free up money for medical expenses, food, utilities and other priority expenses while insurance, UIF or disability claims are being processed. The important point is to obtain the bank's approval rather than simply stopping payment. If your home loan has already become unaffordable, you can also read What Happens to Your House and Car During Sequestration?

Can You Temporarily Reduce Pension or Retirement Contributions?

If your income has fallen substantially, also establish whether retirement contributions can temporarily be reduced or suspended. This depends on the type of retirement arrangement and the rules of the particular pension, provident or retirement annuity fund. Do not simply stop contributions without checking first.

Some retirement arrangements also provide valuable disability, income-protection or death benefits. Reducing or suspending contributions without understanding the consequences could potentially affect benefits you need precisely because you have become ill or disabled.

Speak to your employer, fund administrator or financial adviser and establish what your particular fund allows.

Look at Your Vehicle and Other Financed Assets

Once you know what insurance and income protection is available, reassess your major monthly commitments. If you can afford your vehicle once temporary benefits are taken into account, there may be no reason to surrender it.

If the reduction in income is permanent and the vehicle instalment is no longer sustainable, speak to the finance provider about its available assisted-sale, quick-sale or voluntary-surrender options. Selling or surrendering an unaffordable financed asset can substantially reduce monthly expenditure.

However, establish the likely settlement position and possible shortfall before making the decision.

Could Debt Review Help?

If you still have a regular income but your existing contractual debt repayments have become unaffordable, Debt Review may be an option. The important question is whether your reduced income is sufficient to support a realistic restructured repayment. If it is not, restructuring the debt may simply postpone a problem that cannot ultimately be resolved from your available income. A proper assessment should therefore consider your new income, essential living expenses and the debt that remains after insurance claims and financed assets have been dealt with.

What Happens to Your Debt If You Become Ill or Disabled and Can No Longer Afford It?

Sometimes illness or permanent disability changes a person's financial position permanently. Insurance may settle some debts. An unaffordable vehicle may be returned or sold. Temporary payment relief may help for several months. But after all of this has been considered, substantial unsecured debt may still remain.

Where there is no realistic prospect of repaying that debt from the person's reduced income, sequestration may need to be considered as a longer-term solution. Sequestration should not be the first reaction to illness or disability. It should be considered after establishing what insurance benefits are available, what assets need to be retained or surrendered, what income will remain and whether the financial difficulty is temporary or permanent.

Do the Assessment Before Making Irreversible Decisions

If illness or disability has affected your ability to pay debt, start by gathering information.

• Check your employment benefits.

• Check UIF.

• Obtain copies of your credit-life policies.

• Check disability and income-protection insurance.

• Establish whether your medical aid premium is protected.

• Speak to your home-loan provider about temporary relief.

• Check your retirement-fund options.

Then calculate what your financial position will look like after those benefits have been taken into account. You may discover that the problem is temporary and manageable.

Alternatively, you may establish that your income has permanently reduced and that some or all of the debt will need to be resolved through a more permanent solution. Either way, making that decision with the complete financial picture is far better than sacrificing assets or savings before knowing what protection was already available to you.

Need help understanding your options?

Complete our confidential callback request and Solvendi will assess your financial position with you. We can help establish which debts and assets need to be considered and whether a formal debt solution may be appropriate. Following the consultation, we can provide a written assessment explaining the available process and the applicable costs.

Disclaimer: This article is intended for general informational purposes only and should not be regarded as legal or financial advice. The appropriate debt solution will depend on your income, expenses, assets, liabilities and individual circumstances. Professional advice should be obtained regarding your particular financial position.

Contact us to discuss your current situation and receive a free detailed assessment of how the process works and what your costs will be. We have legal experts with 20 years experience that can guide you through the process. Our main aim is to be as informative as possible. Let's Chat.

If you require advice with regards to Sequestration, Business Liquidations, Insolvency, Bankruptcy or Credit Rehabilitation kindly contact SOLVENDI as follows:

National: 087 220 0710

Head Office: 010 880 7589

Email: consultations@solvendi.co.za 

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