Facing serious financial issues? Debt counselling may be your best option – but not for everyone
- South Africans are struggling financially, and it looks like many will be turning to debt counselling as a way to protect their assets.
- It is not for everyone. You need to qualify, and there are fees you should be aware of.
- Most importantly for many people, it means you can't borrow more money until your debts are repaid.
- Here's what you need to know about debt counselling, including its drawbacks.
- For more stories go to www.BusinessInsider.co.za.
South Africans are facing increasingly serious financial woes, many of which have been exacerbated by the country’s recent Covid-19 lockdowns.
A survey in May found that 68% of respondents said they would not be able to survive for more than one month on their savings, while many would struggle to survive one week. And 77% were worried about their financial situations due to the consequences of pandemic.
According to Debt Busters’ Benay Sager, consumers are coming under increasing financial strain, and it is clear that they are increasingly supplementing their income with debt.
“Consumers were already extremely stretched going into the lockdown. They have been stretched for several years already, and real incomes have not really moved. As a result, consumers were already borrowing more to make up the difference,” says Sager.
Debt Masters’ Johann Wasserman says this hasn’t yet translated into a marked increase in formal applications for debt review, which is a process that usually follows a few months after serious financial troubles rather than serves as an immediate solution for indebted consumers.
At this stage Wasserman says they have actually seen a decrease in debt review applications - but this is likely to change towards the end of the year.
“In a few months from now, when reduced income and retrenchments become a reality due to the slowing down of the economy and businesses that managed to restart after the lockdown, but eventually can no longer keep their doors open increase, I think we will see an increase in debt review applications as people will then need help saving their assets,” says Wasserman.
“Also, one must remember that the debt collectors were also under lockdown, so people would not have had that constant threat and reminder that they need to pay their accounts.”
During the first three months of South Africa’s hard lockdown, Debt Busters saw an 80% increase in enquiries - although this hasn’t translated into a marked increase for new applications. Sager says various factors, including the insecurity around salaries and the inability to commit to debt repayments, are dissuading some from committing to resolving their debts right now - but it’s a likely indicator that many people are starting to face increasingly dire financial concerns.
Qualifying for debt counselling
Many people who find themselves in dire financial situations look towards new loans or debt counselling - the latter of which is a far safer way to handle mounting arrears.
Debt counselling, provided for by the National Credit Act Act, is intended to help consumers who are struggling to manage and repay their debt. It involves an appointed debt counsellor who will consolidate all debt owing, renegotiate this amount with both the creditors and the consumer, and establish a structured payment plan that makes paying off debt over an extended period significantly easier.
“Debt review is a long term solution for someone that is in serious difficulty and who is serious about their finances and who wants to become debt free. It is also a way to protect your assets from repossession if you run into financial difficulty,” says Wasserman.
“A debt counsellor will also be able to advise what the best way forward is for you, based on your individual circumstances.”
Although the process can provide immediate relief, protection, and peace of mind, Wasserman points out that it’s not a “quick fix”, but rather “a long term solution for someone that is serious about getting debt free.”
Not everyone facing financial difficulty is in the right headspace to commit to it either, says Sager.
“The first instinct for many people struggling with money is to look for more money from loans, rather than looking to cut back on expenses,” says Sager. “So debt counselling isn’t for everyone. It’s generally a three to five year commitment.”
Not everyone qualifies, either - it’s only intended for use by consumers who are “over indebted”, which Sager describes as the point “when your monthly expenses and your debt repayments are higher than your net income.”
The debt counselling process
Once a consumer is deemed over indebted and qualifies for debt counselling, the debt counsellor will make contact with all creditors and begin the process.
“It’s basically a way to say stop any lending to the consumer,” says Sager, “which is one of the tradeoffs involved.”
The debt counsellor will then negotiate on the consumer’s behalf with all the creditors - as allowed for by the National Credit Act - that they owe money to. This is usually based around what the consumer can actually afford to pay back - and all parties will agree on the amount before proceeding.
“It’s a multiparty negotiation where the debt counsellor negotiates on behalf of the consumer with all the creditors,” says Sager. “Rather than the consumer having to negotiate with each individual creditor.”
In many instances, the agreed repayment amount is less than the initial amount owed - Sager says sometimes as much as 40% less - with many creditors accepting that it’s better to receive some money than none at all.
The parties might also agree to increase the length, and fix the payments for the duration of the period agreed. This can however mean that debt takes longer than anticipated to pay off.
There is also an industry-agreed standard called the Debt Counselling Rules System (DCRS) that Sager says helps to further simplify the process.
“If the consumer qualifies to pay back their debt within this ruleset, it becomes a straightforward process,” says Sager.
“The consumer would then basically need to make one monthly payment to pay back their debt. That monthly repayment amount stays the same for the duration of the service - and it includes all the fees and all the debt repayments.”
The negatives, drawbacks – and risks
There are a few drawbacks to signing up for debt relief - but the biggest hurdle many have to overcome is the inability to apply for additional loans while the process is underway.
“It is important to know that while you are under debt review you will no longer be able to access credit or apply for loans and accounts,” Wasserman says. "But if you are over indebted you should not be applying for credit anyway."
Wasserman also says a good debt counsellor should work with the consumer to draw up a budget to ensure all living expenses are covered, so there should be no need for credit.
Although the risks are limited owing to the laws governing the practice, there are also some unscrupulous operators who may attempt to take advantage of those seeking debt counselling.
“Never make a payment into anyone’s personal bank account,” says Wasserman.
Instead, all legitimate debt counselling organisations make use of a Payment Distribution Agency (PDA), which handles all of the payments towards creditors.
“We will also not ask for any fees or money upfront. All fees get covered from the debt restructuring payment,” he says.
If in doubt, it’s important to check that the PDA and the debt counsellor is registered with the National Credit Regulator.
All registered counsellors have numbers and should wilfully present this to consumers upon request and cross-checked on the NCR website.
Once the debt review process is complete, it will end with a granted court order, and Wasserman says consumers should ask their debt counsellor about the status with the court application, and for guidance on the legal process to follow to ensure that the legal work is actually done, as this is also something that the client will be paying for.
How much it costs in fees
Debt counselling is not a free service, and both the PDA and counsellor will take a fee for their involvement. The NCR does, however, set the maximum fees that each role-player can charge.
Sager says the fees are typically low - “about 90 to 94% of what consumers pay while under debt counselling goes to credit providers, so there’s not a lot of wastage, especially compared to alternatives like debt collection."
Debt collectors, Sager says, are often appointed by the creditor, “and they may also add their own costs, such as those for phone calls and SMSes, which only amplifies the cost for the consumer.”
Sager says that the debt counsellor takes the first month’s fee in full as a payment for negotiating with the creditors. After this, debt counsellors take 5% of the monthly payment as an ongoing fee, and the PDA will agree to an amount for their fees.
Even so, Sager says it’s important that people pay what they can afford - and for this reason most debt counsellors will propose fees in line with the individual applicant financial situation.
Although debt counselling isn’t a perfect fit for everyone, and has some restrictions, it’s a viable solution for many people who find themselves in dire financial straits.
“Debt counselling is still a relatively little known aspect of the National Credit Act,” says Sager, “But it is something that genuinely provides relief - it’s actually among the best of its kind in the world.”
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