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Debt counselling can be a lifeline for the overindebted

DM168

PERSONAL FINANCE

Debt counselling can be a lifeline when overindebtedness takes over your life

Millions of people have found themselves up to the eyeballs in outstanding bills as they try to make ends meet. The key thing about being over-indebted is to get over the overwhelming situation – and get help in dealing with it.

There is a rise in the demand for debt counselling, with DebtBusters noting an increase in enquiries in January of more than 32% compared with the same period in 2021. In the fourth quarter of last year, enquiries increased 18% over the last quarter in 2020.

There is no shame in being overindebted. In the wake of the pandemic and ensuing lockdowns, millions around the world are in the same boat, having taken on additional debt to make ends meet. The turning point is dealing with your overindebtedness so that it doesn’t take over your life.

Debt counselling is a concept that was introduced to the market as part of the National Credit Act (NCA). It can be a useful tool to help customers overwhelmed by their debt.

A registered debt counsellor helps you by first assessing your financial situation to determine whether or not you qualify for debt

Start today. Consider ways to pay off the smallest debts first to free up income to pay off the next smallest debts, and so on. This creates a virtuous snowball effect counselling. One of the determining factors would be if more than half of your income is going towards repaying debt.

The debt counsellor then makes a court application to prevent your creditors from hounding you for payments and, within 30 days, also notifies all the credit bureaus – Transunion, Experian, Compuscan and XDS – that you are undergoing debt counselling. The counsellor negotiates reasonable payment terms with your creditors and you have one single repayment for all your debts.

There are some aspects to debt counselling, however, that you need to keep in mind:

No further access to credit: Once you are registered for debt counselling and it is noted on your credit profile, you will not be able to access any further credit. This means no more personal loans, no new store cards and no new car loans.

Once you have finished repaying all your debt, your debt counsellor will issue you with a clearance certificate and only then will you be able to take on credit again (subject to an affordability assessment).

Use a registered debt counsellor: Debt counsellors have to be registered with the National Credit Regulator (NCR).

When debt counselling was first introduced, the market was flooded with debt counsellors, many of whom were not registered or qualified.

If someone who is not registered charges you a fee for debt-counselling services, this constitutes fraud and you can report them to the regulator, the National Consumer Tribunal (NCT) and the police.

An unregistered debt counsellor may also be unscrupulous and charge you higher fees than the recommended rates.

A registered debt counsellor will have an NCR registration number. You should be able to find them on the NCR website at www.ncr.org.za. There are 1,639 registered debt counsellors on the site. As many as 2,076 registrations have lapsed, and 24 debt counsellors have had their registration cancelled by the consumer tribunal.

Debt-counselling fees: The fees you may be charged by a debt counsellor are quite specific and fall under the National Credit Act. They are as follows:

  • An application fee of R50, which must be paid upfront before you are assessed.
  • An upfront administration fee of R300 when you apply for debt counselling.
  • Attorney fees: These are negotiated by your debt counsellor with an attorney and should be communicated to you when you apply for debt review.
  • A restructuring fee: This is a once-off fee equal to the total amount that will be distributed each month and is limited to a maximum of R8,000 per person. If you are married in community of property, the maximum fee is R9,000. You pay this fee after your debt counsellor has drafted and submitted the documents to restructure your repayments.
  • Reckless lending: If the debt counsellor decides you have grounds to claim for reckless lending by your creditors, you have to pay a once-off fee of R1,500.
  • Aftercare fee: This is paid every month from the second month of your debt-counselling process and is deducted from your total repayment amount. It is equal to 5% of your final total repayment, and is limited to R450.
  • The NCT submission fee is R500 and there is also an NCT filing fee.
  • Once the debt counsellor has completed the restructuring process, you can either make payments directly to a registered payment distribution agent (PDA) or you can make the payments to the debt counsellor, who then transfers the money to the PDA.

The agency is responsible for making payments to all your creditors as per your restructured debt plan.

The debt counsellor should not be making payments directly to your creditors and you should ask your debt counsellor for receipts whenever you pay any money.

Ayanda Ndimande, the strategic business development manager for retail credit at Sanlam, notes that, in tight financial times, you may feel that the situation is hopeless.

“That is never the case. Start today. Consider ways to pay off the smallest debts first to free up income to pay off the next smallest debts, and so on. This creates a virtuous snowball effect. It’s also critical to reach out for help,” she says.

Ndimande stresses the importance of these three steps before you even think about borrowing money or applying for a loan:

  1. Check your credit report. This will give you a clear snapshot of your current credit position and help you to avoid getting into more debt than you can afford.
  2. Draw up a realistic budget. Be honest and write down your current income and expenses. Include every single expense, no matter how minor it may be. The little costs all add up. This should give you a clear idea of whether you can afford the extra debt you are considering taking on.
  3. Factor in the duration of the credit responsibility. Ask yourself: “Will I be able to afford this a year from today?” If your debt is going to be linked to the prime interest rate – usually a car or home loan – remember that we are at the bottom of a rising interest rate cycle and you need to be able to afford increased repayments over the next two years. DM168

This story first appeared in our weekly Daily Maverick 168 newspaper which is available for R25 at Pick n Pay, Exclusive Books and airport bookstores. For your nearest stockist, please click here.

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