Credit providers say that if you’re battling to service your debt, you must speak to them and they’ll “make a plan”. They will, but don’t expect them to restructure your debt or give you the same concessions that they give to consumers in debt counselling.
When debt is “restructured”, it means that the terms of a credit agreement are changed. These changes may include a reduced interest rate or an extended loan term. Debt restructuring is done via a negotiation between a consumer and a credit provider. It can also be done by a debt counsellor on behalf of a consumer who is over-indebted.
Only over-indebted consumers are eligible for debt counselling. You are indebted if you have debt; you are over-indebted if you cannot meet all your financial obligations and your needs. If simply cutting back on your expenses will enable you to meet all your repayments and cover your needs, you are not over-indebted. Only a debt counsellor can determine whether or not you are over-indebted.
Over-indebted consumers in debt counselling can benefit from generous concessions. These include:
* A reduced interest rate on loans, overdrafts and/or store cards;
* An increase in the terms of loans; and
* The waiving of any monthly service fees being charged by credit providers.
Debt counsellors can offer these concessions thanks to the Debt Counsellors Rules System (DCRS), a set of rules agreed to by credit providers that are willing to restructure the debts of consumers in debt counselling.
The DCRS is the product of a task team set up by the National Credit Regulator. The rules were established to address inconsistencies in debt restructuring methods used by credit providers and debt counsellors.
Anton Thomas, the head of debt counselling operations at Nedbank, says most major credit providers have “signed on” to the DCRS.
In December last year, the regulator issued a circular stating that it had noted that the DCRS “was not being utilised optimally by the [credit] industry”. The regulator encouraged all credit providers and debt counsellors to apply these standard rules.
Thomas says credit providers are not legally obliged – in terms of the National Credit Act (NCA) – to reduce interest and fees to help over-indebted consumers. They have, however, agreed to these measures, “given that certain conditions are met”.
These conditions are that you are, in fact, over-indebted, and your budget has been “shaved” (of luxuries and needless expenses), which is one of the roles the debt counsellor fulfils.
Credit providers need to be sure that you as a consumer deserve these concessions. “When you are in debt counselling, I know that you’ve been assessed by a debt counsellor; your budget has been assessed; you’re taking the pain [when you’re in debt counselling it is noted on your credit report and you are denied access to more credit until you’ve paid all of your debt] and all of your creditors are taking an equal knock,” Thomas says.
He says it would not be fair to expect credit providers to give concessions indiscriminately. “Imagine … everyone would be asking for a reduced interest rate or an extended loan term, which is not fair on credit providers,” he says.
Many consumers in financial difficulty are living beyond their means but aren’t willing to compromise on their standard of living.
Thomas says that if you are struggling with debt, don’t expect your creditors to compromise on the cost of credit. However, you will probably find them willing to “come to an arrangement” with you.
These arrangements will offer you a small reprieve, but nothing more than that.
If you’ve had a bad month and you can’t afford to pay your loan instalment of R1 000, for example, the bank may allow you to skip this month and pay an extra R250 a month for the next four months, he says.
Thomas says there is restructuring outside of debt counselling, but it’s not the same as the restructuring afforded in terms of the DCRS.
Mark Springett, the head of customer operations at Barclays Africa Group, agrees. He says Absa clients who are not in debt counselling but are in financial distress – and approach the bank for help – may be offered restructuring options, which could be an interest rate reduction or term extensions.
Springett says this applies to secured and unsecured debt. However, terms and conditions will apply. “We will attempt to put in place a mutually acceptable restructured agreement for an agreed time period.”
Understand that there could be adverse consequences. If you skip a payment, you will have an impaired credit report reflecting that you are in arrears. Other credit providers have a right to know so that they can accurately assess your risk profile, Thomas says.
“Clients who are experiencing high levels of debt stress, especially with multiple debts across various credit providers, should consider approaching a debt counsellor,” Thomas says.
Don’t expect your bank or credit provider to refer you to a specific debt counsellor. In fact, if you do get a referral, you may have reason to be suspicious.
In terms of the NCA, debt counsellors cannot be employed by credit providers, and credit providers cannot offer debt counselling. This is because part of the job of a debt counsellor is to check for reckless lending and the illegal overcharging of interest. If a debt counsellor is employed by a credit provider or in a partnership of sorts with a debt counsellor, this places the debt counsellor in a conflicted position.
OVER-INDEBTEDNESS: THE DANGER SIGNS
Have you started using your credit card and/or overdraft facility to pay off debts? Borrowing from Peter to pay Paul is a sure sign that you’re debt-stressed.
Are you using your credit card to buy food and other necessities? When you use a credit card or overdraft, you’re using the bank’s money – and the interest charged is normally high.
Are you skipping payments to some creditors? Are you ignoring phone calls and SMSes from creditors? Is debt a major source of stress in your life?
If you’ve answered yes to any of these questions, you probably need help.
Debt counselling is not for everyone. You have to be over-indebted and you have to have a regular income. You also have to be willing to:
* Make lifestyle changes – for example, cutting out luxuries such as dining out – to repay all your debts;
* Commit to repaying your debts according to the payment proposal agreed to with your debt counsellor; and
* Not incur any more debt. You will not be able to access more credit because it will be noted on your credit reports held by the various credit bureaus that you are in debit counselling.
Paul Slot, a director of Octogen debt counsellors, says debt counselling is not the only way to address debt stress. He says “early identification and intervention” can help. The best time for you to contact your credit providers or a debt counsellor for help is when you are about to miss a payment or have just missed a payment. More and more consumers who are about to miss a payment are contacting a specialist for assistance, and an increasing number of credit providers facilitate an intervention when a payment is missed, Slot says.
He says Octogen has implemented a programme to help consumers pay their debts, which has resulted in these consumers having a propensity to pay their debts on time that is 10 times higher than that of the average consumer (determined by a 12-month project with an insurance company).
WHERE YOU CAN CUT
If you’re in debt, you have only two options: increase your income or reduce your expenses. Most people have a fixed income, and find it easier to reduce their expenses. Remember, it’s no use cutting back on your expenses if you don’t use the money you save to reduce your debt.
The National Credit Regulator (NCR) suggests you consider cutting back on:
* Club memberships;
* M-Net, DSTV;
* Travel costs (where possible use public transport);
* Holidays; and
* Domestic worker services.
You also need to look at saving money by reassessing your:
* Expensive assets. If you drive an expensive car, consider down-grading to a more modest car. What you save in car instalments each month you can use to pay other debts.
* Expensive home. If you are struggling to afford the house you live in, sell it and buy a more affordable home.
* Insurance contracts. Contact an independent financial adviser to check if you aren’t over insured.
* Expensive credit. If you have any savings, use this money to pay off your most expensive debt, such as micro-loans, followed by your credit card.