Debt stressed? Don’t shy away from debt review
Previously, Personal Finance writer Roz Wrottesley, in her Financial Rescue column, told the story of Jeanni Leibrandt, who, with her husband, almost unwittingly sank deeper and deeper into debt until they were finally refused more credit, at which point they had no option but to enter debt review.
It’s tough, but as long as you choose a reputable counselling firm to hold your hand through the lows and are prepared to withstand short-term pain (for anything between three and five years), you are guaranteed profound relief at the end of it. This is according to people such as Jeanni who have been there. What’s more, you are likely to be a great deal more money-savvy when you come out the other side.
Debt counselling, when managed well, is so effective in transforming people’s lives, says Benay Sager, the chief operating officer of DebtBusters, that we should be “shouting it from the rooftops”. He says South Africa has hosted visitors from other countries who have shown an interest in our “world-class” system.
DebtBusters has declared February “Debt Awareness Month”, and I sincerely hope the National Credit Regulator and debt counsellors across the country support and promote what should be a national initiative.
At a recent gathering of journalists at DebtBusters’ offices in Cape Town, Sager presented some interesting facts and figures from its quarterly Debtometer report (fourth quarter 2019).
The Debtometer tracks statistics of people who have applied to DebtBusters for debt relief, which represents a relatively small section of the population.
(To qualify for debt review, you need to show that you are over-indebted and that you are earning a steady income. Therefore, the statistics do not reflect trends among consumers who have not reached the point where they seek relief and/or who are unemployed.)
Looking at people who applied for debt counselling, the report shows that, from 2014 to 2019, South Africans’ income has decreased in real (after-inflation) terms and they have borrowed more, with average debt levels increasing 13% more than average income levels.
Another significant finding is that unsecured debt (on personal loans, credit cards and store cards) is beginning to outweigh asset finance, such as home loans and car finance, says Sager. “On average, unsecured debt levels are 40% higher on what we were seeing four years ago. For higher-income earners it is 50% up,” he says.
The report found that the median DebtBusters client needed 64% of his or her net income to service their debts. This is well above the 40% mark generally considered to be the maximum level at which debt repayments are reasonable and manageable. (The NCA does not give a specific threshold expressed as a percentage - see “Are you over-indebted?”)
The average client’s total debt to annual income ratio was 110%, but for higher earners (those earning R20 000 or more a month) it was 134%.
Sager says the Debt Awareness Month initiative has three objectives:
* To get you to recognise early warning signs that you may be over-indebted and to seek help;
* To inform you about the benefits of debt-management and how it works; and
* To learn from others who have been overburdened by debt and successfully achieved financial freedom.
Sager says that of every 100 people who call DebtBusters for assistance, 12 or 13 qualify as being eligible for debt review. Of these, about half embark on the process.
Debt counselling is becoming more acceptable as a way forward, with less of a stigma attached to it, and more and more people are applying for and completing the programme.
The number of debt-clearance certificates issued to DebtBusters’ clients grew by 69% a year between 2015 and 2019 - an almost tenfold increase in a four-year span. Last year, the company granted nearly 5 000 certificates.
“Despite the concerningly high level of over-indebtedness, the good news is that South Africa has a sophisticated and effective debt-counselling sector. There’s no doubt that it works well to help people escape the burden of debt,” Sager says.
ARE YOU OVER-INDEBTED?
According to the National Credit Regulator (NCR), you are over-indebted “when you cannot service your debts in a timely manner as agreed with credit providers”. The NCR says some of the indicators of over-indebtedness are:
* You borrow money to pay other debts;
* You use your credit card and overdraft facilities to pay debts, buy food and other necessities;
* You skip payments on some accounts in order to pay others;
* You receive letters of demand and summonses from credit providers and/or lawyers; and
* You have judgments granted against you.
FINDING A COUNSELLOR
Debt counsellors and debt counselling firms are not created equal, although they must all be registered with the National Credit Regulator and adhere to certain regulations, including what they can charge.
Choose wisely: once you are committed to a court order negotiated by a debt counsellor with your creditors, it is not easy to extricate yourself from the debt review process or change debt counsellors.
Any complaints about debt counsellors can be directed to the regulator (www.ncr.org.za).
A good debt counsellor will:
* Be fully transparent about all costs, including legal costs, which should be included in your single monthly payment. There should be no extra “hidden” fees.
* Have the expertise and experience to negotiate favourably on your behalf with your creditors, bringing your monthly repayment down to an amount you can afford.
* Hold your hand through the process, especially when times are tough, encouraging you to remain committed to your long-term goal.
* Provide ongoing information about your balances and how much you still owe.