The road to debt...and a way out
Jeanni Leibrandt and her husband were never extravagant or reckless. Their debt built up as so much debt does: gradually and undramatically. With no financial reserves, she and her husband were defenceless against unexpected expenses and resorted to credit. Jeanni told Personal Finance her story to reassure South Africans that debt can be overcome – and early action makes all the difference.
“If you find yourself staring into a black hole of debt, you have to realise it’s only going to get worse.
About five years ago, I realised that we were going to lose everything if we didn’t do something about our debt. It had reached about R800 000, including our bond. Until then, I thought I was reasonably good with money; we didn’t go overseas or take holidays or anything like that. We just did the usual things.
My husband and I married in our 20s. We had two children, now in their 20s, and I worked as a personal assistant and my husband in IT. We were living in Pretoria 14 years ago when my husband got a job offer back home in Cape Town, so we resigned from our jobs, got the children into schools and organised the whole move. Then the company withdrew the job offer because they were having financial problems. It was too late; we had to move. That led to nine months of unemployment for my husband. I found a part-time job, but by the time he found another job, we had used up all our savings.
Basically, we had to start again. We had given up our insurance policies and medical aid and cashed in our pensions, so we had to put away a huge amount every month to replace them. But we bought a house – and a flat as well, as an investment – and everything seemed to be going well. We were living on credit. It was easy – the banks just kept on increasing it. But it doesn’t take very much to bring the whole thing crashing down: the car breaks down a few times, the dishwasher breaks, the kids need something… all basic, regular stuff.
Then my husband lost his job due to a stress-induced illness, so he was without a job for two months. He found another one, but it didn’t pay as much and we had medical bills. I had a full-time job by then, but that was never going to prevent us getting into a credit deficit. We sold the flat and we cut everything we could, but five years ago, it got to the point where I knew we were in trouble. We had three credit cards each and a store account. My husband had vehicle finance for his motorbike. We had one personal loan. And we had the bond. We had never defaulted on the bond, but it was obvious that we soon would.
So we went to see the bank we’d both been with since we started working. We were both earning an average income, so we thought we just needed a bit of cash relief; perhaps they could extend the bond? The bank’s answer was a huge shock: ‘No, sorry, you have too much debt’. Even if you are doing your best and have never missed a bond payment, they take all your debts into consideration, apply a formula and that’s it. We have since changed banks….
I was searching the internet for tips on how to pay off debt faster when I came across ads for debt review or debt counselling. After looking at various companies, we went with the one that was most responsive. I had questions like ‘how will debt review affect our credit record?’ The answer was that it doesn’t – when you’ve paid off your debts, your record is cleared and you go on with your life. I was also told you can pay off your debt ahead of schedule if you get extra money, which is what we were hoping would happen.
The whole relationship is online: you give the debt counsellor a list of all your debts and a budget showing your income and what you need to survive each month. Then all your debts are consolidated: bond, credit cards, store cards, loans, motor vehicle finance… you can’t hold anything back. We tried to keep our bond separate, but it wasn’t allowed.
Your creditors are informed by the debt counsellor that you are in debt review and, from then on they can’t contact you directly or charge you any more interest. The counsellor works out how much you can afford to repay each month while still having enough to live on, and develops that into a repayment schedule, usually over five years. When all the creditors have accepted the plan, it is made an order of court. One amount is taken by debit order every month and split among the creditors and you receive a statement showing what has been paid and what is left to be paid.
The amount we had to pay per month was much more manageable than our debts had been, even with the fees for debt review, which were about R12 000, including legal fees and admin costs. But with the lump sum spread over five years and no more interest added, we didn’t find the repayments difficult. When the money went off for the first time, we found we actually had money left for the rest of the month… obviously not a lot, but more than we had had before. We never felt deprived.
Then last year, about 3.5 years into the five-year payment period, my husband and I got divorced, so we sold our house. Because of debt counselling, we had avoided a forced sale by the bank and we were able to get the full market value. Our debt counsellor went to each creditor to get a settlement amount and we paid them all and even had some money left, which we split. We went to court to be cleared of our debts officially and the clearance certificates were sent to all the credit bureaus. My credit score was 87 percent when I last checked. Now I have one credit card just to rebuild my credit record.
I was scared of debt counselling at first, but we never had any problems. We always knew what was happening, and if we had a question, we’d have a response in two or three days. Knowing everything is settled and under control is such a relief. My children were old enough to understand what was going on and it taught them both a good lesson; we’re all wary of credit now. And now they know that life happens and you have to be prepared financially.”
What is ‘debt review’?
Debt review, also known as debt counselling, is not just an advisory service; it is a legal process that was introduced in 2007 in terms of the National Credit Act (NCA) to help over-indebted consumers who have an income from falling deeper and deeper into debt, says Niel Roets, CEO of Debt Rescue, the debt counselling service that helped the Leibrandt family.
Debt is restructured so that it doesn’t keep growing with the addition of interest and can be paid off over a designated period of time by the payment of one affordable lump sum every month. The plan is made an order of the court, so that it is binding on the debtor and the creditors, and the consumer has no need to resort to payday loans, debt consolidation (another kind of loan – it merely replaces your various debts with a single large loan) and other short-term measures that are likely to make the situation worse.
Roets says debt counsellors must be registered with the National Credit Regulator (NCR), which also regulates their fees. “Fees include a once-off application fee of R350 (excluding VAT), a once-off restructuring fee equal to the first month’s payment, but not exceeding R8 000 for a single application, or R9 000 for a joint application, and a monthly after-care fee of five percent of the debt review payment, not exceeding R400.” Fees are included in the overall calculation of the monthly payment, so there are no upfront or extra costs, he says.