A while back I wrote about how you can slowly wean yourself off debt by putting what you save on day-to-day expenses into settling your debts one by one. You begin with the smaller debts with the highest interest rates, such as credit card debt and personal loans, and slowly work your way up to your larger debts, such as your car loan.
It may be tough, but it is a relatively straightforward route to financial freedom.
However, many South Africans – and you may be one of them – are beyond the point of being able to do this. They are simply in too deep. Their debt repayments are consuming the bulk of their income, and they may be regularly missing repayments.
If you are in this position, you are probably what is referred to as “over-indebted”, and your debt problem is so big that, even if you have been ignoring it up until now, you simply can’t ignore it any longer. You may have creditors hounding you or threatening you with legal action, and your credit record is probably so tarnished that more credit is impossible to obtain.
You need professional help, and the sooner you admit it, the sooner you can begin on the long, much more arduous road to paying off your debt and clearing your name.
Fortunately, the law will support you if are you genuine about going this route, and there are real benefits in the form of protection from your creditors and lower interest rates.
The route is known as debt review, or debt counselling. It was established through the National Credit Act with the objective of addressing this country’s enormous consumer-debt problem and is controlled by the National Credit Regulator (NCR).
What is debt counselling?
Debt counselling is a regulated process whereby a qualified debt counsellor (registered with the NCR) negotiates, on your behalf, with all your creditors, to have the term of each credit agreement extended and the instalments reduced. Your debt counsellor may also persuade your creditors to reduce the interest rates on your credit agreements so that you can afford to pay off all your debt as soon as possible. The counsellor then structures a customised plan that consolidates your debt in a single monthly payment and allows for essential household expenses.
Debt expert Matthys Potgieter, of debt-counselling firm DebtSafe, says debt counselling is the preferred method to get out of debt, rather than sequestration or administration (see “Definitions” below).
“The programme is designed in such a way that it protects your assets from repossession and creditors, and your family’s essential expenses are protected with your personalised budget.
“It is definitely not a walk in the park, but the aim [of the government] was that it had a rehabilitative spirit. Debt counselling gives consumers breathing space to clear that excessive debt pile, teaches them to be accountable (regarding proper budgeting) and enables them to have a clean credit record again.”
Note that there are certain conditions and criteria when applying for and undergoing debt counselling:
You need to have a stable form of monthly income.
You need to be approved by the debt counsellor as being over-indebted, according to the definition in the regulations (see "Definitions", below). If you fail to meet the criteria, you will not be allowed to go under debt counselling.
There are fees involved (see “Debt-counselling costs”). These fees are regulated by the NCR. “Debt counsellors cannot simply charge what they want,” Potgieter says.
Once you are on the programme, you have to stick to it. Your monthly payments will be reduced, but you can’t miss a single one. If you do, the agreement the debt counsellor has negotiated with your creditors (which then is ratified by court order) will fall away.
You will have no further access to credit until you have completed the programme and cleared your name.
At the end of the process, Potgieter says, you will receive a clearance certificate that will require your creditors and the credit bureaus to remove any information about the debt review and your previous unpaid debts from their systems.
The length of the programme depends on the amount owed to creditors, he says. “It can take three to five years. But you can make additional payments to your creditors during the process – for example, when you receive a bonus or 13th cheque. Remember, you are in control of your own finances and the debt review process.”
All your debts, apart from your home loan, must be settled before you can exit the programme. But you must be able to pay the original instalment on your home loan, which may have been reduced for the duration of the programme.
You can expect to pay:
A non-refundable application and administration fee (R350 plus VAT);
Assessment and restructuring fees to a maximum of R9500 plus VAT for an individual application, depending on the size of your monthly repayments;
Legal fees for obtaining the court order; and
Ongoing monthly fees of up to 8% of your repayments, to a maximum of R950 plus VAT.
Potgieter says it is a myth that you will be expected to pay an upfront fee. He says alarm bells should ring if your debt counsellor asks for money upfront. “There are no upfront fees, because the fees form part of your monthly repayment plan,” he says.
Over-indebted: The National Credit Act states: “A consumer is over-indebted if the preponderance of available information at the time a determination is made indicates that the particular consumer is or will be unable to satisfy in a timely manner all the obligations under all the credit agreements to which the consumer is a party, having regard to that consumer’s (a) financial means, prospects and obligations; and (b) probable propensity to satisfy in a timely manner all the obligations under all the credit agreements to which the consumer is a party, as indicated by the consumer’s history of debt repayment.”
Administration: You can go under debt administration only for unsecured debt – in other words, secured debt, such as your home loan and vehicle finance, is not included. It has a R50 000 limit and pays your credit providers only every third month, which means it may take a long time to complete. The fees and commissions are high.
Sequestration: When you enter sequestration, you will most likely lose almost all of your assets, because your assets are sold to cover your debt. You are not allowed to be granted credit for five years after being sequestrated. The sequestration court order stays on record at the court for 30 years.