Words on Wealth: Over-indebted? Do this before considering debt review

The debt review process, introduced into our consumer legislation in 2007, is widely touted as the best solution for consumers who have become over-indebted, and in these difficult times, debt counselling firms have seen a surge in applications. But although it offers a lifeline for people drowning in debt, it should not be undertaken lightly, and only when you have exhausted other debt-reduction options and know exactly what the process entails.

Back in 2019, the National Credit Regulator (NCR) warned against aggressive and misleading marketing practices by debt counselling firms. Recently, at Capitec’s annual general meeting in May, CEO Gerrie Fourie noted that many people were entering debt-counselling prematurely.

“I believe there’s a place for debt counsellors, but unfortunately there are many people going into debt counselling who should have first gone to their bank. Twenty percent of people going into debt review terminate within the first 12 months, after paying their R9 000 to the debt counsellor, with no change in their indebtedness, which clearly shows they shouldn’t have been there. Unfortunately, what people don’t understand is that their credit record has been tarnished permanently, so the likelihood of them being granted credit again is very slim,” Fourie said.

The 2019 NCR warning said debt review was being advertised as “a payment holiday or a savings plan where consumers are promised to save up to a certain percentage of their monthly instalments”.

This type of advertising is misleading and prohibited, the regulator said. “Consumers need to understand that debt counselling is a relief measure to cope with financial distress, and that they remain responsible to continue paying their debts until they are paid up. Debt counselling does not in any way give consumers a break from paying their debts.”

The regulator said it encouraged consumers to be proactive and seek help immediately when they noticed signs of over-indebtedness and financial distress.

“Before consumers sign the debt counselling application form, they have to make sure that they understand what the debt counselling process is, what their rights and obligations are as well as the consequences of being under debt counselling. Debt counsellors have an obligation to explain the process in detail and to disclose applicable debt counselling fees in writing,” the NCR said.

A big attraction for entering debt counselling is that, once a repayment plan has been negotiated, your creditors cannot take legal action against you, as long as you keep your side of the deal. It also forces you to change your spending behaviour, which you may feel you don’t have the self-discipline to do yourself.

But it does tie you into a long, fairly costly process, with many onerous conditions attached.

In a comprehensive article I wrote for Personal Finance magazine at the beginning of last year, “Dealing with Debt”, I listed the various debt-reduction options open to you. Debt counselling came second-last, just before sequestration, the most radical option of all.

Here, briefly, are your options if you’re struggling with debt:

1. Voluntary arrangements. You approach your creditors and ask them for help, typically in the form of restructuring your loan or granting you a payment holiday. Ideally, this should be done before any legal action has been brought against you. This is the most cost-effective option, since it does not involve legal costs, and is least damaging to your credit record.

2. Debt consolidation. You consolidate all your debts into a single long-term credit agreement with a single monthly repayment. The drawback of this method is that you turn short-term debt into long-term debt, which means you ultimately pay a lot more in interest. If your mortgage bond forms part of the consolidated debt, you could lose your home if you default on repayments.

3. Debt mediation. You resolve a debt dispute with a specific creditor through mediation instead of court action, reaching an agreement on how to repay your debt and preventing the creditor from obtaining a judgment against you.

4. Debt administration. This may be seen as “debt counselling light”, and applies only to debt totalling R50 000 or less. Your collective debts are managed through a court order, but costs are high relative to the amount of debt.

5. Debt counselling (debt review). After negotiating with your creditors, the debt counsellor draws up a repayment plan, taking your basic living expenses into account. Once your debts have been settled, you are granted a clearance certificate, which allows you to reapply for credit, but, according to Capitec’s Fourie, the chances of being granted credit are low. Fees, which are incorporated into your repayment plan, comprise initial charges totalling about R7 000 or more and ongoing monthly admin fees of about R400, depending on the complexity of the agreement. In the past, the only way to exit debt review was with a clearance certificate. However, the law has changed, letting you cancel the process voluntarily. Note that you will have to pay the original instalments and interest rates again, there may be additional penalty fees, and if you default on your repayments, you run the risk of legal action.

6. Voluntary sequestration. You declare yourself bankrupt, liquidating all your assets and absolving yourself of any debts you owe – your creditors share the spoils. Simply, you lose all your possessions and can start again with a clean slate after being rehabilitated – this happens automatically after 10 years, but if your finances take a turn for the better, you may apply for rehabilitation before the 10 years are up. Your assets need to be above a certain value (including enough to cover legal costs of at least R20 000) in order to go this route.

* Hesse is the former editor of Personal Finance

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