Defeating debt - Understanding debt counselling

UNDERSTANDING DEBT COUNSELLING

THE BASICS…

What keeps you up at night? For 26.48 million South Africans it would be debt, as per the Credit Bureau Monitor, for the first quarter of 2022. Let’s not kid around, with the increases in food, the petrol price and daily living expenses, most South Africans are finding it difficult to keep their heads above water, never mind investing.

Below is an extract out of the report, showing the credit standing of all consumers, dating from June 2019 to March 2022.

Source: Credit Bureau Monitor, Q1 2022

As you can see almost 62% of South African consumers are in good standing, however you will note a slight increase in credit records in arrears for 1 to 2 months, specifically this last quarter, which is showing us that the consumer is coming under pressure. Especially if compared to the average since June 2021.

This is again made worse by increasing interest rates, which of course increases the debt that a person pays off. Here’s a thread I did for BankerX on how the interest rate affects you and your debt that you pay

There is no doubt looking at these figures that with further increasing interest rates on the table (I always err on the side of caution), and worsening economic conditions in the world, people are going to become more indebted, just to maintain their living standards.

This is made worse by low increases in salaries, meaning not many people have kept up with inflation. What really makes up your inflation basket is also quite different to the next person… I mean, who gets a 7% increase now a days…

This is cocktail of toxicity that leads to increased consumers turning to unsecured credit or debt to meet their daily needs.

What is the difference between secured vs unsecured debt?

Secured Debt - Your debt is secured by some asset – like a house or a car.

Unsecured Debt - There is no asset to secure the debt – like credit card debt, payday loans, student loans.

The problem with unsecured debt is that due to there being no asset to back the debt, the interest rate charged is higher. Let’s not even talk about debt owed to loan sharks, and unregulated entities. I have heard rumours of up to 35% interest being charged, and more – due to it being unregulated, Trust me, you do not want to go here. You will drown in debt.

Having access to credit is important, so ensure that you meet your debt obligations, secured or unsecured, and understand the impact it has on your ability to secure further access to credit, now and into the future.

What happens if you do find yourself in trouble, and things are snowballing out of control? What can you do? Here is to understanding debt counselling and how it works:

What is debt counselling?

Debt counselling is the process in which an over-indebted person (you) applies to the courts to have their debt re-arranged. What does over-indebted mean? How do you know when you are in this position? It is when you, as a consumer, are unable to comply and pay the debt obligations you are under in terms of your credit agreements.

It is also referred to as debt review and should be considered if you experience financial problems. Keeping your head above the water in the current economic environment is proving very difficult, and there will be a need for people to access this.

Debt counselling does not mean your debt is written off by the credit provider, it is a second chance to repay the debt you owe. The repayment can be re-arranged in different ways from reducing monthly instalments to extending the period in which the debt is paid back to the credit provider.

And sorry for you, only a natural person can go through debt counselling, you cannot apply for your company/business.

This is a joke, please pay your bills on time

What is the procedure to apply for debt counselling?

Once you realise that you need help, the process followed is outlined below:

Step 1:

Apply to a debt counsellor to declare you over-indebted.

Step 2:

Once debt counselling has been applied for, the debt counsellor will notify all your credit providers and every registered credit bureau of your debt counselling application, within 5 working days.

Step 3:

The debt counsellor will evaluate your financial situation and prospects of debt re-arrangement. During this period, you and all your credit providers must comply with request from the debt counsellor, and everyone needs to take part in the review and negotiations of this re-arrangement of debt.

Step 4:

The debt counsellor will then determine whether you are over-indebted and if any of the credit agreements appear to be reckless - this is done within 30 days after receiving the debt counselling application.

Step 5:

The debt counsellor will then come to one of the following determinations:

  1. You are not over-indebted, and the application is rejected - you can still approach the courts,
  2. You are not over-indebted, but you are experiencing financial difficulties, and it is recommended that you and your creditors enter a voluntary debt re-arrangement agreement. The voluntary agreement must then be signed by all parties, including the credit providers, you the consumer, and the debt counsellor,
  3. You are over-indebted, and it is proposed that the court make the following orders:
  • Declare some of your credit agreements as reckless, meaning that the credit provider should have taken better care in giving you the credit, and that the credit should therefore be scrapped, and/or
  • Re-arrange your obligations under some of the credit agreements by, either extending the period of the agreement, reducing monthly payment amounts, or postpone the dates of the payments due to the credit provider.

Step 6:

All the credit providers, you have agreements with, will be informed of the debt counsellor’s proposal, and they are then allowed to reject or accept the proposal made.

Step7:

Once the courts receive the debt counselling application, a hearing will be held. The hearing held will consider the debt counsellor’s proposal, the consumer’s financial information and any objections from credit providers.

Step 8:

This entire process is then finalised once the court makes a debt re-arrangement order or dismisses the debt application.

With all the steps finalised, a payment distribution agency will take over the re-payments of your debt obligations under your credit agreements, while you are under debt review.

Always remember, the process is geared to help you as the consumer out of debt. Use it if you feel that you are sinking in debt. But you need to take the first step.

So, what is a debt counsellor?

A debt counsellor is a person (natural), meaning it is not a company, with the required education and experience to register as a debt counsellor with the National Credit Regulator (NRC). This debt counsellor will be the person to assist you when you are unable to service or pay your debt.

Again, they help with negotiating and re-arranging your obligations under your credit agreements.

  • The debt counsellor must inform you of the following:
  • The debt counselling procedure,
  • The effect of debt counselling,
  • Their fees – always check the fees people.

You must understand the debt counselling process before you undergo debt counselling. I cannot stress this enough, understand the process and how things work. In the long-term this will make it easier for you.

The debt counsellor will further provide advice on managing your living expenses – think budgeting (practise this and with your children). The debt counsellor will teach you to set aside a certain amount of income, which will be used for necessities, like:

  • Food,
  • School fees,
  • Transport,
  • Paying rent/bond, etc.

The remainder of the money will then be used to pay your debt owed to credit providers.

You should see the debt counsellor as the person who will be providing you with advice and guidance on the debt counselling process. Make sure your debt counsellor brings value to the table, and enable you to pay of debt, and make better, more informed decisions. They need to have the required experience and qualifications and make sure they are registered.

What are the effects of debt counselling on you?

Once you apply for debt counselling, you are no longer allowed to enter into any other credit agreements with creditors, until one of the following occurs:

  • The debt counsellor rejects your debt application,
  • The court dismisses the debt counsellor’s proposal and your debt application for debt counselling, or
  • The obligations under these credit agreements, listed under a debt re-arrangement order or agreement, has been fully satisfied. Therefore, ensure you meet all your obligations for the duration you are under debt review.

No creditor can proceed with legal action while you are in the process of applying for debt counselling, if you are in the court process, or while you are in the process of re-arranging your debt for payment.

The creditor however can proceed with legal action if you, the consumer, breach the debt agreement (meaning you break the agreement and you did not fulfil an obligation), or if the debt application has been rejected, by either the debt counsellor or the courts, or if all your obligations were met during the duration of the debt review.

The creditor could further apply to terminate the debt counselling, as a result of you breaching or breaking the debt re-arrangement order or agreement.

How do you cancel your debt counselling?

Cancel culture is real, and yes you can even cancel your debt counselling. However, only in certain conditions. Below I explain how:

  • Once you receive a clearance certificate from a debt counsellor,
  • If there is no court order:

So what do you do if you meet those conditions

  1. You can inform the debt counsellor in writing of your desire to cancel,
  2. The cancellation can only proceed if it is done before notifying creditors of your debt counselling application, and
  3. You must pay the debt counsellor’s fees before the debt counselling can be cancelled.
  4. If there is a court order
  5. You must apply to the court to cancel the debt counselling proceedings against you, and the court must declare that you are no longer over-indebted,
  6. If the application with the courts is successful, then the debt counsellor will notify all the creditors of your cancellation. 

When are you issued with a clearance certificate?

A clearance certificate is given by a debt counsellor, when all debts that were part of the debt counselling has been paid in full. A clearance certificate is alternatively provided if you, as a consumer, can show that:

  • You are financially stable, and you can pay your outstanding debt, now and into the future, under long-term credit agreements, like a home loan,
  • The long-term credit agreements that formed part of the debt counselling process is paid up to date - it does not need to be paid in full, or
  • All other debts that formed part of the debt counselling application, except the above long-term debt, has been paid in full.

The debt counsellor, within 7 days after issuing the clearance certificate, must file the certificate with the National Credit Register and all credit bureaus. With this, any information relating to your debt counselling must be removed from your record, as a consumer.

There are many processes and steps to debt counselling. Most of it is regulated in terms of what can be done, and within what framework and timelines. Working through this process, these are the important points that jumped out at me:

  1. Understand the debt counselling application process, and familiarise yourself with the National Credit Act – This is the framework of the debt counselling process,
  2. Your debt counsellor must have the qualifications and experience to provide you with help, guidance, and advice – best you get someone registered,
  3. Understand the effect of the debt counselling process on you as a consumer of credit – what you can and cannot do,
  4. Make sure you hit your goals and obligations in terms of the debt re-structure if under debt counselling – Your creditors will be waiting, and
  5. Visit websites like the National Credit Regulator to better understand your rights and what you can do at www.ncr.org.za. Here you can also lay a complaint against a creditor – think reckless lending or loan sharks.

And the last ingredient required to make this a success, is you, your ability to accept, understand and work towards a debt free you! You can do this!


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