Don’t miss a payment if you’re in debt counselling

28 November 2012

Only 32 000 out of about 70 000 consumers whose debt counsellors are either in negotiations with their creditors or who already have repayment plans in place, paid their October repayment plan instalments.

This is a worrying statistic because if you default on repayments after registering for debt counselling, your creditors have the right to cancel your debt counselling agreement and take legal action against you.

Note that if your counsellor is in the process of drawing up a repayment plan for you, this does not entitle you to a “payment holiday”. You still have to meet your obligations to your creditors.

Once your repayment plan has been drawn up, you must commit to meeting your repayments each month, and the onus is on you to ensure they are met. If you miss a repayment and a creditor takes legal action against you, your counsellor will be powerless to help you.

Cycle of debt
Luke Hirst, the chief executive of the debt-counselling firm DebtBusters, says debt is a huge problem among South Africans generally, and that only 42 percent of consumers are up to date with their debt repayments.

Hirst says the problem is that people have borrowed far more than they should have. “For example, when buying a car and calculating the instalment they can afford, many people forget to take into account additional costs such as the maintenance, fuel and insurance costs. Or they buy homes they can barely afford. Then they have a bad month financially and they start buying groceries on their credit card. Before you know it, the credit card bill is high and you take out a personal loan to try to wipe out your credit card debt. It becomes a vicious cycle of debt,” he says.

If you are already having to skip one repayment so that you can meet another, this is a clear signal that you are over-indebted and that you should contact a debt counsellor.

You may voluntarily approach a debt counsellor for help if you believe you are over-indebted (see “Who to contact if you need help”, below). You may also be referred to a counsellor by either a creditor or the magistrate’s court if a creditor takes legal action against you.

Once you apply for debt counselling and a counsellor agrees that you are over-indebted, you cannot take on new credit until you have paid off all your debts and have received a clearance certificate to this effect from your counsellor. You will also be listed on the credit bureaus’ records as a consumer who is undergoing debt counselling.

Once your creditors agree to a repayment plan with your debt counsellor, your payments are processed via a payment distribution agency (PDA).

Review process
Peter Setou, the senior manager of education at the National Credit Regulator (NCR), says that since the debt counselling review process began in June 2007, more than 123 000 consumers had applied for debt review by the end of October, although a number of these cases were still being assessed. In cases under assessment, consumers would still make direct payments to creditors instead of using PDAs.

However, Hirst says that none of the PDAs is running at optimum levels. “The PDAs are supposed to send out monthly statements to over-indebted consumers and their debt counsellors, but these statements are not always sent out. This means that debt counsellors are left to assume that payments are being met while consumers, in some cases, take advantage of the situation and skip payments,” he says.

There are five PDAs: National Payment Distribution Agency, Consumer Protection Excellence, DC Partners, Hyphen and African Bank.

Setou says about 4 000 new consumers use PDAs each month. To date, they have distributed repayments totalling R834 million.

Shortage of counsellors is ‘jeopardising process’
Although more than 123 000 consumers have applied for debt review since it was introduced in June 2007, there are only 1 425 qualified debt counsellors in the country.

Hirst says debt counselling is a relatively new industry with teething problems but, for the debt counselling process to succeed, more counsellors with improved training are urgently required.

Hirst says one of the main problems in the industry is insufficient training for debt counsellors, which is resulting in counsellors failing to do their jobs properly.

He says debt counsellors need to educate their clients on the repercussions of not paying their monthly payments.

‘Co-operation needed’
According to Hirst, there are more than seven million consumers in South Africa experiencing debt problems.

“That number is continuing to grow, making it essential that creditors and debt counsellors work closely together to process the burgeoning volume of clients effectively and efficiently,” he says.

DebtBusters‘ clients under debt review have an average monthly income of about R16 500. The average household under review has 12 credit agreements totalling R200 000 of short-term debt (including credit cards, personal loans, store cards and overdrafts). Ninety-five percent of clients have further long-term debt including vehicle finance, and 75 percent also have home loans.

He says if debt counsellors and credit providers fail to agree on repayment plans, “the weight of debt counselling administration will then crash onto the judiciary”. He says if this occurs, magistrates will find it impossible to deal with the volume of cases and the costs for all parties will rise while successful debt rehabilitations will fall.

“A failure of the debt counselling system will be disastrous not only for over-indebted consumers but also for the credit providers, who will be forced to write off more and more of their loan book, while at the same time spending more and more on debt recovery,” Hirst says.

Ongoing training
Peter Setou, the senior education manager at the NCR, says there is ongoing training for debt counsellors.

“About 65 percent of the 1 426 registered debt counsellors already possess either a diploma or degree qualification. Further, the NCR’s monitoring officers travel nationally to offer support to debt counsellors where necessary,” he says.

There are eight institutions accredited to train debt counsellors: the Association of University Legal Aid Institutions, Damelin, Institute of Bankers, Rudo Research and Training, The Credit Skills Training Institute, Cornerstone Performance Solutions, Summit Financial Partners, and You and Your Money.

Setou says that, to date, the NCR has issued two compliance notices and six instructional letters to debt counsellors. An instructional letter is sent to a counsellor as a first step by the NCR, to notify the counsellor that he or she is not complying with the law and how the actions may be corrected. If no action is taken by the counsellor, he or she is then issued with a compliance notice, which is a legal notice. If the counsellor fails to comply with the compliance notice, he or she may be referred by the NCR to the National Prosecuting Authority for prosecution.

To date, six cases involving debt counsellors have been taken to the National Consumer Tribunal, and one counsellor has been deregistered.

Debt counselling fees
Currently, the National Credit Act (NCA) states only that you must pay a fee of R50 for a debt counsellor to consider your financial circumstances and decide if you are over-indebted. Any additional fees a debt counsellor may charge you have not yet been regulated. In the interim, the NCR and the Association of Debt Counsellors have provided a guide to the maximum fees that debt counsellors may charge you for their services. According to the guidelines, if a debt counsellor finds you are over-indebted and agrees to help you restructure your debts, you must pay the counsellor a restructuring fee, which will be the lesser of either the first instalment of your debt repayment plan or R3 000. If the debt counsellor finds you are not over-indebted, you will have to pay a maximum rejection fee of R300 (excluding VAT).

As R3 000 is a large amount of money for someone who is already in debt, the Association of Debt Counsellors suggests that you pay a maximum of R500 once your debt repayment plan has been submitted to all your creditors. The balance of the restructuring fee must be paid once all your creditors have accepted the debt repayment plan. If you withdraw from the debt counselling process after your debt repayment plan has been submitted to your creditors, you will still have to pay the first instalment of the restructuring fee, up to a maximum of R500.

Legal fees
If your creditors don’t approve the debt repayment plan and the debt counsellor has to obtain a consent order from the Magistrate’s Court, you will be liable for legal fees. The debt counsellor has to disclose the legal fees to you upfront, and you must agree to them in writing.

If you want your debt counsellor to continue to advise you after your credit providers have accepted the repayment plan, you will have to pay a monthly after-care fee of a maximum of five percent of your monthly debt repayments (excluding VAT) for two years. After two years, the monthly after-care fee is reduced to a maximum of three percent (excluding VAT) of your monthly repayments. You have to start paying the after-care fee in the second month after you have paid the debt restructuring fee.

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