What to do when debt spirals

28 November 2012

October 17, 2001
By Sipokazi Maposa

What can you do if, despite your best intentions, you’ve borrowed money but cannot keep up with your debt repayments? In the fourth and final part of our series on money lending, we look at your options.

Many people find themselves in the dangerous situation where their disposable income is smaller than their required debt payments. This is often caused by reckless borrowing, and you may find yourself coming under pressure from your creditors. There are various ways you can solve this problem. Some of the options are debt rescheduling, debt consolidation, and debt administration. These options can help you take care of big debts, but have disadvantages you should be aware of.
• Debt rescheduling: This is when you negotiate with the lender to change the terms of your loan, for instance, arranging to repay your debt in smaller amounts, but over a longer period. This will leave you with more money for your basic needs, but you will end up paying much more than the original amount you borrowed because of interest charges.
• Debt consolidation: This is when you take a large loan from one lender and use it to pay all the smaller debts you have. The advantage is that you will now only have one debt to pay over a long period, but once again you will end up paying more because the interest rate will be high.
• Debt administration: This is when you get a debt administrator, usually a lawyer, to manage your money when you can no longer afford to pay your debts. The administrator considers your salary or wages against your expenses for basic needs. He or she will allocate a certain amount of your salary to you, and the rest will be distributed among the people you owe money to.

Debt administration falls under the Magistrate Court Act and was introduced to help people with judgments against them. These days, however, you don’t have to have a judgment against you to be placed under administration. Debt administration applies to people whose debts do not exceed R50 000 but who cannot meet their financial obligations. If you have too much debt you can be voluntarily placed under debt administration.

The Magistrate Court Act dictates that administration fees should be 25.5 percent. There is some debate about debt administration charges. Some administrators argue the charge should stay at 25.5 percent while others say the rate should be 12.5 percent plus VAT, which is currently 14 percent, because all services attract VAT.

< debt of pitfalls>
The Micro Finance Regulatory Council (MFRC) advises that if you decide to use a debt administrator you should be aware that:
• The fewer of your installments you pay, the longer it will take you to pay off your debt – and so you will end up paying more interest;
• You do not have access to your own income. The administrator, not you, decides how much of your salary you should get;
• You cannot get credit until you have paid your debt in full, but some creditors can give you credit if you disclose that you are under debt administration;
• You cannot enter into any new debt without the consent of the administrator, Paxton Ramothata, the complaints and enforcement manager at the Micro Finance Regulatory Council (MFRC), says. If you have paid most of your debt, the administrator may be willing to allow you to access credit;
• You will pay much more than the original amount you borrowed, due to added interest charges;
• It is your responsibility to ensure your administrator is paying your creditors regularly; and
• Debt administration can have a bad impact on your credit rating. Even after you have paid all your debts, you have to wait through a five year “rehabilitation period”, during which you will not be able to access any credit facilities.

Melvin Weiner, a practising attorney and administrator for NW Financial Administrators, disputes this. He says debt administrators do not get your entire salary, but a monthly installment determined by the court. You can have access to credit, he says. You must tell the creditor you are under administration, but you do not need the consent of the administrator to get more credit. However, it is advisable to approach your administrator for assistance if you genuinely need more credit, Weiner says.

He also says debt administration need not have a negative effect on your credit rating, and that this route may not end up costing you more because, when you are under administration, creditors do not charge you interest, and you pay only administration fees.

Weiner says he knows of many debtors who were able to get credit while under administration.

Debt administration caveats
As in any section of society, there are shady operators – unscrupulous debt administrators who will get you into more trouble by:
• Receiving money from you but not actually distributing it to your creditors on a regular basis;
• Obtaining loans in your name to pay administration fees;
• Adding exorbitant charges for administration costs; and
• Never actually getting you out of debt and using you as a cash cow.

Weiner warns debtors that money lenders, such as micro-financers, should not be debt administrators.

Dave de Beer, the vice-chairman of the Association of Micro-lenders, told the recent MFRC conference that some administrators advertise that if you take an administration order you won’t have to pay off your loan. Weiner says he has never seen these adverts.

Micro-lenders and debt administrators play an important role and are here to stay, Weiner says.

And as long as there are unscrupulous micro-lenders, there will also be unscrupulous administrators, he says.

The problem with some micro-lenders is that they lend money to disadvantaged people who cannot afford to repay it, Weiner says. He also says that micro-lenders are not doing credit checks on would-be borrowers, or properly examining an applicant’s financial position before lending them money.

Weiner says that every pay day he sees clients complaining about the way they are being treated by micro-lenders. The most common complaint is that a money lender deducts money from a person’s wages orbank account, whether or not payment is possible.

One client at Weiner’s office, Pamela Xameni, said more than half her net salary had been deducted by micro-lenders, even though she was under debt administration.

The micro-lenders had not given her the information she needed, such as the amount she was supposed to pay back to them each month, she says. They had only told her the number of installments she had to pay.

Patricia Mvimbi, another of Weiner’s clients, says micro-lenders deduct money from your bank account by supplying your details directly to your bank via magnetic tape without consulting your administrator.

Magnetic tape is the computer system used by banks that allows institutions to electronically debit your account. Weiner says the treasury can reverse the money deducted through a magnetic tape transfer, but there could be a delay of two to three weeks.

Zamile Vusani, a branch manager at micro-lender G&A Cash Centre, says you must look for a MFRC certificate at the office of the lender you are considering.

If you plan to borrow money, take the proposed contract home with you and study it carefully before signing anything.

Vusani says G&A Cash Centre always does credit checks before granting loans, and will negotiate alternatives with a client who is battling to make repayments.

Marylin Budow, a non-practising attorney who heads the consumer affairs division at African Bank, urges consumers not to blindly leave their financial affairs to a debt administrator.

If you are under debt administration you should get copies of every transaction your administrator makes on your behalf. Make sure creditors are being paid and find out how, when and how much the administrator is paid, she says.

Weiner says that a debtor under administration has the right to know the full details of the progress being made.

The National Loans Register
In November last year the MFRC launched the National Loans Register (NLR), which provides information to encourage responsible lending and to protect consumers’ rights.

Lenders can use the register to get information about a client’s existing micro-loans and a summary of the borrower’s consumer credit status.

This enables lenders to assess your ability to afford a loan when you apply for one.

The MFRC and the Consumer Credit Association (CCA) have agreed to share data, which means that NLR users will have access to information about more than 25 million bank accounts listed with the CCA.

This will help lenders to make informed decisions about who to lend money to, and contribute to stability and development in the micro-lending industry.

Things to remember
• Debt rescheduling, debt consolidation, and debt administration should only be considered as options if you absolutely cannot afford to pay off your debts;
• It is important to find out how much you will have to pay a debt administrator for administration costs, penalty charges, interest charges, and any other charges that may occur;
• You should try to save some money every month for unexpected expenses;
• You should follow a budget to make sure that your monthly expenses do not exceed your known income; and
• You should not use up all the credit made available to you from stores and financial institutions.

Some lenders will offer you a second loan from them, while you still owe money on the first. They say you can use it to pay the balance of the existing loan, and want you to sign a new contract with them. This is a bad idea – you will simply end up having more debt to pay.

For advice or to lodge complaints, you can telephone the Micro-Finance Regulatory Council on 0860 100 406, fax (011) 647 4440, or send an email to info@mfrc.co.za

See also:
Part 1: What you need to know about micro-lending
Part 2: How moneylenders can collect
Part 3:Keeping the moneylenders in line
National loans register starts

Comments are closed.