There’s nowhere to hide when creditors hunt you down to settle your debt. From incessant phone calls, to letters piling up in your mailbox, they will stop at nothing until you pay.
Thankfully, you don’t have to walk this challenging journey alone. With the help of a qualified debt counsellor, you can start over.
This article will guide you through the basics of debt counselling and answer all your questions.
What is debt counselling?
Debt counselling is a financial solution where over-indebted consumers can have their debt restructured through a lower, affordable payment. This process also protects the consumer, since the debt counsellor negotiates with the credit providers on the behalf of the consumer.
Over-indebted consumers can apply for debt counselling to assist them in settling their debt. This is done by restructuring their monthly instalments and preventing them from taking on any further credit.
Businesses that offer debt counselling must abide by the National Credit Act (NCA) and they can be taken to the National Credit Regulator (NCR) if they don’t treat consumers in accordance with this.
In the NCA itself, it explains that its role is to assist over-indebted consumers to restructure their debt. The act provides for consumers who are unable to service their monthly repayments on their credit agreements, allowing debt counsellors to rearrange their monthly repayments with their credit providers.
Debt counselling can assist you in the following ways:
- Once you’re officially under debt counselling, your creditors will no longer be allowed to contact you directly. Instead, they will work through your debt counsellor, who will champion your needs and negotiate the best deals for your unique circumstances.
- Your creditors will no longer be able to take legal action against you. By going under debt counselling, you’re making a commitment to paying off your debt and your creditors are required to be patient with this process.
- Your credit score will be paused at the credit bureaus. You won’t be allowed to apply for further credit while under debt counselling and this status will be displayed on your credit record until the process is complete. Despite hearsay, there is no ‘black mark’ next to your name once you have paid up your debt and received your clearance certificate.
Debt counselling usually takes between three and five years to complete – but this depends on the amount of debt you have and how much you’re able to pay towards your debt each month. Upon completion, you’ll receive a clearance certificate and your name will be cleared at the credit bureaus.
In 2019 alone, over 20,000 South Africans were assisted by DebtBusters, and 4,000 managed to receive their clearance certificates. Taking a step in the right direction towards your own financial health will relieve the strain of mounting debt and the woes of living from one pay cheque to the next.
Applying for debt counselling is a simple process. You just need to approach a debt counselling company, such as DebtBusters, and express an interest in debt counselling. You can do this by filling in an online application form or calling the number available.
When should you apply for debt counselling?
It’s important to understand that debt counselling is not for everyone. If your debt is manageable and you’re not in over your head, it may be best for you to handle your debt independently or seek an alternative financial solution.
However, if you’re struggling to make ends meet and your debt is only increasing, debt counselling might be exactly what you need.
The NCA describes an over-indebted consumer as someone who is unable to meet their debt payments at the end of each month.
“The act also states that if the debt counsellor has completed an assessment and has reached the conclusion that a consumer will not be able to meet their debt commitments at the end of a month, then that consumer is over-indebted,” according the NCA.
If a debt counsellor concludes that you’re not over-indebted, they will send you a letter of rejection. If you disagree with this outcome, you can approach the court within 20 business days to have yourself declared over-indebted.
If you’ve received a Section 129 Notice, then you should immediately apply for debt counselling. This is usually your last chance to apply for debt counselling. If your creditors are dissatisfied with your actions following a Section 129 Notice, legal action will be taken against you and you’ll no longer be able to apply for debt counselling.
You may be rejected from debt counselling if you’re unemployed. However, if you can prove that you receive a steady income through other means, such as a government grant or a fixed allowance, your application may be approved.
If you lose your job while under debt counselling, it’s important to immediately contact your debt counsellor and explain how your financial situation has changed. The counsellor will then be able to reach out to your creditors and renegotiate your monthly repayments.
If you have credit life insurance in place, this will kick in if you’re retrenched and the fund will assist you with your monthly repayments.
The cost of debt counselling
If someone is unable to meet their debt obligations at the end of each month, how will they be able to afford a service such as debt counselling?
Once you start the debt counselling process, your debt counsellor will restructure your monthly debt payments. This means the counsellor will get in touch with all your creditors and negotiate the lowest monthly instalments at the best possible interest rates.
Once it’s arranged, the debt counsellor will compound it into a single monthly payment which you will need to settle each month. The amount will be lower than what you were paying before and the cost of debt counselling will be included.
There are three main costs when it comes to debt counselling:
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- Restructuring fee: This is the cost of the above-mentioned service of negotiating with your creditors and settling a single monthly payment. This cost will be equal to your first monthly instalment, but it will never exceed R10,350 – even if your monthly cost is more than that. Therefore, instead of your first instalment going towards your creditors, it will go towards your chosen debt counselling company.
- Sundry fee: This is considered the legal fee and it’s equal to, and taken from, the second instalment you make once you’ve started debt counselling. This amount will never exceed R9,000, and it will ensure you have legal protection if a court order is taken out against you.
- Aftercare fee: For the remainder of your monthly debt repayments, starting from the third monthly repayment, you will pay an additional 5.75% of your restructured fee. However, note that this will never exceed R518, and your overall monthly repayments will still be less than they were prior to you starting with debt counselling. This cost ensures that you have ongoing support from your debt counselling provider, and it also covers the cost of managing your monthly repayments.
Like any other service, you need to support debt counsellors for the work they do. But, because of the work they do, you’ll still end up paying less overall.
The impact on your credit score
When you start debt counselling, the credit bureaus will be informed, and you’ll no longer be able to take on any new credit. This will be for the duration of your debt counselling process and it will prevent you from falling into any further debt.
Once you receive your clearance certificate, you must send it to the credit bureaus and they will indicate on your credit report that you’re no longer under debt counselling. You’ll then be able to apply for new credit.
Remember that going under debt counselling is considered a responsible decision, and credit bureaus will not punish you for taking your personal finances into your own hands and taking effective steps to settle your debt. Your credit score will not be forever tarnished and, just like everyone else, you’ll be able to grow your credit score over time.
However, be careful not to fall back into the same trap. There’s good debt and then there’s bad debt. If you decide to take on new credit, make sure you lean towards taking on good debt. The following is a good way of distinguishing between the two:
- Good debt: In the long run, this will generate you further income. For example, if you decide to take out a loan so that you can do home renovations on the granny flat on your property and then rent it out, creating an additional income each month.
- Bad debt: This is debt that won’t increase your long-term financial position. For example, taking out a payday loan in order to carry yourself through the month, or taking out a personal loan to pay for a holiday or any other luxury purchase.
In order to heal your credit score after debt counselling, you’ll have to take on a small amount of debt and prove that you’re able to meet your payments on time and in full. When you do this, make sure you take on good debt rather than bad debt.
When should you consider debt counselling?
Falling into unmanageable debt can be a slow process. Over the course of a year, you may slide from someone who’s meeting debt payments to someone who’s struggling to make ends meet.
If you find yourself answering “yes” to any of the below questions, it may be time to take a hard look at your financial situation and consider debt counselling as a possible solution:
- Are you able to save? It’s recommended that South Africans save 20% of their income each month. This may be a tall order, even for those who’re not struggling with debt. However, it may also be a warning sign that you’re not managing to make ends meet. Without savings or an emergency fund, you’re at risk of falling into debt as soon as an unexpected expense arises.
- Does your debt keep you up at night? If your subconscious is plagued by your growing debt, it may be a sign that your debt is taking a turn for the worse. You may be in denial about the magnitude of the situation, but your subconscious may be on red alert, trying to warn you to take action. If this is the case, consider getting a second opinion from a debt counsellor.
- Do you rely on credit for monthly expenses? If you find that you need to take out a loan or use credit cards at the end of each month to cover basic expenses, such as food or clothes, you may be in deeper water than you realise. This shows that you’re spending more on servicing your debt each month than you can afford, and it’s only a matter of time before you’re unable to meet your financial obligations.
- Are you taking out debt to settle debt? By taking on new debt so that you can meet your monthly debt obligations, you’re simply perpetuating the cycle of debt. By the time the next month arrives, you’ll have to do the same and you’ll eventually climb deeper into debt. Ultimately, you’ll just prolong your repayment process, and walking such a fine line is incredibly dangerous.
- Are you lagging behind on payments? If you find that you’re taking longer to pay your monthly instalments and you’re skipping certain months because you don’t have enough money to cover these expenses, you may be in over your head. Sit down and take a serious look at your finances, and make sure you get in touch with a qualified debt counsellor for a second opinion.
Becoming over-indebted can sneak up on you. Don’t overlook the signs that could prevent you from reaching a financial free life even sooner.