Debt counselling guide

Many South Africans are struggling with debt they can’t afford to repay.

With the rising cost of living, high interest rates, and slow income growth, it has become increasingly difficult for many people to keep up with their debt repayments.

Not sure you’re on top of your debt?                                                              

Start by calculating your debt-to-income (DTI) ratio. This is the percentage of your income that goes towards paying off debt.

To calculate your DTI ratio, take your monthly debt repayment amount, divide it by your gross income, and multiply the answer by 100.

A high DTI ratio shows that you have too much debt in relation to your income – for example, if you’re using 40% or more of your income for debt repayments. This indicates you’re overindebted and would benefit from a debt management solution such as debt counselling.

Your DTI ratio can only improve if you reduce your debt, or your income increases – which is hard or impossible to achieve for most of us in today’s economy.

If this sounds like the situation you’re in, it’s essential to get help before things get worse. 

What is debt counselling?

The National Credit Act (NCA) of 2007 introduced debt counselling as a debt solution for overindebted South African consumers.

You’re overindebted if you have more debt than you can afford to pay back when, for example:

• Your monthly financial obligations and debt payments exceed your income
• You’re short of cash after paying your debts
• You need to use credit cards to pay for basic needs, such as food or rent
• You’re borrowing new money to pay off old debts
• You miss account payments because you can’t afford them
• You feel worried or stressed about money most of the time

Also referred to as debt review, debt counselling helps you regain control of your finances and ease your path towards debt freedom.

A debt counsellor will negotiate with creditors on your behalf, potentially securing lower monthly payments and interest rates.

In addition, the counsellor can put together a restructured payment plan for you, combining multiple debts into one so you pay a single, manageable amount every month. 

Debt counselling versus debt consolidation

It is a common misconception that the only way to consolidate your debt is to take on new credit or a debt consolidation loan.

A debt consolidation loan is sometimes seen as an “easy” way to repay debt, but it often comes with high interest rates, which can hamper your ability to get out of debt.

Consolidating your debt through debt counselling means it is repackaged into one lower monthly amount. This makes it easier to keep up with repayments.

Note, however, that debt counselling is a legal process – once you enter into an agreement, you can only exit once your debt has been repaid in full (excluding home loans), and you’re not allowed to take on extra credit until the process is complete.

Who can apply for debt counselling?

You can apply for debt counselling if:

• You’re found to be overindebted, or are on the verge of overindebtedness
• You have some form of income to repay debt

If you’re unemployed, you can unfortunately not go under debt counselling.

Understanding the debt counselling process

Debt counselling provides you with a structured way to manage your debt.

A debt counsellor looks at how much you owe and creates a new, more affordable repayment plan for you.

This involves renegotiating interest rates and repayment terms with your credit providers to lower your monthly payment. You’ll only have to make one monthly payment to a payment distribution agency (PDA) registered with the National Credit Regulator (NCR), and have no direct dealings with your creditors.

Debt counselling removes much of the stress from the debt management process – you won’t have to try to juggle payments or worry about receiving letters of demand. You’ll also have more cash for everyday expenses.

What to expect during debt counselling

Your debt counsellor will review your financial situation and help you devise a repayment plan that fits your budget.

Throughout the process, the debt counsellor will help you build healthier spending habits.

Here’s a closer look at what the process involves.

Checking if you qualify for debt counselling

Your debt counsellor will check if you qualify for debt counselling. If your application is successful, your credit providers, the NCR, and the credit bureaus will be notified. Your credit providers will be legally obliged to adjust their systems to show you’re under debt review/debt counselling.

Reviewing your financial situation

The next step is to provide your debt counsellor with all the information you have about your financial situation.

This will provide insight into how much you earn and owe, and where any cash shortfalls may be.

It will also ensure that your debt counsellor understands the extent of your financial problems – including whether you’ve skipped payments, or had legal action taken against you.

Creating a budget

Your debt counsellor will help you create a new, affordable budget, designed to help you pay off your monthly debts while covering your essential living costs.

Negotiating with your creditors

You’ll be pleased to know that you won’t need to talk to your lenders yourself.

A reputable, registered debt counsellor will have good relationships with banks and creditors and can secure lower interest rates and more favourable repayment terms on your behalf.

The next step is to receive a detailed proposal on how to make your debt more manageable.

Restructuring your debt

Because debt counselling is a legal process, your new payment plan will have to be approved by your local magistrate’s court, and you will receive a legally binding consent order.

Once this is in place, you’ll start making a single monthly payment to the PDA, which will cover all your debts. The PDA will then pay your creditors on your behalf.

Documents required for debt counselling in South Africa

• A valid South African ID document or passport
• Your last three months’ payslips
• Proof of income, such as bank statements and rental income
• The latest statements from your credit providers
• Any letters of demand or summonses issued
• Any loan and vehicle finance agreements, home loan statements, and other credit-related documents
• Additional proof of expenses, for example utility bills, insurance policies, medical aid statements, and school fee statements
• Marriage certificate, if you’re married in community of property, along with your spouse’s ID

The benefits of debt counselling

Now that you understand the debt review process better, let’s look at the advantages of debt counselling.

Legal protection

While you’re under debt counselling, you’re protected under the NCA. This means your creditors won’t be able to take legal action against you or repossess your assets, even if you’ve defaulted on payments in the past.

Your creditors are also legally required to cease all communication with you – they may only liaise with your debt counsellor.

Reduced monthly payments

Your debt counsellor will calculate what you can afford to repay after covering necessities, and negotiate with your creditors accordingly.

Instead of paying several creditors every month, you’ll make only one consolidated monthly payment to a PDA.

Debt counselling typically increases your repayment period and lowers your interest rate, reducing your debt’s overall cost.

Financial guidance

A debt counsellor has a wealth of financial knowledge and experience.

This means you’ll benefit from the financial guidance of a seasoned professional while under debt counselling.

Interest reduction

Your debt counsellor can often negotiate significantly lower interest rates for you, making your debt easier to manage.

In addition, creditors won’t be able to charge you additional penalty interest, which would normally apply when you default.

However, note that interest will continue to accrue on your debts during debt counselling – just at a fixed, lower rate.

Asset protection

While you’re under debt counselling, and sticking to your new payment plan, your creditors can’t attempt to repossess your assets such as your house or car.

This is true even if you were behind on payments before entering debt counselling, and remains the case for as long as it takes you to repay your debts.

Even if repossession proceedings had already started before you entered debt counselling, the process will be automatically suspended.

Debt counselling helps you avoid bankruptcy, which would result in the loss of your assets. Helping you to retain ownership of your property is a significant advantage of debt counselling.

Understand the cons of debt counselling

While debt counselling is a great way to get back on your feet if you’re overindebted, you should be aware of some limitations and conditions, listed below.

No more credit while under debt counselling 

It may seem frightening to you that you can’t take out any further credit while under debt counselling.

However, this is purely for your own protection – if you’re already overindebted, more credit would increase your financial problems.

Credit providers are legally required to decline credit applications from anyone under debt counselling.

Once all your debt has been repaid (excluding home loans), you’ll obtain a clearance certificate, which means you’ll once again be allowed to apply for credit – although you should think twice about this if you’ve already been under debt counselling.

No missed payments

Once your new payment plan takes effect, you can’t skip any payments.

If you miss a payment, you’ll violate your debt counselling agreement, which means you’ll no longer be legally protected. Your creditors will once again be able to take legal action against you, and you’ll also face high interest charges.

Sign up to see if you qualify for debt counselling 
with DebtBusters

Tackle overindebtedness with a real, lasting solution from DebtBusters. Our goal is to help you become debt free, ideally within three to five years – although this depends on your amount of debt and what you can afford to pay every month.

Your 10-step debt counselling plan

Step 1

Contact DebtBusters or fill in the free call-back form below. One of our consultants will contact you to find out more about your financial situation.

They’ll explain how debt counselling works, how it can benefit you, and how much you can save. If you choose to continue with the process, we’ll send you an application form and a list of required documents.

Step 2

Once we receive your application, we’ll assess your finances to determine whether you’re overindebted. We’ll also conduct a credit check and ensure all your accounts are included in your credit report. If you’re overindebted, we’ll proceed to step 3. If you’re not overindebted, we’ll recommend other debt management solutions that may suit your needs.

Step 3

We’ll notify your credit providers, the NCR, and the credit bureaus that you’re officially under debt counselling. Your credit providers will adjust their systems to reflect this.

Step 4

We’ll go through your budget and show you where you can save money – for example, on insurance, bank fees, groceries, and more. Saving just 8% of your monthly spending every month over the course of a year can be like getting a 13th cheque, tax-free! This will help you to pay off your debt faster.

Step 5

Your credit providers will send us information about your accounts, including outstanding balances, interest rates, monthly repayments, and any legal action initiated. We’ll update your profile with this information and confirm with your creditors that you’re overindebted.

Step 6

We’ll send you your new budget, showing how much you can afford to pay your credit providers. We’ll also include a list of creditors in your debt obligation list. Your consultant will explain how much you must pay, where to pay, and when. Payments will be made to a PDA that will pay each creditor on your behalf.

Step 7

The DebtBusters negotiation team will use specialised systems to calculate amounts owing to each credit provider. We’ll then send your credit providers proposals for your new payment amounts, along with your budget, list of creditors, and repayment plan.

Step 8

If your credit providers accept the proposals, we’ll guide you through the legal process. If any creditor doesn’t agree to the plan, our negotiators will adjust the offer. If an agreement is still not reached, we recommend starting a legal process so a magistrate can make the final decision.

Step 9

You’ll need to make your monthly payments to the PDA for the full debt counselling period. We’ll review your budget annually as part of our service.

Step 10

Once you’ve paid off all your debts (excluding home loans), we’ll issue a clearance certificate and send it to your credit providers, the NCR, and the credit bureaus. Your credit record will be updated within five business days to show that you’re debt free.

Experience financial freedom with DebtBusters

Our expert team offers personalised debt counselling to help you effectively manage and reduce your debt.

Take the first step towards a debt-free life and contact DebtBusters today. Your journey to financial freedom starts with a call!