What is debt counselling, and when should you consider it?

Although the finance minister didn’t increase income taxes this will be cold comfort to the nearly half of credit-active consumers who, according to the National Credit Regulator, have impaired credit records.

Benay Sager, chief operating officer at DebtBusters, says often consumers do not realise how much financial difficulty they’re in, but are most concerned about the perceived stigma of asking for professional help to deal with debt.

The number of debt-clearance certificates issued to DebtBusters’ clients grew by 69% per year between 2015 and 2019 – almost a tenfold increase in a four-year span.

In 2019 it granted nearly 5,000 certificates.

Debt counselling was introduced as part of the National Credit Act in 2007. The provision helps over-indebted or soon-to-be over-indebted consumers to repay their outstanding debt through an affordable repayment plan.

“Our team receives thousands of enquiries a month. Many consumers do not understand what over-indebtedness technically means or how to seek help,” said Sager.

“A good rule of thumb is that if you’re struggling to pay all your debts on time or are losing sleep over your debt, you should get help.”

On contacting a debt counsellor, consumers should be given a free debt assessment to determine their level of debt and whether debt counselling is a potential solution.

Having taken the first step, it’s important to be honest. If the assessment determines someone is over-indebted, then the consumer can decide to formally apply to debt counselling.

As part of the process, the debt counsellor renegotiates reduced monthly payments on all credit agreements that fall under the National Credit Act.

This ‘restructuring of debt’ is done within industry parameters and strikes the balance between the consumer’s ability to pay and their overall debt levels.

It is not something that most consumers can easily or efficiently do on their own, said Sager.

Once more affordable repayment rates are negotiated with all creditors, the consumer’s ‘rearranged debt’ is then approved at a court or National Consumer Tribunal (NCT) to ensure the renegotiated rates kick in for the duration of debt counselling.

Consumers make one affordable, payment each month, which is distributed to the creditors included in the debt-counselling for the duration of the plan.

In debt counselling, all the relevant fees are built into this monthly, affordable repayment amount, therefore the consumer pays a single amount per month to an independent Payment Distribution Agency (PDA), also regulated by the NCR.

“Debt counselling is a highly regulated and very efficient mechanism for consumers to pay back their debt,” said Sager.

Debt counselling usually lasts for between three to five years, depending on the amount of debt, the arrangements the debt counsellor is able to negotiate with the creditors and what the consumer can afford to repay each month.

Upon finishing the programme the debt counsellor will issue a clearance certificate confirming that all the accounts listed under the debt counselling agreement are paid up.

Home loans are the exception and do not need to be fully paid but must be up to date. The debt counsellor will ensure that the credit bureaus receive the certificate, said Sager.

The most commonly asked questions about debt counselling are:

Who can apply? Anyone struggling with debt. If you are married in community of property you must apply with your spouse.

What does it cost? The NCR has fee guidelines. The debt-counselling fees form part of reduced monthly instalments.

Can someone under debt counselling apply for credit? Consumers cannot apply for credit while undergoing debt counselling.

Once they have completed the programme and received a clearance certificate they can again apply. It is advisable to draw up a realistic budget and discuss this with the debt counsellor or a financial advisor before applying.

Read: South Africans are using almost half their salaries to pay off debt

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What is debt counselling, and when should you consider it?