What is debt counselling & how it can save your relationship, your job and a fair whack of money.
This is the third in a seven-part series on how South Africans can survive a tough economy and build wealth in the face of inflation and price increases. Read other articles in the series here.
Are you 36 years old, owe 8 different companies money and need between 102% and 146% of your net income to service your debt? If you are, then you’re not alone.
Do those figures sound crazy to you? Perhaps. But sadly, we think that the financial health of most South Africans is only going to get worse before it gets better. March already saw a 25bps increase in the repo rate bringing it to 7%. A repo rate hike always results in an increased cost of borrowing for consumers, as banks immediately increase the cost of home loans, vehicle finance, student loans, personal loans, store cards, credit cards and any other type of credit or loan that is linked to the repo rate. And that’s before consumers have to pay for more expensive petrol and electricity which both went up recently.
In our previous Smart Money article we took you through three different scenarios as to what your options are, if you’re indebted and looking to get out of debt for good. In the last scenario, we said that if you can no longer make ends meet, and perhaps you can’t borrow any more money even if you’ve tried to, then it’s time to bring in the pro’s to help you get back on track.
Debt Counsellors are either individuals or companies whose debt counselling process helps clients (like you or I) who are struggling to make debt payments, by entering you into a structured debt repayment plan with the companies you owe money to – in installments, that you can afford. This is calculated after taking a look at how much you owe to different companies or lenders, how much you earn, and what your monthly living costs are.
It will vary from client to client – depending on how much you owe, and earn. The maximum length of time it can take however, is 60 months.
Debt counsellors have agreements with most of the banks and other lenders, to reduce the interest portion of your debt right down. If you’re trying to decide on which debt counselling company to use, this is an important to question to ask them: which banks and lenders do they have agreements with and what is the average interest rate reduction they’ll be able to negotiate on your behalf?
“We are typically able to reduce interest rates from an average of 22.95% down to between 0% - 3%.,” says Bhavesh Naran, a marketing coordinator from debt counsellors, DebtBusters. “Once we strip out the interest, and divide the outstanding amounts over 36 to 60 months, the client’s monthly debt repayments come down to 36% of net pay which means that families can repay their debt and cover their monthly living costs again, providing much needed relief,” he says.
Lastly, whilst you’re going through the debt counselling process, you’re automatically granted legal protection from creditors. That means no more fees and no more calls from everyone who wants money from you.
The purpose of debt counselling is to get you debt free and therefore you will not have access to your credit cards, retail accounts, overdrafts or any types of debt while under debt counselling. In order to ensure you can’t access further credit during this period, the credit bureaus will be notified that you’re undergoing debt counselling. This information will then be made available on your profile on all the credit bureaus until you’re finished the debt counselling process, at which point it is removed. Some people find the thought of not having access to credit a bit stressful but most people who have been wracked with debt for years, find it liberating.
Our perspective? We don’t think you should want more debt if you’re already struggling to cope with the debt you have. It also stops consumers from entering the trap of using debt to settle debt, which is an impossible situation to get out of.
Lastly, we find this defined period of debt counselling – where you’re paying down your debt as quickly as possible with the assistance of the professionals – is an ideal opportunity to work on your personal financial education so that by the time your debt is paid off, you’ll be well on your way to building wealth.
Debt Counselling is a formal process, which is governed by the National Credit Act and as such, debt counsellors are regulated in how they charge you their fee for the service they provide. Typically, the bulk of those fees are charged in the first two months of your repayments, and thereafter your money goes to paying back your loans.
It’s very important to know that your monthly debt repayments (known as your rehab payment) and associated fees are based on how much YOU can afford, which is determined by your budget. For example, if your debt counsellor says that your monthly repayment fee of your debt is R770 per month (because that’s what you can afford) then that’s the restructure fee you’ll pay to your debt counsellor in your first month. Here is a more detailed example of how the fees work in the first three months:
- Month 1 - Restructure fee: This is equal to your rehab payment payable in your first month (up to a maximum fee of R6,840). To clarify using the example above: if your monthly rehab fee is R770 a month, this is the restructure fee that your debt counsellor will take as a payment for their services in your first month in debt counselling. Also, month one will cover your once off application fee of R57 and a fee of R57 for your credit check.
- Month 2 – Sundry Fee: This includes your legal fee. Anything above the legal fee gets distributed to your credit providers.
- Month 3 – Rehab payment to your credit providers: Your rehabilitation payment is the amount you pay back on your debt every month.
You’ll be issued a clearance certificate from your debt counsellor saying you’ve repaid all your debt and then this information will be relayed to the credit bureaus. Once that happens you’ll clear your name and improve your credit rating.
If you go to this page and apply for debt counselling online, a consultant will call you to do a free assessment and credit check to see if you qualify.
Alternatively, you can look for a debt counsellor on the National Credit Regulator’s website.
The views and opinions expressed in this article are those of the authors and do not necessarily represent or reflect the views of 1Life or its employees.