South Africans spend a staggering 76% of our monthly income on debt. If you consider that this leaves 24% of what we earn for other expenses, and that life is getting more costly every month, it’s obvious that we have a debt problem.
With so many South Africans in so much debt, it’s little wonder that we’re failing to pay it back. Unfortunately, most people have a tendency to pile loan upon loan, which becomes unmanageable, and they start missing payments and avoid increasingly urgent phone calls from lenders. Eventually the credit well dries up completely, people begin to default on their payments, legal action is taken and they are ultimately blacklisted.
“The first step to sorting out a situation like this is acknowledging that there’s a problem – preferably before legal action is taken,” says Kelli Knutsen, the marketing manager of DebtBusters. “Thereafter you need to draw up a plan and a budget for dealing with it. A debt counsellor will help you to do this as well as act on your behalf to improve the terms of your credit and to prevent any legal action from being taken against you.”
Debt counselling is a legal debt management arrangement. While many people avoid taking this step, there are significant benefits to the process. Reputable debt counsellors will help not only with reducing the interest on debts and getting your creditors off your case, but will also assist you in establishing good credit habits so you don’t return to your old ways.
Here is how the process works:
You apply to a debt counselling companyFind a reputable debt counselling company that is registered with the National Credit Regulator. Ask them how they plan to deal with your debt to reduce the interest, extend the term of your loans, help you to establish a repayment plan and support you in changing your behaviour. Some unscrupulous debt counsellors will take your money but not act on your behalf, so be sure to get measurable feedback from them.
Your debt counsellor runs a credit check to assess whether you qualify for debt counsellingA credit check will show them the state of your financial affairs. They will also need to know that you have an income and can service your debts in some way as well as pay their fees, otherwise you will not qualify for debt counselling. Your fees to the debt counsellor and their partners are calculated based on your affordability and will be paid as a portion of your first two monthly instalments and as a small ongoing percentage.
Then they apply to the magistrate’s court to act on your behalfDebt counselling is a legal process and cannot be carried out without the approval of the courts. Obtaining a court order usually takes about three months but the debt counsellor will begin to act on your behalf immediately. They will contact all of your creditors who will then not be permitted to take any legal action against you and can no longer harass you for money.
A reputable debt counsellor will help you to create a budget Kelli says that many people have no idea where all their money goes every month. By drawing up a formal budget and working out what expenses need to be met, debt counsellors help you to regain control. But they should also offer you support in changing your behaviour in the form of financial planning, education and online resources as well as assess your insurance needs.
The debt counsellor will contact your creditors and adjust your interest and payment termsReputable debtcounsellors have relationships with registered credit providers and will contact all of them to tell them you are in counselling and have made a commitment to pay back the money you owe. They use their relationships with these credit providers to negotiate decreased interest rates and increased terms of loans, which means that you will have less to pay back each month. The debt counsellor notifies the credit bureaus that you are in counselling and until all your debts are paid back you will not be allowed to access further credit.
The debt counsellor will offer you access to a payment distribution agency to handle your debt repaymentsA payment distribution agency takes control of all your monthly payments to your different creditors so that you pay the agency a lump sum each month rather than making multiple payments. Payment distribution is different from debt consolidation, which is when you take out one large loan to pay all your debts, often at a loaded interest rate, and then only have to service that one repayment.
When all your debts have been paid back, your debt counsellor will update the credit bureausWhen you have paid back the money, you will immediately be credit worthy again and you should be equipped to manage your finances going forward. This is far better than allowing a blacklisting to take place, because a default on your credit record stays in place for two years and a judgement against your name will prevent you from getting credit for five years.
All good reasons to opt for debt counsellingIf your debts are out of control and you are not managing to make your repayments, it is vital that you confront the problem head-on. Although debt counselling may seem like a daunting and complex process, it will save you significant money and stress. Don’t stick your head in the sand. Deal with your credit problems now and start working towards a debt-free and financially healthy future.