Debt Counselling

Debt counselling was introduced in the new National Credit Act (NCA) of 2007. This was an attempt to give over-indebted consumers a viable solution to their debt problems. The aim is to get consumers debt-free in an affordable manner.

The debt counselling process involves a debt counsellor, credit providers, the National Credit Regulator (NCR), the credit bureaus and legal representatives. Each of these parties plays an important role and has a specific interest in the process.

Debt counselling has been largely misunderstood

Due to its complicated nature and general misunderstanding, debt counselling has picked up a tainted reputation. In the early days, the regulations and guidelines were less clear than today. This resulted in consumers having a negative view on the subject before understanding it fully.

Debt counselling is not a solution that will help everyone that has debt. It was designed specifically for consumers in a particular situation. A consumer needs to be over-indebted or likely to become over-indebted in the next few months to qualify.

The process is available for those who need help and the benefits are great

Over-indebted, as defined by the NCA, is a term used to describe a consumer whose monthly income is not enough to cover their monthly living expenses and their debt repayments.

For example, if Patrick was earning R10,000 per month, his living costs were R7,000 and his debt repayments were R5,000, he would not have enough money to cover both of these and would technically be short R2,000 each and every month. Patrick is therefore over- indebted. This usually leads to borrowing more money or missing debt repayments.

Debt counselling will help Patrick by reducing his debt repayments with one lower monthly debt repayment. Being over-indebted, Patrick would make a good decision by choosing to speak to a debt counsellor as there are not any other options for him at this point.

Other benefits of the process include:

  • A simple payment plan
  • Reduced interest rates (as low as 0%)
  • Saving of cars and homes
  • Legal protection from credit providers
  • Avoiding getting into even more debt

Let’s have a look at debt counselling and clarify some of the misconceptions floating around.

We will continue using Patrick as a reference.

Misconception 1: “Debt Counselling is bad for my credit record”

It actually rehabilitates the credit record, over time. When Patrick goes under debt counselling, his credit report will be ‘flagged’ as being under debt counselling. The reason for this is that it notifies any credit providers that Patrick is going through this process, and therefore they cannot give him any further credit.

Under debt counselling, Patrick will not be allowed to take out any new loans or use any existing credit lines. The reason for this is that debt counselling is a rehabilitation process and the aim is to get him debt-free. Taking out new debt will not aid in getting rid of the debts that are currently weighing Patrick down.

When Patrick approached us, his credit record was already in bad shape. His credit score was very low, he was flagged as being a ‘high-risk’ and he had a few defaults on his name. Most over-indebted consumers would have similar issues on their credit records. Debt counselling aims to restore Patrick’s credit record over time. This is done through consistent payments, catching up on arrears, as well as preventing him from taking out more debt.

Once Patrick has completed debt counselling, the flag would be removed and his credit record would have been restored. He will now also be debt free and be able to use credit again should he wish to do so.

Misconception 2 : “I will never be able to take our debt again”

As mentioned, once Patrick has completed debt counselling he will be debt-free and able to use credit again should he wish to do so. He is only not allowed to use debt whilst under the process because he is aiming to get rid of his debt once and for all. It is also not within the rules of the National Credit Act that a credit provider give debt to Patrick when he cannot even afford his current debts. This would be considered reckless.

Once fully rehabilitated and debt-free, Patrick will have a clean credit record with no indication that he was ever under debt counselling. He will now be able to enter the credit market again if he wishes to. He would be fully rehabilitated. The entire process usually takes between 24-60 months to complete, depending on affordability.

Misconception 3: “Debt counselling is only for people who have really bad debt problems and should be the last resort”

False. It is a positive process and has helped hundreds thousands of people to become debt-free. More than 8,000 South Africans apply for debt counselling each and every month, so Patrick is not alone. Simply missing a few debt repayments is a big enough reason to seek the help of a debt counsellor.

As soon as Patrick started feeling that he was losing control, he approached a debt counsellor before it was too late. Credit providers are allowed to initiate legal action against consumers that do not pay their debt on time or in full. A debt counsellor protects the consumer from the credit provider initiating this if they hadn’t started already.

Misconception 4: “Debt counselling does not work”

As mentioned earlier, the process involves many steps for the debt counsellor. This is why it is very important for Patrick to choose his debt counsellor wisely. Make sure that all the checks are in place. The debt counsellor is registered, they use DCRS (Debt Counsellors Rule Set), they use a registered Payment Distribution Agency (PDA) they have the appropriate systems in place, they charge the correct fees as stipulated by the NCR.

If Patrick is committed and makes his monthly debt repayments through debt counselling, he should debt free in 60 months or less, depending on his situation. Complications can set in if Patrick misses multiple debt repayments, because he is then not sticking to his end of the arrangement. Hundreds of consumers exit the process each month after clearing their debts. They are issued with a clearance certificate indicating that all of the short-term debt has been paid up.

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