Debt counselling was included in the National Credit Act (NCA) of 2007 in an attempt to give over-indebted consumers a viable solution to their debt problems. As is the case with most legal products or solutions, debt counselling is a complicated one. It was designed to solve a specific South African socioeconomic problem which involves many parties and many
variables. 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.
Due to its complicated nature, debt counselling has picked up a tainted reputation and consumers often have a negative view on the subject before understanding it fully. Debt counselling is not a solution that will help anyone that has debt. It was designed specifically for consumers in a particular situation. You may only use debt counselling as a
debt solution if you are over-indebted or likely to become over-indebted in the next few months.
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 Pele 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. Pele is over-
indebted. This usually leads to borrowing more money or missing debt repayments and both of these are bad.
Debt counselling will help Pele by restructuring his debt repayments and giving him a new, lower monthly debt cost, which he can afford. Being over-indebted, Pele 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.
Let’s have a look at debt counselling and clarify some of the misconceptions floating around.
We will continue using Pele as a reference.
Misconception 1:” Debt Counselling is bad for my credit record”
Untrue. When Pele goes under debt counselling, his credit record will be ‘flagged’ as being under debt counselling. The reason for this is that it notifies any credit providers that Pele is going through this process, and therefore they cannot give him any further credit.
Under debt counselling, Pele 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 rehabilitation process and the aim is to get Pele debt free. Taking out new debt will not aid in getting rid of the debts that are currently weighing Pele down.
When Pele approached us, his credit record was already in bad shape. His credit score was very low, he was flagged as being ‘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 rescue Pele’s credit record by showing that payments are being made, catching up
on arrears and missed payments as well as preventing him from taking out more debt.
Once Pele 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 Pele 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 Pele when he cannot even
afford his current debts.
Once fully rehabilitated and debt free, Pele 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.
Misconception 3:” Debt counselling is only for people who have really bad debt problems and should be the last resort”
False. Debt counselling is a positive process and has helped thousands of people to become debt free. More than 10,000 South Africans apply for debt counselling each and every month, so Pele is not alone. Simply being over-indebted is a big enough reason to seek the help of a debt counsellor. As soon as Pele 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 by being the middleman between the consumer and the credit provider.
Misconception 4: “Debt counselling does not work”
As mentioned earlier, the debt counselling process is very complicated. This is why it is very important for Pele 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 Rue Set), they have the appropriate systems in place, they charge the correct fees as stipulated in the NCA.
If Pele 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 only set in if Pele misses multiple debt repayments, because he is then not sticking to his end of the arrangement.
Debt counselling works if both parties stick to their end of the deal. 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.
For more information or other articles visit our website www.vantagedebtmanagement.co.za or call us on 021 201 1175.