Debt counselling, also known as debt review, was introduced with the “new” National Credit Act in 2007. The process was created because there seemed to be a lack of options for consumers who were struggling with their debts.
Debt relief options prior to Debt Counselling
Consumers only really had two formal options, administration and sequestration. Administration was only for debts up to R50,000 value and the repayment plan was inconsistent. Due to no real structure and no strict regulation, the process often resulted in increasing debt balances. The fees for this process are also very costly.
Sequestration is for consumers with assets. There is the voluntary option, whereby you declare yourself to be sequestrated and then there is the involuntary option where your creditors request you to sequestrate. Basically, your assets are sold and the creditors get paid out. The order gets listed on your credit report for around 10 years after the process.
The Debt Counselling industry 13 years down the road…
In the early days of the debt counselling process, it had it’s teething issues. Due to the regulation being new and interpreted in various ways, the process was not streamlined or consistent. Debt counsellors and consumers alike did not fully know or understand how the process was supposed to work.
More than a decade later, the debt counselling industry has started to mature and many firms out there are doing a stellar job. One of the most difficult things for a consumers is knowing which debt counselling company to choose. With the introduction of strict National Credit Regulator guidelines and monitoring, the process is now a lot more transparent.
How does Debt Counselling work?
The aim of debt counselling is to assist consumers get out of debt in an affordable manner. A debt counsellor will formally negotiate with all of your credit providers to reduce installments and interest rates. The new negotiated agreements will get legally certificated to make sure they are adhered to.
As a consumer, you would only make one installment per month. The monthly payment is made to a Payment Distribution Agency (PDA). The use of PDA ensures your money is safe and secure. The PDA then distributes your money to each credit provider each month.
Under the process of debt counselling, you are not allowed to take out any new debt or use any credit cards or store cards. Due to it being rehabilitation process, the focus is on getting you out of debt, not getting into more.
One you have paid off all of your debt (excluding home loan), you will be issued a clearance certificate. This will state that you are debt-free. Your name will now be cleared and credit report restored to a healthy status.
Debt Counselling is a formal, legal process
Debt counsellors need to be fully registered with the National Credit Regulator. To apply for the process, a contract needs to signed. This gives your debt counsellor power of attorney to start speaking and negotiating with your credit providers.
As with other financial service providers, such as credit providers, debt counsellors need to act within the laws of the National Credit Act. The cost of undergoing this process is controlled as the fees are capped within the regulations.
Also, should any debt counsellor perform any unethical activity, they can be reported to the regulator and risk losing their debt counselling license.
What are the main benefits of Debt Counselling?
Here are some of the benefits of being under debt counselling:
- One, single consilidated monthly debt repayment
- Reduced, affordable debt repayment each month(reduced by up to 60%)
- Interest rates reduced to between 0-5% (unsecured debt)
- Save money due to interest rate reduction
- Retain all of your financed assets (house and car)
- Get legal protection
- Money safe and secure through use of a Payment Distribution Agency
- Get monthly statements showing how much each creditor got paid
- Receive clearance certificate once all debt has been paid (excluding home loan)
How do you know if you need Debt Counselling?
Debt counselling is mainly for consumers that are over-indebted. This means that their incomes are not enough to cover all debt repayments and living expenses.
If you feel that you have to make use of new debt each month (including credit cards or overdraft) you could be over-indebted. Another telltale sign is if you start missing/defaulting on debt repayments.
The best way to find out how it could assist you and if you need it would be to contact a debt counsellor for an assessment. Some debt counsellors provide free in-depth financial assessments.
For more information on debt counselling or debts in general, speak to the experts you can trust today – www.vantagedebtmanagement.co.za.