DebtDebt Counselling

The Debt Counselling Process Simplified

debt counselling simplified

In 2007, the debt counselling process was introduced as an official debt solution for South Africans . The aim of debt counselling is to rehabilitate over-indebted South Africans and assist them by making their debt repayments more affordable.

What does over-indebted mean?

Over-indebted, according to the National Credit Act (NCA) definition, means that a consumer’s monthly income is not high enough to afford both their debt repayments and living expenses. At the end of each month, an over-indebted consumer has no money left and often has used some sort of debt to make it through the month. It is common for over-indebted consumers to use one source of debt to pay off other debts.

Let’s look at a quick example:

John earns R20,000 per month, after deductions. John has 2 personal loans that cost him a total of R3,500 per month, a vehicle costing R4,500 per month and a credit card and clothing account that total R3,800 per month. Johns monthly living expenses (rent, groceries, insurance etc.) come to a total of R11,000 per month.

 

This is what John’s monthly budget looks like:

Income                                    R20,000

Personal Loans                      R3,500

Vehicle                                     R4,500

Credit + Clothing Account   R3,800

Living Expenses                     R11,000

Net Position                            -R2,800

 

John is over-indebted. He is R2,800 short at the end of each month. This would cause John to miss debt repayments or borrow more each month. Both of these are risky options. Borrowing more will make his position worse by adding more debt and more debt repayments. Missing debt repayments will cause John’s credit report to fall into arrears and he will be penalized by the credit providers who may even initiate legal action against him for not paying on time.

What does a debt counsellor actually do?

A debt counsellor is an individual or company that helps consumers with the debt counselling process. A debt counsellor’s job is to assess a client’s full financial situation and determine which debt solution they need. They will look at the consumers credit report and their full budget. Find out how to choose the right debt counsellor HERE.

If the consumer is over-indebted the debt counsellor will look at their budget and determine how much the consumer can reasonably afford to pay towards their debt. This must also be acceptable to the credit providers. The role of the debt counsellor is to act as the middle man between the client and the client’s credit providers. The client gives the debt counsellor power of attorney to handle their debt situation. The debt counsellor aims to please all parties by giving the client a monthly debt repayment that they can afford and giving the credit providers a reasonable instalment and interest rate.

How does the debt counselling process work?

The debt counsellor negotiates new credit terms for the client. In most cases they stretch out the term of the debts, which makes the monthly repayment lower and more affordable for the struggling client. Some debt counsellors use a rule set (called the Debt Counsellors Rule Set or DCRS for short) which enables them to reduce interest rates as well. This saves the client a bucket load of money during the process.  Click HERE to find out how the fees for debt counselling work.

How does debt counselling benefit the client?

  • One lower, affordable monthly debt repayments
  • Saves the client money due to interest rate and fee reduction
  • Prevents creditors from harassing the client
  • Prevents creditors from initiating legal action against the client
  • Save the client’s home and vehicle from repossession
  • Client can become debt free in 36-60 months
  • Simple payment plan
  • Clean up the client’s credit report
  • Clearance certificate issued once process complete

Why would the credit providers accept this process?

The credit providers are mandated to accept certain proposals under the debt counselling process. The debt counselling process also ensures them that they will receive their money back according to the new payment plan. The credit provider is happy to receive the money over a longer period, which is a lot better than never receiving any payments from the client.

How do I know when I should speak to a debt counsellor?

  • You feel stressed or anxious about your debt and finances
  • It feels like you are losing control of your money
  • You have missed or short-paid one or more debt repayments
  • Credit providers or banks are refusing to give you new loans or credit lines
  • You have a lot of debt
  • You believe you’re blacklisted
  • Your credit score is low

Click HERE to find out 4 common misconceptions about the debt counselling process.

 

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