Let’s explore how formal debt solutions are structured. South African consumers have been struggling financially for a while now. Even before the Covid-19 pandemic hit our shores the economy was not making things easy for taxpayers. Slow GDP growth, rising unemployment, increasing living costs and stagnant incomes were all contributing to tough times for consumers.

Many are forced to rely on debt when households are under pressure

When a household income is unable to cover all of the expenses, credit cards and loans start to seem appealing if not necessary for survival. Debt allows consumers to spend money that they do not have now and then pay it back later.

Having access to large credit facilities such as credit cards or overdrafts are easy ways to bridge the budget gap. Personal loans and pay day loans are also frequently used to make it to the end of the month, before the next pay date.

What is a formal debt solution?

A formal debt solution is a legal and contractual process that is offered to assist consumers out of debt. In South Africa, the National Credit Act (NCA) sets the legal framework for credit agreements and solutions.

In 2007, South Africa’s new credit act came into full effect. Along with new and updated regulations and guidelines, a formal debt solution for over-indebted consumers was introduced. It was called debt review. Over the past few years, as the industry has matured and the process has evolved, debt review is now commonly called debt counselling.

How does a formal debt solution work?

Debt counselling is known as a formal debt solution as it involves legal steps and is part of the NCA. The result of the debt counselling process is a set of new legally binding agreements.

A debt counsellor’s role is to formally negotiate with a consumers credit providers to reduce installments and interest rates. Once negotiations are finalized they need to be legally ratified to become binding. A debt counsellor gets the power of attorney to speak to all of the consumers creditors.

The benefit to the client is paying a lower, affordable installment and saving money on large interest payments. Debt counselling is available for over-indebted consumers who are unable to meet their current debt repayments.

Can a consumer do this on their own?

A consumer is able to notify credit providers that they are struggling and ask for some leeway. These arrangements, in contrast to the above, are informal. A credit provider may give the consumer a “payment holiday” or let them pay a reduced amount for a few months.

With informal debt arrangements, the credit provider can ask for the consumer to catch up with the missed or short payments at any time. On top of this, the balances of the debt might grow due to extra interest and fees that need to be added.

One major difference is that a consumer can not negotiate on the interest rate of the credit agreement.

So what should you do?

If you feel that you are finding it difficult to meet all your obligations, speak to a debt counsellor to find out how they could help. A large reduction in your monthly debt repayments could free up much needed income in your budget.

At the very least, you could learn how a debt solution could assist you and get a summary of your current financial position. It is best to speak to the experts rather than take no action which could put you at increased risk.

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