Debt counselling, also known as debt review, was introduced with the “new” National Credit Act in 2007. Government identified that there was a lack of options for consumers who were struggling with their debts. We look at the option and decide whether it is a good option to go for.

Debt relief options prior to Debt Counselling

Prior to 2007, 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 and uncapped. We do not see many administration cases in action anymore.

Sequestration is an option for consumers with assets (car or home). There is the voluntary option and then there is the involuntary option where your creditors request you to sequestrate. With this option, your assets get sold and the creditors get paid out. The order gets listed on your credit report for around 5 years after the process.

As you can see, none of these options were attractive to consumers. They seemed to have more downside than upside and appeared to be punitive.

The Debt Counselling industry has drastically transformed over the past 15 years

In the early days of the debt counselling process, it had certain teething issues. Due to the regulation being new and interpreted in various ways, the process was not clear and there was a large amount of inconsistency. This led to incomplete processes and consumers who were getting “stuck”. Luckily, all of that has changed.

More than a decade and a half later, the debt counselling industry has started to mature and many firms out there are doing a stellar job. The process is getting the recognition it deserves from consumers and the credit providers alike. One of the most difficult things for a consumers is knowing which debt counselling company to choose. With the introduction of the strict National Credit Regulator guidelines and monitoring, the process is now a lot more transparent.

How does the Debt Counselling process work?

The goal of debt counselling is to assist consumers get out of debt in an affordable manner. It is largely a rehabilitation process. A debt counsellor will formally negotiate with credit providers to reduce installments and interest rates. The new negotiated agreements will get legally certificated to make sure they are adhered to.

The individual would only pay one consolidated installment per month. The monthly payment is made to a Payment Distribution Agency (PDA). The use of PDA ensures that consumers’ money is safe and secure. The PDA then distributes the funds to each credit provider each month. The consumer gets a detailed statement showing the distributions.

Under the process of debt counselling one is not allowed to take out any new debt or use any existing credit cards or store cards. Due to it being rehabilitation process, the focus is on getting rid of the current debt, not getting into more.

Once all debts have been settled (excluding home loan), a clearance certificate is issued. This will state that the consumer is debt-free. The credit report restored to a healthy status and the debt counselling indicator is removed.

Debt Counselling is a formal and legal process

Debt counsellors need to be fully registered with the National Credit Regulator in order to practise. To apply for the process, the consumer needs to sign the application forms. This gives the debt counsellor power of attorney to start speaking and negotiating with 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. A great benefit is that all of the fees are all included in the new monthly repayment.

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 top benefits of the Debt Counselling process?

Here are some of the benefits of applying for this debt rehabilitation process:

• One, single consolidated monthly debt repayment
• Peace of mind, reduces stress due to lower financial burden
• Reduced, affordable debt repayment each month (reduction of up to 70%)
• Interest rates reduced to between 0-5% (for unsecured debt agreements)
• Save large amount of money due to interest rate reduction
• Retain possession all of your financed assets (house and car)
• Get legal protection through a court/consent order
• Payments are safe and secure due to the use of a registered 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 or qualify for Debt Counselling?

Debt counselling is 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. If your debt repayments are eating up most of your salary you could be over-committed.

The best way to find out how it could assist you and if you qualify would be to speak to the experts. Some debt counsellors provide free in-depth financial assessments and advice.

For more information on debt counselling or debts in general, speak to the highest rated debt counsellor in South Africa – Vantage Debt Management.