Debt counselling was introduced in South Africa in the 2007 National Credit Act (NCA). The process is designed to help over-indebted consumers to get out of debt. This is done by negotiating the terms on loans, such as the interest rate and term, which in turn makes the monthly debt repayments more affordable. Often banks will receive their money over a longer term and often at a lower interest rate, thanks to the DCRS system.
The question is, why would the banks agree to this?
1. Banks Would Rather Receive Some Money Than Nothing At All
Many over-indebted consumers make sporadic payments, short-pay or give up paying their debts altogether. The debt counsellor works out a payment plan for each consumer. This details the payment schedule and makes sure that each credit provider is receiving their fair share. A credit provider would rather receive a smaller amount of money, than nothing at all.
2. It Saves Them Time
If a consumer defaults on a debt payment, the credit provider has to initiate a collection process. This involves phone calls, emails and letters. It is often difficult to reach these consumers as they try to avoid confrontation when it comes to their missed debt repayments. The debt counsellor gains power of attorney over the consumer debt matters and therefore becomes the middle man between the consumer and the credit provider. The debt counsellor will negotiate directly with the credit provider.
3. It Saves Them Money
The collection process is expensive due to all of the resources dedicated to retrieving outstanding debt. Credit providers and banks have huge departments that deal exclusively with the collection of bad debts. These staff need to be paid salaries, they also need their own resources and equipment. The cost of collection often amounts to more than the small debt that is trying to be collected. Under debt counselling, the debt counsellor will try to ensure that all payments are made on time and in full.
4. It Allows Them To Avoid The Legal Process
Debt counselling is a step that can be taken by the consumer before legal action commences. The process prohibits credit providers from initiating legal action if they have not done so already. This is one of the big advantages of the process for someone that has missed a lot of debt repayments. The legal process is very expensive for the credit provider and debt counselling offers a great alternative that is in everyone’s interest.
The Important Role Of The Debt Counsellor
The debt counsellor has a very important role to play in the process. They have to wear an objective hat and act in the best interest of both parties. On the one hand, they want to make the debt repayments affordable to the client so that they are still able to live a decent life and on the other hand they need to ensure that the credit providers are still receiving a decent repayment.
After all, the consumer did sign for the loan and knew how much to was going to cost them. For some consumers bad things happen and people fall into financial trouble. This could be due to unforeseen events, such as medical treatment, retrenchment, theft or family circumstances. Becoming over-indebted could also be entirely at the fault of the consumer. People overspend and live a lifestyle beyond their means. A lot of the time this lifestyle is funded with unsecured credit.
A debt counsellor needs to look past all of the emotional elements and work with the facts on hand. In front of them stands a consumer with too much debt which they cannot afford. They need assist this person, without them losing their assets, while at the same time satisfying the banks with reasonable repayments.