Times Live, 18 March 2012 – Brendan Peacock
Stigma keeps over-indebted from asking for help to sort out their finances
There seems to be a stigma attached to applying for debt counselling, but taking the initiative to deal with one’s debt burden should be seen in a new perspective that engenders respect, rather than shame.
While many of us ride our luck and avoid scrutiny of our financial affairs out of fear, it is those who have applied for debt counselling who are now facing up to their budgeting problems and stand to learn the best money-handling habits.
Hein du Plessis, MD of DebtSafe, says statistics show that the debt problem is rising. But the debt counselling process has not had the impact it was supposed to have since it started four years ago. “While there are hundreds of thousands of South Africans defaulting on their debts each year and ending up with impaired credit records, the total number of applications for debt review sits at around 6000 a month. The process works, so the lack of its use is concerning,” says Du Plessis.
So why aren’t enough people signing up? Du Plessis says people usually try to borrow money to get out of debt – a decision that ends up making the situation worse. “Debt counselling is too often seen as a last resort, but it actually prevents the agony of blacklisting and legal action. It’s a proactive step that shows your creditors you’re taking responsibility for your debt. Because it relieves all the pressure, it should be the first step, not the last.”
Debt counselling leads to an average reduction of 54% in monthly debt repayments. But the process is viable only for those who are not beyond help. “Anyone considering applying for debt counselling must still have a viable income and be able to make a reasonable debt-restructuring offer to their creditors.”
The debt review process aims to find a settlement that suits both parties and a stabilised process of repayments. Du Plessis says improvements in the industry and reasonable offers to creditors have brought increased buy-in from jilted lenders. This trend would make legal action the less preferred route in future.
“It is the better option because it rehabilitates consumers and turns them into future borrowers. There was resistance to the high level of regulation, but the process provides a high level of visibility for creditors into what the person can afford.”
If your creditor opts for the legal route, it begins sooner than you might think. “Technically, legal action starts the moment your creditor sends out the first notice of default. Once they begin that process, they will be dictating the repayment terms, and they will nearly always be higher than what the debt-counselling process could achieve. So it’s important to apply for debt counselling before you default. Don’t wait until you are six months behind on your payments.”
What happens when you apply for debt counselling? “Counsellors help put a repayment plan and budget in place. The process also prevents you from applying for further credit. The repayment amount stays constant, so it gets easier every year to service those payments. Cascading payments also means once debts are paid off, the money gets spread to remaining obligations.”
In other words, the debt counsellor will structure the repayments to focus on getting rid of the debt with the highest interest rates first, such as credit-card debt. Once this debt is paid off, you keep paying the same amount towards your total debt each month, which enables you to pay more on existing debts. Eventually, you will be paying off the last debts faster than the repayment terms require, which works in your favour.
Be warned: while being signed up for debt counselling protects you from legal action, missing one month’s repayment will see the process terminated. Aside from the legal protection it offers, debt counselling also involves many mechanisms to reduce the costs of servicing your debts – such as interest, fees and charges. Extending repayment periods could open you up to ever-climbing interest and never-ending debt, but the in duplum rule built into the National Credit Act limits the interest you pay while under debt review.
“It caps the interest figure once it reaches the same amount as the outstanding debt balance at the point of default. Also, note that debt counsellors have the ability to negotiate interest rates with creditors, to a certain degree.”
Stick to cash – and stop borrowing
“When you borrow to pay debts, you know you have a problem,” says Hein du Plessis.
Here’s his advice for staying away from unmanageable debt.
“Be careful with credit – don’t assume your earnings and expenses will remain constant. Living costs are rising fast. My advice would be to limit debt to asset-based finance if you can, and even then you should stick to reasonable instalments. Cars are dangerous purchases – don’t finance a car for longer than 36 months. If you stick to this rule, you will see what is actually affordable for you. Cars lose value, so if you’re still paying off a vehicle 60 months after you’ve bought it, I would say that was a bad purchase decision. ‘Affordability’ is not what you can afford to pay in monthly instalments.”
He advises against taking on more credit if you’re struggling to meet your existing payments. “Stop borrowing. Stick to cash, because any loans or credit available without assets to back them will come at high-interest rates. If you’re overexposed, act today. If you can’t pay basic expenses after servicing your debt, it’s already too much. If you can deal with creditors directly to renegotiate, do so. When you borrow now, you’re spending next year’s salary – you have to catch up at some stage. Lastly, and most importantly, never borrow against your retirement funding.”