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Over-Indebtedness. What It Is, & What Your Options Are

Debt is as typical in South Africa as potholes. But there’s a big difference between simply owing money (indebtedness) and being over-indebted.

Why the Distinction?

Indebtedness means you owe money (like a loan, credit card, or some other financial obligation) that you are currently repaying monthly. Being indebted is not inherently negative; debt can be an investment in your future when used wisely. Think of a home loan or student loan that adds to your long-term future. 

However, over-indebtedness is another story, indicating a more serious situation. It means your debt has become unsustainable, and you cannot make all your monthly payments.

Why do the National Credit Act (NCA) and the National Credit Regulator (NCR) use this term?

Established in 2005, the NCA aims to protect consumers from reckless lending and promote responsible credit practices. The term “over-indebtedness” is crucial from a statutory perspective because it defines a situation where consumers are at risk:

  • Financial Strain: Over-indebtedness means you can’t meet your basic needs and essential expenses due to overwhelming debt repayments.
  • Default Risk: This situation increases the chance of defaulting (falling behind on your payments) on loans, which can lead to further financial hardship and legal action from creditors.
  • Economic Instability: When a significant portion of the population is over-indebted, it can impact the country’s overall economic stability.

Recognising the Signs of Over-Indebtedness

Here are some red flags that might indicate you’re over-indebted:

  • Struggling with minimum debt payments.
  • 3 Months behind on some, or all, of your payments. 
  • Maxing out credit cards and relying on them for necessities.
  • Constant stress and anxiety about finances.
  • Receiving calls from debt collectors.

Simply put, you are over-indebted if you cannot make your current and future debt repayments based on your overall financial situation.

Taking Back Control

If you’re facing the hardship of being over-indebted, know you’re not alone. Here’s what you can do:

  • Track Your Spending: Understand where your money goes. Gather bank statements and categorise your expenses. It is daunting, and we know you would rather not even peep at your bank statement. But you will need to rip that Band-Aid off. Remember, seeing those numbers will not make it worse, but ignoring them will definitely make it worse. 
  • Cut Back: We know it is hard, but this is a dire situation. Remind yourself that it is not going to be like this forever, but for now, you need to identify areas where you can reduce spending—eating out less, cancelling unused subscriptions, etc. It is time to cut your spending down to the bone. 
  • Talk to Your Creditors: Be proactive about catching up on payments. Explain your situation and explore flexible payment options. Ask for breathing space for a few months and try your best to work with your creditors rather than against them. Remember, you signed those agreements, so you are liable to pay up as stipulated.
  • Consider Debt Review: For severe cases, a Debt Counsellor can help negotiate with creditors and create a manageable repayment plan. Debt Review is a good option if you receive a stable income. It has proven effective in reducing your monthly debt payments so that you have money for essential living costs, and the process also protects against repossession. 

Understanding the difference between being in debt and being over-indebted is crucial for taking control of your finances. Seeking professional advice can help you manage your debt and improve your overall financial health.