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Debt counselling demystified – Why your client’s problem is also yours

Historically, indebted people will very often reduce or cancel contributions to financial products. For this reason, the industry needs to come to the party to address the problem.

The extent of the problem is evident from the latest Debtbusters quarterly report.

Nearly half of credit-active consumers in South Africa have impaired credit records, according to the National Credit Regulator, but many don’t seek professional help to deal with debt or leave it too late. Benay Sager, Chief Operating Officer at DebtBusters, says often consumers do not realise how much financial difficulty they’re in, but are most concerned about the perceived stigma of asking for help. Sager says South Africa has a world-class, regulated debt counselling sector and it is working well.

Debt counselling was introduced as part of the National Credit Act in 2007. The provision helps over-indebted or soon-to-be over-indebted consumers to repay their outstanding debt through an affordable repayment plan. Debt counsellors are registered by the National Credit Regulator (NCR), and registration information can be found on the NCR’s website.

On contacting a debt counsellor, consumers should be given a free debt assessment to determine their level of debt and whether debt counselling is a potential solution. If the assessment determines someone is over-indebted, then the consumer can decide to formally apply to debt counselling. Once they do so, the debt counsellor does most of the heavy lifting by informing all creditors and credit bureaus that the person has applied, and is undergoing the debt counselling process.

As part of the process, the debt counsellor renegotiates reduced monthly payments on all credit agreements that fall under the National Credit Act. This ‘restructuring of debt’ is done within industry parameters and strikes the balance between the consumer’s ability to pay and their overall debt levels. It is not something that most consumers can easily or efficiently do on their own.

Once more affordable repayment rates are negotiated with all creditors, the consumer’s ‘rearranged debt’ is then approved at a court or National Consumer Tribunal (NCT) to ensure the renegotiated rates kick in for the duration of debt counselling. Consumers make one affordable, payment each month, which is distributed to the creditors included in the debt-counselling for the duration of the plan.

In debt counselling, all the relevant fees are built into this monthly, affordable repayment amount, therefore the consumer pays a single amount per month to an independent Payment Distribution Agency (PDA), also regulated by the NCR.

“Debt counselling is a highly regulated and very efficient mechanism for consumers to pay back their debt,” Sager explains.

Debt counselling usually lasts for between three to five years, depending on the amount of debt, the arrangements the debt counsellor is able to negotiate with the creditors and what the consumer can afford to repay each month.

Should the consumer’s financial circumstances improve they can increase the monthly payments or pay a lump sum to reduce the period or end the process. In fact, consumers are encouraged to pay more if they can.

Upon finishing the programme the debt counsellor will issue a clearance certificate confirming that all the accounts listed under the debt counselling agreement are paid up. Home loans are the exception and do not need to be fully paid but must be up to date. The debt counsellor will ensure that the credit bureaus receive the certificate.

MoneySmartWeek(MSWSA), a National Treasury, Financial Sector Conduct Authority and National Consumer Financial Education Committee initiative will also run from 23-28 March 2020. Organisations and individuals interested in hosting financial education events are invited to complete the 2020 Participation Guideline/Application form.

Download the Debtbuster report.

Download a case study that shares two clients’ journeys from over-indebtedness to being debt free.

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