Debt Counselling – Not A Silver Bullet

South Africans have a strong appetite for credit, spending, up to 76% of their incomes on debt repayment. As long as they can keep up with the payments, all is well but many individuals are not coping. There are hundreds of thousands of debt burdened individuals in debt review and it is estimated that a massive 8 million consumers are more than 3 months behind in their debt repayments.

Sugendhree Reddy Head of Personal banking for Standard Bank says “More and more South Africans are having to seek relief from the debt review process but it is not always the best route to pursue if you are feeling the pinch. Sometimes with careful planning and discipline an individual can get back on an even footing, without going through the expensive route of debt counselling”

Many people are surprised to learn that debt counselling costs a lot more than they anticipated. The well- publicised fee of R50 only gets you through the first stage of the application which is to see if you qualify.

The first step in the process requires you to outline in detail your current financial situation. A counsellor will intervene with your creditors and design a plan that allows you to cover your living expenses and apportion the remainder of your available funds to your creditors. Once a consumer has been placed under debt review, credit providers can no longer attach any assets or take any further legal action against the consumer pending a determination by a Debt Counsellor as to whether the consumer is actually “Over-Indebted” or not. Should the consumer be “Over-Indebted” the consumer continues under Debt Review until all debt is settled.

Debt counselling fees

There are a number of fees set out by the Debt Counselling Association of South Africa. Once it has been established that you can be placed under review the following costs apply.

A restructuring fee of the lesser of the first instalment of the debt re-arrangement plan or a maximum of R6000.00 (excluding VAT), in respect of a consumer whose applications have been accepted.  100% of the fee is payable at the first instalment.

Should a Debt Counsellor fail to submit proposals to Credit Providers or refer the matter to a Tribunal or a Magistrate Court within 60 business days from date of the debt review application the Debt Counsellor has to refund 100% of the fee paid by the consumer (excluding the application fee)

A monthly after-care fee of 5% (excluding VAT) of the monthly instalment of the debt re-arrangement plan up to a maximum of R400.00 (excluding Vat), for a period of 24 months, thereafter reducing to 3% (excluding VAT) of the monthly instalment, to a maximum of R400.00 (excluding VAT), for the remaining period of the debt rearrangement plan. Legal fees can also be charged.

Reddy says “So as you can see, debt counselling does not come cheap because it takes many hours and reams of paperwork to put a debt restructuring plan in place. Plus the councillor becomes your advocate throughout the entire process and for as long as you are under review” Reddy says that there are some other negatives around debt counselling that people often don’t consider. “Perhaps the biggest issue is the cost of the extra interest charges that the client has to pay. When the restructuring takes place, the repayment period is extended. So say for example you have a R20, 000 loan at 14% interest over a five year repayment period and it is then extended to 7 years; the repayment will reduce from R465 per month to R375 per month, so it seems like a good solution. However, the total interest you pay will increase from R7, 922 to R11, 483” says Reddy. If you have a number of debts to restructure, the cumulative effect of the interest is very significant. The upside of credit review is the fact that there is no permanent record of being under Debt Review at the Credit Bureau, meaning that unlike Administration or sequestration, the process leaves no negative listing against your name. However it will be reflected while you are going through the process. The Debt Counsellor will ensure that you will never pay more money than you can reasonably afford.

While under debt review, you only make one monthly payment – to a payment distribution agency who ensures that your creditors are paid. This one payment will make your finances much easier to manage and reduce your banking fees. You will not have to sell your assets but it would be a good idea to get rid of stuff you don’t need to free up cash. The more debt you can pay off the less interest you will pay and it will speed up the process.

A consumer who is over-indebted may approach a debt counsellor directly, or they may be referred to a debt counsellor by their creditors or by the magistrate’s court. You need to know that debt counselling is not a silver bullet that will make your debt disappear. It can be a long expensive process. While you are under debt review you will not be permitted to take on any more debt (which is a good thing). Reddy says “sometimes all it takes to get yourself out of debt is a close look at your budget, some brutal cost cutting and a good dash of determination. Debt review should be considered an avenue of last resort, not a quick fix”