When to consider debt counselling

When to consider debt counsellingAs salaries struggle to keep up with inflation, and the economy in general continues to deteriorate, many middle- and higher-income earners are now relying more heavily on unsecured loans to maintain their lifestyles. As a result, many more South Africans are now drowning in debt.

Households facing this squeeze have two options: to keep their head in the sand and hope something will happen, or to face the facts and take action.

One of the options available is debt counselling where you select to go under debt review. While this may carry a stigma or be viewed as a ‛failure’, the truth is, no-one needs to know. You don’t have to tell your friends or even your employer. This is a better than waiting to default and having a judgement taken against you. Once you are in default the collection and legal fees start to mount and debt that you were already struggling to repay could easily double.

Listen to Maya and Mapalo Makhu discussing this and other topics in the My Money, My Lifestyle podcast.

In a nutshell, once you enter debt review you are protected from legal action by creditors and a debt counsellor provides a court-issued agreement in terms of a repayment plan.

Benay Sager, Chief Operating Officer at DebtBusters explains that 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 repayment amount, therefore the consumer pays a single amount per month to an independent Payment Distribution Agency (PDA), which is regulated by the National Credit Regulator.

Once under debt review you may not apply for any credit until all the debts, as per the court order, are settled. 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.

Note that if you are married in community of property, both spouses are required to go under debt review as you are both equally responsible for the debt.

Make sure you have the right debt counsellor

If you are considering debt review, note that not all debt counsellors are equal. While there are many satisfied customers in debt counselling, there are just as many who have had a negative experience. Make sure you are working with an ethical provider who is a member of the Debt Counsellors Association of South Africa (DCASA) and/or the National Debt Counsellors Association (NDCA).

According to the National Debt Counsellors Association their members must:

  1. Always act in the best interests of their clients
  2. Use a registered PDA
  3. Use (and believe in) the NCR-approved DCRS system
  4. Have debt counsellors registered with the NCR
  5. Not sign customers up without written signed consent
  6. Provide continuous client support

Questions to ask

Do you use the DCRS?

We have received many complaints from debt counselling customers who discover that it will take more than five years to settle their debt and that they end up paying more than if they had not entered debt counselling.

The use of the Debt Counselling Rules System (DCRS) system is a very important question to ask before signing up with a debt counsellor as not all debt counsellors use it.

The DCRS has been developed through negotiations between the credit providers and the debt counsellors. The goal of the DCRS is to settle the unsecured debts within a maximum of five years. In many cases credit providers agree to a significant interest rate cut in order to meet the rules.

Although the DCRS is recommended, it is not required by the Act and some debt counsellors do not use it. Instead they lower the monthly payment by restructuring the debt over a longer period, even up to seven years. The debt counsellors who do not use the DCRS may not be negotiating a better deal for their clients and over that time a client could end up paying far more than if they had not entered debt review. The reason for this may possibly be that it allows them to earn more legal fees.

What is the process?

Many people complain that either they have been put under debt review without their explicit consent or that the debt counsellor has not kept them informed.

You cannot enter debt review unless you have signed Form 16. This gives the debt counsellor power of attorney to contact all the credit providers to calculate whether you are over-indebted and to negotiate a repayment plan.

As soon as you have signed Form 16 the debt counsellor issues a form 17.1(b) which immediately protects you from any further legal action by your creditors. On receipt of the form 17.1(b) credit providers are required to provide a certificate of balance within five business days and the debt counsellor then undertakes an assessment to see whether you are overindebted. It is important to note that at this stage you can still cancel the debt review process.

If you agree to the process and are found to be over-indebted, a debt counsellor then issues form 17.2 (b) within 10 business days after receipt of the certificate of balance from all creditors. This includes a repayment plan which could include interest rate concessions from your creditors. It is important to note that once 17.2(b) has been issued, while you can move debt counsellors, you cannot automatically exit debt review.

A good debt counsellor would provide the revised repayment schedule for your approval. At this stage you can assess whether they have negotiated a better rate and that you will be debt free within five years. If you are not happy, you can move to another debt counsellor to renegotiate your repayment plan.

The next step is to apply to the Magistrates Court or National Consumer Tribunal and the magistrate declares the consumer overindebted based on the recommendation of the debt counsellor. The debt counsellor should inform you of the court date. If your finances have improved by this stage and you are no longer over-indebted, you must still go to court but can provide this new information in the court application and instead ask to be declared “no longer over-indebted” based on the debt counsellor’s recommendation. If the magistrate agrees that you are no longer over-indebted, this terminates the debt review.

Once the court order has been issued you may not exit debt review until all your debts (except a home loan) under the court order are settled.

What is your policy on credit insurance?

Some people end up paying credit insurance to both the credit provider and the debt counsellor. Credit providers are entitled to insist on credit life insurance as it protects against retrenchment and death, but the consumer has the right to choose the insurance policy, provided it meets the requirements of the credit provider.

Some credit providers offer credit life cover for free if you are under debt counselling. Some debt counsellors also offer credit life products, but you need to confirm that they are a registered Financial Services Provider.  You should also insist that they only replace credit life where the credit provider product is more expensive.  If the debt counsellor sells you a credit life product, you should insist that they cancel the credit provider policy.  If the credit provider will not accept the debt counsellor policy, then you will be double paying.  David O’Brien of debt counselling firm Meerkat.co.za, says that to avoid the problem of overpaying, he only offers to replace the credit life policy if the customer will save money.  Meerkat also offers the service where they cancel the credit provider policy to ensure that the customer receives the benefit of the money saved each month, and are able to settle their debts faster.

What to do if your debt counsellor goes AWOL

The NCR has a website showing you if your debt counsellor is registered. There are currently only 1 657 registered debt counsellors, but there are also 2 059 debt counsellors who have not maintained their registration, for various reasons. Only a registered debt counsellor can assist you.

If your debt counsellor is not registered, or not contactable, or not providing you the required service, then you can transfer to another debt counsellor.  You approach a new debt counsellor, and complete the application form, and after the transfer on the NCR system, which takes about a week, the new debt counsellor will then be on your record.

According to O’Brien, if you transfer debt counsellor for any reason, then you need to be aware of the following.

  • If the court or National Consumer Tribunal (NCT) order has already been issued, you have no choice but to stick to the agreement.  You can, however, accelerate the repayments so that you settle the debt sooner.
  • If you transfer to another debt counsellor before the court order has been issued, the new debt counsellor will reassess your case, which may result in a different or better payment plan, or even find you not over-indebted, but they are entitled to a new fee for that process.  The new debt counsellor will then complete the legal process and have the order issued.
  • If your previous debt counsellor is contactable, you can ask them for a refund of any fees, where work has not been done.
  • It is not advisable to switch to a different debt counsellor just because you have been promised a lower repayment. Generally, these promises are not fulfilled.
  • If your debt counsellor provides poor aftercare service, you are fully entitled to pay your creditors directly as per the court order and not through the debt counsellor. However, you need to keep an eye on the monthly amounts, as these often change between credit providers as the plan matures through time. Remember that you are responsible for meeting the terms of the court order.  The PDA process manages that administration and can also be cheaper than the bank fees of managing all the payments yourself.
  • If you have been paying directly, and have settled all your debts, you need to ask your creditors for a paid-up letter for each account.  If your original debt counsellor is not contactable, then you can transfer to a new debt counsellor to issue the clearance certificate.  Some debt counsellors offer this clearance certificate service to non-customers. The debt counsellor may charge a fee which can vary, but can be around R1 000. You could also apply the National Consumer Tribunal to obtain a clearance certificate.
  • If you are working through your original debt counsellor, the fees paid would already include obtaining a clearance certificate. This is issued to all creditors, credit bureaus and the National Credit Regulator’s debt system in order to remove the debt review flag.

This article first appeared in City Press.

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