The Truth About Debt Counselling

The Truth About Debt Counselling

SHARE

Thanks to the recent economic upheaval, people are more familiar with debt than they would like to be. Unfortunately, they are also applying for debt counselling for all the wrong reasons – thinking they can avoid their debts when they really need to confront them with lifestyle changes.

Debt counselling is not a ‘hiding place’

The debt counselling system is becoming bogged down by the weight of a huge number of applications, currently more than 7 000 a month, many of which are from people who should not be applying for debt counselling in the first place. According to Stats SA, the number of people who applied for debt counselling rocketed from 36 246 in November 2008 to 132 291 by November 2009.

Who should use debt counselling?

Of the flood of applications, a percentage is from people desperate for ways to escape repaying their debts and therefore opting to hide behind debt counselling. According to Stats SA, applicants are typically people who on average earn about R10 000 a month, have ten different credit accounts across various credit providers and are being threatened with imminent legal action.

That applies to a lot of us in the current economic climate, but sensible people do not seek debt counselling – it has unpleasant consequences, especially for the businessman and entrepreneur. Everything that can be done through debt counselling (except the temporary protection from creditors) can also be achieved in direct negotiation with those creditors.

This may involve repaying debts over a longer period of time, or such similar solutions aimed at stretching your cash flow, but typically means implementing the lifestyle changes necessary to achieve solvency. Gabriel Davel, CEO of the National Credit Regulator, says that this deluge of unnecessary claims is creating a bottleneck in the system and inhibiting the timeous debt counselling of genuine applicants.

“Debt counselling is meant to assist over-indebted consumers who can no longer afford to pay their monthly financial commitments, not for consumers who choose not to repay their debts.

“When certain applicants fail to fulfill their agreements with credit providers, it bogs down the system but more importantly may result in those consumers losing their assets through repossession.”

Righting the misconceptions about debt counselling

Where the misunderstanding has arisen is the protection applicants enjoy from creditors once they apply for debt counselling. Many consumers mistakenly believe this protection is permanent. Davel points out that it is only for 60 days – time for applicants to renegotiate all their credit facilities – after which the applicant is again exposed to the possibility of legal action and repossession. “When under debt counselling, you are required to pay the monthly installments agreed with your debt counselor. If you fail to make these payments, you forfeit the protection afforded you by the National Credit Act, and the credit provider has the right to take legal action against you, even when under debt counselling,” says Davel.

“It must be made very clear to consumers: even if people apply for debt counselling, they still have to repay their debts or they will certainly lose their cars or even their houses, depending entirely on their debt repayment record.”

When should you consider debt counselling?

Davel explains that debt counselling should be the very last resort for consumers as it comes with some medium-term drawbacks, such as being credit blacklisted for five years, thereby damaging one’s ability to apply for further credit or even to apply for certain jobs.

He advises consumers: “Start by letting your creditors know you are experiencing difficulty. You may be able to achieve the same results without debt counselling and its negative implications.”

Furthermore, Davel outlines what you need to know about debt counselling:

  • If you are married in community of property, your spouse will also come under review
  • Your name will be flagged at the credit bureau so you cannot incur additional debt
  • There are significant costs, both of an upfront and regular monthly nature, made to the debt counsellor
  • Once the agreement is in place you have to meticulously stick to the terms of repayment or the credit provider has the right to terminate the agreement and proceed to legal action to repossess assets.
Eamonn Ryan
Before becoming a financial writer and freelance journalist in 1997, Eamonn Ryan was a legal adviser, company secretary and alternate director at listed company Cashbuild Limited from 1988 to 1997. Since becoming a financial writer, he has focused on the business and financial sectors, as well as personal finance, writing for Finweek, The Star Business Report, Sunday Times Business Times, Business Day, Mail & Guardian, Entrepreneur, Corporate Research Foundation (which brings out a series of books each year ranking SA’s best employers and best managers), as well as a host of once-off and annual publications such as ‘Enterprising Women’ and ‘Portfolio of Black Business’. He also writes media releases, inhouse magazines and sustainability or annual financial reports for various South African corporates and financial services groups, including the Ernst & Young annual M&A book.
  • jaydeenwest

    This article is clearly from the perspective of a business man, as the tables have turned and now the credit providers are suffering the consequences of allowing consumers undue credit. Every person under debt review is the consequence of the credit providers reckless behaviour whereby they failed to do correct financial checks on the consumers before allowing them credit.I agree that many of the points mentioned above are valid but much of what has been said is merely just advise from someone who has never had to take credit upon credit in order to survive. It is not a secret that more than half our population live off diminutive amounts of money. The only way that these people can put food on the table is to open food accounts, subsequently they then realize that they need to take out a credit card in order to repay the food accounts which amounts to a vicious cycle of credit to repay credit. So many take out clothing accounts so that they can afford to buy their children school uniforms as it is more feasible, for example, to spend R200 a month on the repayments of the clothing account than spending say R1000 on school uniforms at once. It is so easy to give advise on how people should manage their finances but it is unrealistic when applied in so many South African’s lives.

    I believe that there are a few Debt Cousellors out there who are misinforming the public about the benefits of debt review, but we are bound to have a few rotten apples in every tree. Never the less this rehabilitation process is something positive for so many South African’s who are drowning in financial struggle. I think its by time that the consumers become protected against so many powerful credit providers who have been dangling the carrot in front of the face of the consumers for years.The credit providers are the ones who have failed to educate the consumers, trying to lure them in with false advertising, credit cards in the post and gimmicks.

    Many are not interested in the consequences of debt counselling. This may be a difficult statement to digest for some members of the high society, but the ability to lay your head down at the end of the day and know that you have enough money to look after your family, and not have to worry about losing your assets is more important than the fact of being blacklisted etc.