Auctioning your home might not solve your debt problems
Cash-strapped South African's who auction off their homes in an attempt to settle their debts could still find themselves with financial problems if the house goes under the hammer for less than the market value, warns independent debt-counsellor DebtBusters.co.za.
The warning comes as figures show that more houses are being sold at auction by owners attempting to ward-off repossession by their banks, with some auction houses even promoting the scheme as a ‘recovery' solution for over-indebted people.
DebtBusters.co.za says that homeowners should talk to their bank and seek independent advice from a debt counsellor before they consider selling, and even then they first sell their homes on the open market because auctioned properties usually sell for a lot less than their market worth.
Luke Hirst, MD of debt counselling experts www.debtbusters.co.za , says "Over indebted people really need to evaluate the merits of the debt counselling process before they consider auctioning off their homes in the current climate."
If you are struggling with bills you cannot pay then you should consider debt management. If you are up to date with your payments, but need to tame your debts, then debt consolidation is a good option if you are a home owner.
Paul Beadle, MD of www.justmoney.co.za, South Africa's online guide to money, agrees, saying: "If owners are worried about losing their homes they should not be panicked in to taking the drastic step of auctioning off their property. Buyers at auctions are looking for cheap deals, so a property is likely to sell at auction for less than the market value, which could mean that sellers might not even be able to recoup enough money to pay off all their debts."
Hirst, himself a registered debt counsellor, says that people should be doing everything in their power to keep hold of their fixed assets. Instead, he argues that they should be taking stock of all their expenses and seeing whether they could be saving money elsewhere. Failing that, South Africans should apply for debt review.
"By going under debt review, consumers are able to restructure their finances in a way that may allow them to keep their family home. A registered NCA debt counsellor will be able to restructure their debt repayments so that they have enough money to live on each month after they pay the monies that they owe."
Debt Review was introduced by the National Credit Regulator in June 2007 and aims to offer a life line to over indebted consumers. Once under debt review, consumers work hand in hand with their counsellor to restructure a repayment plan. The counsellor will negotiate with creditors on behalf of the consumer and get monthly payments down to a reasonable amount.
Both Beadle and Hirst advise against consumers selling their houses in the current climate unless they absolutely have to. Beadle says, "People with debt problems should always seek independent financial advice before they take such drastic action. They should talk to their mortgage lender as soon as they have problems meeting their home loan repayments, but they should also consult a registered debt-counsellor who can advise on their entire financial situation.
People with major debts may well have to sell their homes - but having the advice of a debt counsellor could give them the time to sell it on the open market for its full worth."
Hirst advises that consumers try the following before rushing to auction:
1. "If you have short term debt as well as a home loan, see if you can consolidate this short term debt into your home loan."
This will mean one monthly repayment at the cheapest possible interest rate. "It is not always advisable to move short term debt over the long term, but these clients have no choice. If they start earning more money they can always overpay into their bond."
2. "Seek help on debt management. Consultants can help you manage your debt and reduce your budget.
They will advise you on things like paying off the most expensive debt first."
3. "If it has gone too far then you need to go under debt review.
Only a debt counsellor can do this. It is a fantastic method to get protection from your creditors, rearrange your debt and have the debt counsellor make a repayments proposal to the creditors to get you out of debt."