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How does debt counselling affect your financial health?

For many, the idea of debt counselling may signal financial ruin, the inability to ever access further credit, and being blacklisted. But according to debt experts, this couldnt be further from the truth.

23 December 2019 · Danielle van Wyk

How does debt counselling affect your financial health?

What you will learn in this guide:

In this guide you will gain an understanding of how the debt counselling process affects your financial health, chances of accessing further credit, and the overall benefits and pitfalls of the process. 


For many, the idea of debt counselling may signal financial ruin, the inability to ever access further credit, and being blacklisted. But according to debt experts, this couldnt be further from the truth.

So, what does debt counselling actually mean for your finances?

What is debt counselling?

Debt counselling is a smart and carefully managed debt solution instituted by the National Credit Act (NCA) in 2007. The process is designed to assist consumers who are overindebted and struggling to meet both their short- and long-term debt responsibilities by giving them access to a debt repayment plan.

This structured debt plan is agreed to by your creditors. This will allow you to repay the debt in the most manageable way possible. This way you regain financial stability in the long run while still being able to maintain your cost of living and other financial responsibilities.

Depending on your unique debt situation, the process typically lasts between three to five years. Through this process, and depending on the debt counselling company you choose, you will be assigned a debt counsellor who champions your debt rehabilitation.

This means that the debt counsellor is responsible for negotiating with the creditors, implementing the debt repayment plan, liaising with you, and ensuring that you are kept abreast of any necessary information throughout the process. The counsellor is also there to answer any questions you may have about the debt counselling process.

Trusted debt counselling companies will ensure that their debt counsellors are well trained, registered, helpful, and empathetic.

Debt counselling is also presented as an alternative to other more traditional debt solutions such as debt administration and debt sequestration. One of the biggest advantages that debt counselling has over the other two is that once the debt has been repaid and the process concluded, you will be considered rehabilitated with no negative impact on your credit score. For example, in the case of sequestration you would have to apply to the high court for a rehabilitation order.

How do you qualify?

Whats important to note is that while anyone can apply for the debt counselling process not everyone may qualify. In order to be eligible for this debt solution, consumers must be overindebted according to the NCAs definition. This means the consumer is unable to meet the minimum monthly instalments as stipulated by creditors for a period that exceeds six months.

What does it cost?

While debt counselling is one of the cheaper debt solutions, its not free. However, the fee structure is strictly regulated by the National Credit Regulator (NCR). This means that debt counsellors are not permitted to charge more than the stipulated guidelines. They must also disclose all expected fees to the consumer upfront, and this should be provided in writing.

Here is a breakdown of the fees you can expect to pay:

An application fee:

This is the fee payable by anyone who applies to the debt counselling process and covers the assessment of eligibility. This once-off fee is typically no more than R50.

Administration fee:

This is an upfront fee that covers the explanation of the process, the fee breakdown, enlisting you into the Debt Help System (DHS), Form 17.1 which serves as notification to all creditors, and the rejection form process as stipulated in Form 17.2(a). This fee may not exceed R300.

The other fees are typically included into the agreed-upon monthly repayment amount which is payable by the consumer for the duration of the process. This fee is usually paid to and managed by a payment distribution agency (PDA). PDAs are accredited by the NCR to collect these payments and redistribute them to the necessary creditors.

The included fees are:

A restructuring fee:

This fee may not exceed R6,000 or the first payable instalment, whichever is cheaper. This means that should your instalment be cheaper than R6000 your debt counsellor may not charge you more.

Aftercare fees:

This is also a monthly fee that is payable to your debt counsellor in addition to the debt counsellors fee. This fee is typically worked out as five percent of your monthly instalment usually about R400 maximum. After 24 months, this decreases to three percent until you've settled your debt.

However, should you decide to withdraw prematurely from the debt counselling process you will be liable for up to 75% of the restructuring fee. Its then the debt counsellors duty to refer your application for withdrawal to the National Consumer Tribunal within 60 days of your notice. Should the counsellor fail to do so, you will be eligible for a full refund.

There are also legal fees to consider. This too should be disclosed to you upon inception of the process.

These fees may range from R750 for a consent order which outlines the agreement between you and your creditors. This fee is only payable in the second month of the process. Should there be a need for further legal proceedings or consultation afterwards regarding any of your debt, the counsellor should negotiate that with you.

It is vital to find a debt counsellor that is registered with the NCR. The counsellor should also be familiar with the debt counselling process and its legalities, as this can save you time and money in the long run.

Now that you have a better understanding of the process lets take a closer look at the process.

Does debt counselling cover all your debt?

This is an important question to ask, and the answer according to the debt experts is twofold. Debt counselling can cover all your debt - except if a credit provider has already begun legal action against you for defaulting on your debt.

In this case, the consumer will usually be issued with a Section 129 notice. In it you will be notified in writing of your options which include debt counselling, dispute resolution, approaching the consumer court of Credit Ombud, or pursuing a plan to settle out of court. You will then have 10 days in which to respond. Failure to do so will result in further legal action.

In this case, this debt may not be included under the debt counselling process. This iterates the importance of soliciting the help and protection of debt counselling before you land in legal trouble.

The benefits and pitfalls of the debt counselling process

It is important to be informed about the process in its entirety before making a decision. The following touches on a few of the benefits and pitfalls:

Your payments will be consolidated:

Without the use of an additional loan, the debt restructuring plan bundles all your debt into one and allows you to pay one monthly instalment. This instalment is then distributed between your creditors by a PDA.

Only having the responsibility of one payment allows you to free up some cash, and alleviates financial strain.

Your assets are protected:

Undergoing debt counselling means that your assets such as your car, home, and any other assets bought on credit and enlisted in the process are protected against repossession by your creditors.

For many consumers, this is crucial as the fear and reality of losing a home or a vehicle can be crippling.

You no longer have to deal with creditors:

The debt counselling process relieves you of having to deal with creditors. For overindebted consumers, this means no more incessant phone calls and letters of default. This is because your assigned debt counsellor will act as the liaison between you and your creditors.

You can't access further debt:

Being under debt counselling means youre no longer eligible for any further credit. While this may sound daunting, its a good thing. It prevents you from getting into any further debt and so undoing the rehabilitation.

The NCR will flag your credit profile in order to ward off credit providers, but rest assured that once your debt has been settled this notification will be removed and your credit accessing ability restored.

While few, there are also drawbacks to the debt counselling process:

Not all debt counsellors are legitimate:

Unfortunately, some debt counselling companies are unregistered fraudulent entities. Enlisting with an unregistered provider could mean landing yourself in an even worse financial position. An illegal provider has no mandate to properly negotiate with creditors, so legal action could still be taken. They may also overcharge you, and they cant offer the protection that registered counsellors can.

If you want to verify the legitimacy of a debt counselling company contact the NCR.

Other negatives include not being eligible for the process, failing to properly negotiate with your debt counsellor as to a manageable restructured monthly payment, and the exclusion of certain debts from the process if legal action has already been taken.

How does debt counselling affect your overall financial health?

Debt counselling allows you the opportunity to rehabilitate your debt in a safe and affordable manner while preserving your credit profile. For overindebted consumers who are struggling to meet debt responsibilities, their credit profiles are majorly impacted and often the damage can take years to repair.

Debt counselling puts a pause on any credit profile impact as it allows you the time to settle your debt without entering into any new credit agreements. According to debt experts, this also serves to teach consumers about better financial management, as they are unable to access further credit and are therefore forced to make their money work for them.

The debt counselling process was initiated with the goal of financial freedom in mind. Through undergoing debt counselling you can essentially start with a clean slate

If you are interested in debt counselling or want to find out more, click here.


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