Guiding consumers since 2009

Your guide to debt counselling

By Athenkosi Sawutana

The National Credit Regulator (NCR) reported more than 20 million consumers to be in debt in 2018 and 40% of them were behind with their payments. Due to the economic conditions in the country, many consumers find themselves incurring too much debt that they cannot repay.

Justmoney decided to answer the most pertinent questions about debt counselling, so that you can take control of your personal finances.

  1. How do you know if you have too much debt?

One way to determine how much debt you have is by calculating your debt-to-income ratio. If your debt and expenses exceed your income, you should not take up any more credit. It means you cannot service your current debt and you cannot even pay for your day-to-day expenses.

Take your monthly debt payments, divide it by your gross income, and multiply the answer by 100. According to Investopedia, a high DTI shows that you have too much debt for your income. If your DTI is low, that means you are still in control of your debt and you may even qualify for more credit.

 DTI = monthly debt repayments100

Example 1:

Gross income =R20,000

Personal loans =R7,000

Credit card =R2,000

Vehicle loan =R3,500

DTI = 60%

Example 2:

Gross income =R20,000

Personal loans =R1,500

Credit card = R1,000

Vehicle loan = R3,500

DTI = 30%

If you fall under example 1, that means you are unlikely to get more credit, and you have too little money to save.

However, if you fall under example 2, you are likely to receive more credit because it shows you are managing your finances better.

The only way to reduce your debt-to-income ratio is by decreasing your debt and increasing your income.

Other signs that you are over-indebted include:

  • Borrowing from one creditor to pay another
  • Having no emergency fund or savings plan
  • Your disposable income does not last until your next pay day
  • Making late or skipping payments

If this is your situation currently, you might need assistance before things spiral out of control. In 2001, the NCA introduced debt counselling to assist consumers who are struggling to pay their debt.

  1. What is debt counselling?

The NCA defines debt counselling as a process that helps you restructure your debt obligations if you cannot pay them. It is a relief plan that is designed to assist those who are declared over-indebted. With debt counselling, your debts will be consolidated, and you will pay one instalment to your debt counsellor. However, this should not be confused with debt consolidation where you consolidate your debt with a loan. You cannot apply for debt counselling if you’re over-indeted.

  1. How does debt counselling work?

After choosing your preferred debt counsellor, the debt counsellor will do an assessment to check if you are indeed over-indebted. In order to do this, your counsellor will need your proof of income, bank statements, a list of your creditors, and your monthly expenses.

After assessing the depth of your indebtedness, the counsellor will help you draw up a repayment plan. He or she will allocate reduced instalments to all your creditors, while ensuring that you can still afford the necessities, and have extra to help you get through the month.

When you are satisfied with the plan, the counsellor will contact your creditors and negotiate with them.

The debt counselling process is meant to legally protect you from being hounded by creditors. For the process to be recognised as legal, the debt counsellor’s legal team will apply for a court order. The court order will prevent the creditors from taking legal action against you.

The Magistrate can grant the court order with or without your presence, as long as the debt counsellor’s legal representatives are there.

Once the court order has been granted, you will not be allowed to cancel your debt counselling programme until your debt has been settled.

  1. What happens to your assets when you are under debt counselling?

You will not lose your assets when you are under debt counselling. Your long- and short-term debts are included in your debt counselling programme. It is only when you withdraw or fail to cooperate with your debt counsellor that you can lose your assets.

Debt counselling protects you from losing those assets because when you are under debt counselling your creditors are not allowed to take legal action against you.

  1. How much do you pay for debt counselling?

The National Credit Regulator has a fee structure guideline, which includes an upfront application fee of R50. Debt counsellors are not allowed to charge more than is stipulated in that guideline.

Other fees include:

  • An administration fee of R300.
  • A determination fee which is aligned to the outcome of the full assessment of your financial information.
  • A restructuring fee, payable in the first month after drafting and submitting the proposal.
  • A NCT submission fee of R500, payable in the second month after completing the restructuring process.
  • A reckless lending fee of R1,500, payable in the second month after completing the written outcome of the reckless lending assessment.
  • An aftercare fee of 5.75% of your monthly debt rehabilitation amount for every month that you are under debt counselling.
  • An attorney fee payable after the creditors have accepted the repayment plan.

It is also important to note that most of these fees are only paid once and they will be unique to your debt situation.

If your application for debt counselling has been rejected, you are liable for a R300 rejection fee.

  1. Can you apply for debt counselling if you are unemployed?

Debt counsellors can assist you only if you have a monthly income. Remember, they are there to help you pay reduced instalments, not to help you avoid paying. If you are unemployed, you need to speak to your creditors, so that you can arrange how you will repay the money you owe them.

Should you be retrenched or be unable to work because of an accident, speak to your credit provider about credit life insurance. Credit life insurance is the insurance that you take to cover your debt in case you are unable to pay your debt. Many consumers are not aware that this insurance is included in their loan contract.

  1. Can you have joint debt counselling?

If you and your partner are married in community of property, you will automatically both be under debt counselling. This is because legally your assets are one.

Both of you will be responsible for the payments until you have completed the programme. However, if the marriage is out of community of property, you can choose whether you want to apply for joint counselling or not.

When you divorce, you will have to cancel the your debt counselling contract you and to re-apply for a new one.

Your new application will be separate from that of your ex-spouse or partner and it will be based on your personal debt profile.

  1. How long does debt counselling last?

Debt counselling can last for up to five years, depending on the depth of your indebtedness, and the amount you pay. However, you can complete the programme earlier if your financial situation changes or you can increase the instalments.

Skipping payments can prolong the debt counselling process. It is therefore important that once you commit to the programme, you stick to it.

Debt counselling also gives you an option to choose which accounts to settle first. But that also means increasing the repayment amount for those accounts.

  1. Can you withdraw from debt counselling?

You can only withdraw from debt counselling once you can prove that your financial situation has improved. As stated in section 71 of the NCA, you must demonstrate that you can fulfil future obligations in terms of your long-term agreements, including your mortgage.

Moreover, you must ensure that all the debts that have been included in your debt counselling agreement have been fully paid.

Once you have met all these requirements, your debt counsellor must issue you with a Clearance Certificate within seven days of completing the programme. The certificate serves as proof from your debt counsellor that you are no longer under debt counselling.

  1. Can you get credit while you are receiving debt counselling?

By law creditors are not allowed to assist someone who has not completed their debt counselling programme. Granting credit to a consumer who is under debt counselling is deemed as reckless lending by the NCR. If a creditor is found guilty of reckless lending, it could lose its trading license.

The reason you are receiving debt counselling is that you are over-indebted and therefore looking for relief. However, this does not mean you can never apply for credit in future.

After receiving your Clearance Certificate, you must ensure that your debt counsellor submits it to all the credit bureaus. The bureaus will unflag your name and remove the debt counselling status under your name.

When all the above has been done you can apply for credit again. Take time to build your credit score and ensure that your name has been unflagged by the credit bureaus. Adverse information can have a huge impact on your credit score.

  1. What happens when you default on your debt counselling payments?

The debt counsellor has every right to suspend his or her services if you’re not cooperating. Cooperating means paying for debt counselling and ensuring that there is enough to pay the creditors. If you are not cooperating, the debt counsellor will give you ten days to rectify the situation. If you fail to do so the contract will be cancelled.

When the debt counsellor terminates the contract, it opens communication between you and your creditors. Your creditors will start calling and making demands. Failure to meet those demands will lead to legal action. Your creditors will apply to the court to have your property attached and sold so that they can recover their money, or your salary may be garnished.

Furthermore, your credit record will be damaged. If you fail to meet the creditors’ demands, your creditors may even apply for a judgment against you, leading to an inability to take credit for up to five years.

  1. What if you choose to make direct payments to your creditors?

The NCA states that if you decide to make direct payments instead of utilising the Payment Distribution Agent, the debt councillors cannot construe that as non-cooperation. However, you are still expected to pay your instalments on time, as stipulated in your debt counselling agreement.

Furthermore, you are expected to send proof of payment to your counsellor, because at the end of the day you are still under debt counselling. This allows the debt counsellor to keep record of your payments.

  1. Does debt counselling mean you are blacklisted?

Being under debt counselling does not mean you are blacklisted. The term blacklisting has lost its meaning over the years. It usually applies to people whose accounts have been written off, handed over, or who have a judgement against them. Being under debt counselling means that you are taking responsibility for your debt and this is always perceived as positive by creditors.

You can apply for debt counselling while you are blacklisted, but your status will not be removed. The judgement against you will remain, until you have fully paid your debts and five years have passed. You can try to persuade your creditors to remove the status, but there is no guarantee that you will succeed.

Credit bureaus usually agree to remove the status only if the judgement was granted by mistake or that you were not in willful default of the account.

However, creditors are not allowed to blacklist a consumer who is under debt counselling. Debt counselling allows you to obtain legal protection against new legal action that can be taken by credit providers through the NCA. If you ever encounter such a problem, talk to your debt counsellor.

  1. Can you change to a different debt counselling provider?

If you no longer wish to continue with the services of your current debt counsellor, the NCA has a provision for you to switch your service providers. When you apply for debt counselling, you sign a power of attorney that gives the counsellor permission to be your representative. When you end your relationship, you must revoke the power of attorney and sign it to another service provider.  

When you want to end the relationship, you need to inform your counsellor so that they can cancel their contract with you. The counsellor also needs to inform your creditors about the end of your relationship.

You also need to take note that you will be charged the same fees you paid to your first debt counsellor. So, before you switch, think about the costs involved.

Even though it is rare for a person to receive debt counselling more than once, you can apply for debt counselling for as many times as you want. Whenever you find yourself over-indebted you can contact any debt counsellor and he or she will be happy to assist you.

Debt counselling can offer many many benefits if it is done correctly. Before you apply, speak to an independent financial adviser.  Commit to the repayment plan and before you know it, you will be living a debt -free life.

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