If you're struggling with debt, there are a wide range of programmes that could provide some relief. However, in order to choose the best one, you must be aware of its benefits and pitfalls.
JustMoney finds out why debt counselling may be the best debt solution compared to debt administration.
Tip: Consolidate your debt by clicking here.
What is debt administration?
Debt administration is a debt-relief programme where the debtor or consumer is allowed to pay reduced instalments. Creditors then receive their payments every three months until the debt is paid off. According to LegalWise, you can only be placed under debt administration when you get a court order from the magistrate.
How do you apply for an administration order?
According to LegalWise, you must apply for a court order in the area where you reside, are employed or conduct your business.
All your creditors will receive a copy of the application with all the documents and they have a right to reject the application or the granting of the administration order.
Once the order has been granted, the magistrate will appoint an administrator who will collect and distribute the funds to your creditors. Note that your debt should not exceed R50,000. If it does, you don’t qualify for debt counselling.
When applying for an administration order you will be charged an application fee according to the number of creditors you have.
What are the advantages?
According to LegalWise, the application fee for debt administration is not payable upfront. It is deducted from your payments before it is distributed to the creditors.
Once the creditors have accepted the order, the law does not allow them to communicate with you and they will not take any legal action against you.
Disadvantages of debt administration
You will be listed with the credit bureaus for 10 years, which means you will not be able to obtain credit during this period.
Added to this, interest continues to be charged on each account. Since you will be paying a lower instalment than the contracted one and only every three months, you will end up paying much more.
When negotiating the interest rate, the interest on your debt will not be allowed to decrease by more than 15.5%.
Your employer will be instructed to deduct the arranged payments straight from your salary which means that your employer will be aware of your predicament. You will only be allowed to keep a portion of your salary for your living expenses.
Debt administrators are not regulated, which makes it easier for them to skip payments to your creditors and leave you with an unending debt.
ALSO READ: Your guide to debt counselling
What is debt counselling?
Debt counselling is a programme that was instituted by the National Credit Regulator (NCR) to assist overindebted consumers.
According to the NCR, if you cannot meet your monthly obligations to your creditors after basic living expenses have been paid, you can apply for debt counselling.
If you can afford to pay your instalments but spend an excessive amount on entertainment, holidays and other luxuries, you are not eligible for debt counselling.
The debt counsellor will consolidate all your debts and draw up a repayment plan that will give you some breathing space.
The important part is that you will pay lower instalments, and you will be able to keep your most important assets such as your house and vehicle.
On top of that, your creditors will not be allowed to communicate with you, and you will have the peace of mind of knowing that your debts are being paid. In five years you will be debt-free and ready to improve your credit score.
As with debt administration, you will not be allowed to take credit and if your creditors grant you credit while you are still under debt counselling, they will be guilty of reckless lending.
Debt counselling is a cheaper alternative to debt administration because you will only pay a once-off fee whereas you will have to pay 12.5% of the monthly repayment with debt administration. For instance, if your instalment is R2,700, you will have to pay a monthly debt administration fee of R337. With debt counselling, you will only pay a monthly after-care fee which equals 5% of your repayment. This amount will be reduced to 3% in your second year of debt counselling.
Unlike debt administration, there is no restriction to the amount you should owe to qualify for debt counselling.
Moreover, debt counselling is regulated by the NCR, which protects you from any irregularities.
JustMoney’s partners can help you clear your credit record so that you can access credit again. For more information, fill in this form and a consultant will call you back.