MONEY: The need to educate over-indebted consumers

DEBT. For many this word is worse than a swear word, and many feel that they are alone in their struggle, with no solution to their problems. The world economy has been through more valleys than peaks in the past eight years, leaving consumers worse for wear, and it had a very negative impact on almost half of credit active consumers.

Debt counselling

But, there was light at the end of the tunnel. In 2005 the new National Credit Act came into being, with debt counselling introduced in 2007. With this came a solution to combat the problem of over-indebtedness.

It has now been almost eight years since the implementation of Debt Counselling in South Africa. In the beginning it was met with a mixture of excitement and doubt. Both credit providers and debt counsellors were faced with many challenges, challenges which all parties worked hard at to find solutions to.

This was done in order to ensure a smooth process for the mutual client. It has been a learning curve for many, but it is with certainty that we can say that the majority of the problems have been sorted out and Debt Counselling is now an industry that is helping thousands of debt stressed consumers during their difficult financial times.

Why was it implemented?

Nearly 48% of all credit active consumers in South Africa are considered to be over-indebted. This is based on the fact that they have one or more credit agreement that is at least three months in arrears. Statistics showed that the average consumer had fourteen unsecured accounts, one vehicle, and one property, and this figure was increasing on an annual basis especially in respect of the number of unsecured debt.

Due to this it was clear that there was a need to find a solution for these consumers. Consumers needed assistance to ensure that they become debt free with minimal risk of losing the asset that they have worked so hard for during the past few months or years.

What is debt counselling?

Debt Counselling was introduced in 2007 with the implementation of the National Credit Act, and it offered the client a solution to their financial predicament. The consumer could approach a registered debt counsellor for assistance with the repayment of their debt obligations. It also afforded the Consumer’s a lot of protection during this process as the credit provider could not proceed with further legal action against the consumer in the first 60 days.

This 60 day period provided the debt counsellor with the time needed to reach an agreement with the consumer’s credit providers, thereby finding and amicable and holistic solution to the consumer’s debt problems.

Statistics show that the average person that approach a debt counsellor for assistance is between the ages of 35 and 45, with an even split between male and female applicants. Most of these confess that they have been in financial trouble for a few months, but felt ashamed to admit this, and therefore delayed approaching a debt counsellor for assistance.

In the words of Mr. Johnson, a debt counselling client: “When I first found myself in a situation where I could no longer pay all my bills, it felt as though I was a disappointment to my family. I did not discuss my problems with my wife, as I did not want her to feel that I could no longer care for her and my two beautiful daughters. I eventually approached a debt counsellor, and it was my saving grace. I must admit that this was not a quick fix solution. It took time and dedication from my side, but it all paid off in the end. I am now on the brink of being declared debt free!”

During the debt counselling process the consumer only pays a single monthly amount towards his debt, which payment is made to a Payment Distribution Agency (PDA). The PDA in turn pays the consumer’s credit providers in line with a repayment plan drafted by the debt counsellor. This ensures that the consumer’s funds are safe and secure, and provides the consumer with further peace of mind.

Debt counselling is also a legal process, with guidelines on how it should be dealt with at every stage of the application.

Warning signs of over-indebtedness

Financial trouble is not a balaclava-wearing intruder that made its way into your home undetected. It doesn’t happen overnight, and it is not an accident. No, unfortunately financial trouble is found at the end of a long and winding road of ongoing financial mistakes that have been ignored for far too long. Luckily, there are many warning signs along the side of this road. If some of the following sounds familiar, stop, and change your course today.

Warning Sign 1: You have no idea what your financial situation is.

If you don’t know what is going on in your accounts, it means you are spending on a whim with no budget in mind at all. This kind of irresponsible spending is dangerous, even if you have a lot of money to spend. Stop! Make a budget and stick to it.

Warning Sign 2: You are buying food and petrol on credit every month.

The moment you start funding essentials with credit, warning lights need to flash in front of your eyes. It means that your expenses are more than what you earn and that tank of petrol you have just “borrowed” R600 for will escalate to R1000 in less than three months. Stop! Cut costs immediately.

Warning Sign 3: You are lying about money.

Are you hiding your credit card statements from your spouse? Does he/she have no idea how much debt you have and you are telling lie upon lie to keep it that way? If you are lying about your financial situation it means you are ashamed and this shame will cause you to stress, and perhaps even spend more. Stop! Spill the beans and make a plan together.

Warning Sign 4: You’re funding debt with debt.

Once you start transferring money from your credit account to your cheque account to fund your home loan, car payment or any other debt, you are paying double interest. If you are doing this regularly you will soon find yourself in far more debt than you started off with. Stop! Make a new budget and cut all luxuries.

Warning Sign 5: You have no savings.

This might not seem like such a big issue. At least you are living within your means, right? Wrong. If you have no savings or emergency money you have nothing left at the end of each month, which means you will need to take out a loan or use credit to fund any unforeseen costs. And because you don’t have money left at the end of the month, you won’t be able to pay off this debt. Stop! Cut costs and start saving.

Warning Sign 6: You are only paying the minimum amount on your credit card/s.

Just paying the minimum on your credit card bills means you will never get rid of the debt and because of the interest the total amount of debt will escalate each month. In other words, you are throwing away money. Stop! Pay at least double the minimum amount every month.

Warning Sign 7: You are borrowing money from family or friends.

Nobody wants to call on family or friends to help with money. Unfortunately, the ugly truth is that if you are turning to others for money you have most probably depleted all the credit sources available to you. Borrowing money from other people won’t solve anything. Stop! You might need the help of a professional.

What is the next step if I am over-indebted?

Any consumer that finds himself over-indebted can approach a debt counsellor for assistance. A consumer is over-indebted the moment you can no longer pay the debt obligations while at the same time making provision for normal day to day living expenses.
To apply for debt review the consumer need to approach a registered debt counsellor, and complete the application form. The debt counsellor will proceed to inform the consumer’s credit providers of the client’s application, and will also calculate an affordable premium for the consumer. This premium will be divided between the credit providers by means of a repayment plan, which will be made an order of court.

The amendment of the National Credit Act

Many changes have taken place since the start of the process, with the most recent being the implementation of the National Credit Amendment Act (NCAA). One of the many changes that acted in the consumer’s favour was the change to section 86(2) of the NCAA. Previously the credit providers could refuse to accept the debt review application if the legal process started when a section 129 letter was sent to the client.

This letter is a notification giving the consumer notice that the account is in arrears and affording the client the timeframe to rectify the matter by various means, prior to the issuing of a summons against the client. This resulted in many accounts being excluded from debt review, as the section 129 letter was already sent to the consumer prior to his application. The amendment indicated that the account can only be excluded if a summons has been issued prior to the debt review application, affording the consumer the opportunity to reach an agreement on the account through, amongst others, approaching a debt counsellor.

Another important amendment was to section 86(10). Previously it indicated that the credit providers could terminate the debt review process after the lapse of 60 business days. It did not make provision for the delay that is experienced in the Magistrate Courts when a debt review application is brought before the Magistrate. Due to this delay most of the debt review court orders were not yet granted before the lapse of the 60 business days, even though a court application was pending. The amendment clarified that the credit provider could not terminate the debt review application if there was a pending court application. This safeguards the consumer from unreasonable action by the credit providers.

How do I stay debt free?

  1. Learn how to draft a proper budget and stick to it;
  2. Learn how to say NO to unnecessary debt.
  3. Do not buy on credit, save and buy cash.
  4. Don’t use your credit card to buy the normal day to day necessities.
  5. Determine and prioritise how to repay the debt you have
  6. Change your debt behavior, even if this includes cutting up those cards
  7. Be resourceful and think of ways to increase your income and pay more towards your debt

Debt review has helped thousands of consumers during the past eight years, by guiding them on their road to financial freedom. Act before it is too late.

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