Updated 26.05.2021

Debt Counselling: The Benefits and Risks

Debt counselling is supposed to be the best alternative against sequestration when someone defaults on the debt. People seldom know the benefits and risks of debt counselling. Therefore, it is in their best interest to understand and measure the advantages and disadvantages before considering debt counselling.

In case you are over-indebted then your future financial well-being requires your review of your current financial matters. That will help you understand whether you need debt counselling or not.

Debt Counselling

Debt counselling is a restitution process in which the debt is carefully reviewed and over-indebted consumers are assisted by debt counsellors who negotiate with credit providers for the reduction of repayments and reshaping the debt structure. The overall rationale is that a debt counsellor can better negotiate on your behalf with a credit provider.

Benefits of debt counselling

The time duration of debt counselling prevents you from any possible harm by credit providers e.g. expropriation of your assets, legal notices, and legal action. Until the debt counsellor has completed the assessment you cannot be threatened by credit providers and their lawyers’ notices. After the assessment, if your counsellor finds you unable to meet debt commitments then you are declared over-indebted.

Once you are deemed over-indebted you are qualified for debt review. Your credit record mentions this information until the whole counselling process is completed. The consumer credit bureau database then removes the information and you are not blacklisted anymore. You can continue with your new debt commitments with a clean record and apply for new credit as well.

After the completion of counselling, your new repayment plan grants you ease of paying just one installment per month which goes to The Payment Distribution Agency where your repayment plan is already submitted. Agency repays the credit provider on your behalf.

Your counsellor gets thorough knowledge of the living expenses you make. The counsellor does this by setting aside some funds from your income (salary or business profit) so that living expenses remain well covered.

Negotiation with a debt counsellor can make you better understand your financial condition. It grants you insight to not only manage your current situation but also to make future financial decisions.

The credit provider cannot charge interest to an account that already has arrears when debt counselling is consulted. The NCA’s (National Credit Act) rule limits the interest and other costs added by credit providers.

Risks of debt counselling

After the assessment of your expenses and income debt counsellor may declare that you are not over-indebted so you are issued a rejection letter with the liability to pay the rejection fees. In this case, you may choose to consult the magistrate court and apply for the court orders to be declared as over-indebted.

During the counselling process, you cannot take another credit except what NCA has permitted you in the form of the debt consolidation loan. Your eligibility for new credit is based on the clearance certificate issued by a debt counsellor.

You are liable to pay the consent order fee. The consent order is known as the contract between you and the credit provider upon restructuring a debt plan.

If you are a defaulter of more than one credit provider then your debt counsellor may not be able to manage all your debts except that one that is being dealt with by the counsellor. In this kind of situation, consulting the NDA may help reduce all your installments.

Debt counselling has both the benefits and risks involved. So you must try to get your credit report to understand the worst elements in your debt which influence badly on your credit score.

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