With the number of loan products available in South Africa and how easy it is to avail them, you don’t have to wonder why many become over-indebted after some time. One of the solutions to resolve this situation is by undergoing the debt counselling process.
What is a debt counselling in South Africa? Is debt counselling a good idea to begin with? What are the pros and cons of debt counselling? How can it help people get out of debt? These are the things that will be answered as you read on.
What is Debt Counselling?
Debt counselling is one of the measures introduced by the South African government through the National Credit Act of 2007 in assisting over-indebted citizens. Over-indebtedness means you don’t have the financial capability anymore to comply with all your loan obligations within the agreed terms. This happens when your total repayments exceed your household income, forcing you to default on the loans.
When you undergo debt counselling in South Africa, it means you’re not able to handle the situation anymore that it’s necessary for a professional intervention to take place. Debt counsellors will negotiate with creditors on your behalf with the goal of getting reduced fees on your existing loans. These trained professionals will do their best to come up with a deal that will make it more possible for you to repay your outstanding balance.
Debt counsellors will be tasked to check your financial status and conduct a review on your current loans. They will make recommendations to the court and creditors on the possibility of restructuring your debt to help you recover. In extreme cases, loans you might have taken haphazardly can be suspended.
Debt counsellors will also help in planning your monthly budget so you’ll be able to repay your debts without sacrificing daily necessities.
How Does Debt Counselling Work in South Africa?
The debt counselling process starts with you being tagged as over-indebted. After this, you’ll have to undergo the debt counselling process where you will initially be protected for 60 days from any legal action your creditors might take to get to you. The South African credit bureau will also tag you as an individual under debt counselling.
Assigned debt counsellors will assess your situation and negotiate with your creditors to come up with a compromising deal. You must comply with these new terms unless you want to face your creditor in court.
Creditors can’t hound you directly to pay your debts. They will have to talk to the counsellor who represents your case during the debt counselling process.
When you undergo debt counselling, this means you’ll be under debt review and you’ll be prohibited from applying for a new loan. After you’ve settled all outstanding debts, you’ll be issued with a Clearance Certificate as proof that you’re done undergoing the debt counselling process and you’re good to apply for a loan again.
The time it takes to complete the debt counselling process depends on your ability to repay your outstanding balance. South Africans spend an average of 60 months to clear all their debts.
Advantages of Debt Counselling
- Creditors won’t be able to approach and hound you to pay your debts without your debt counsellor on your side. You’ll also be shielded from legal actions within 60 days while you’re undergoing debt counselling in South Africa.
- Your debts will be restructured and repayments will be made only through one agency. Your debts will be restructured and consolidated so you only have to make monthly payments to a single Payment Distribution Agency who will manage repayments on your behalf. This save you from paying different fees enforced by your creditors.
- Debt counsellors are more likely to get a better deal with your creditors compared to when you negotiate with them directly.
- Debt counsellors will apportion your monthly income for necessities. They can guide you in planning your monthly budget so you get to pay your debts accordingly and not make the same mistake you did then.
- Undergoing debt counselling process in South Africa leaves no bad marks on your record. Credit bureaus don’t keep records that you’ve been under debt review after you get your Clearance Certificate.
Disadvantages of Debt Counselling
- You won’t be able to avail new loans when you’re under the debt counselling in South Africa.
- You’ll have to pay for the services debt counsellors provide.
- Debt counselling in South Africa doesn’t guarantee you’ll get out of your loan dilemma instantly. Negotiations with your lender may get prolonged if they don’t agree with the proposals presented to them by your debt counsellor.
Debt Counselling Fees
Debt counselling in South Africa isn’t free. You still have to pay the debt counsellors for the effort they exert in assisting you to recover from over-indebtedness. The fees are regulated and companies should comply with these fees.
To start, you’ll have to pay an application fee of R50. Your application will be processed and if you get rejected, you’ll have to pay R300 for the ‘Rejection’ fee.
For the first month, you may have to pay your debt counsellor an amount not exceeding R6 000. Legal fees may also amount up to a maximum of R3 350.
If you want to know more about the debt counselling fee structure, take a look at the guidelines set by the National Credit Regulator or NCR.
Frequently Asked Questions
When does my debt review process start?
The debt review process can only officially start once you have signed the “Form 16” either a paper copy or via an electronic signature.
Does going into debt counselling negatively effect your credit record?
Going into debt review does not negatively effect your credit record and is one of the benefits of debt counselling. The process is designed to rehabilitate individuals from debt. Once the debt has been settled you should have a good credit score and there is no permanent impact on your credit record.
Is debt counselling impacted by your marriage?
This depends on the basis of the marriage and the nature of the loans. Married couples are often considered as a unit so the loans and debts belong to the unit (both partners).
What is reckless lending?
If a registered credit provider makes a loan to you while you’re in debt counselling, that is automatic reckless lending. Another example, is where the individual cannot afford the loan and the bank hasn’t verified your income. If the loan is discovered to be reckless, then the bank has to write off the money – banks obviously do not like doing this so will do their best to avoid this. It is more likely the case where the customer exaggerates their income on their application form, you must always be honest when applying for a loan.
Can I change my Debt Counsellor?
Yes, it is possible to transfer your debt counsellor.
List of Debt Counsellors in South Africa
Here are the top debt counselling agencies in South Africa.