Escape the debt trap

2011-01-15 09:48

If you find yourself in debt, do you ignore that pile of bills and hope the problem will go away? If so, you’re not alone. According to Paul Slot, Octogen director and debt counsellor, most people struggle to admit they are in debt and simply borrow money to get out of it, forgetting that this will only make the problem worse.

If you’re in debt, you need to ask yourself a couple of tough ­questions.

First of all, why are you in debt? Have you been living beyond your means? Buying on credit? Spending recklessly? Or have you been retrenched? Perhaps you’ve had to cover an ill family member’s ­medical expenses, or maybe you’ve had a death in the family.

It may help you to know that if you are in debt for reasons beyond your control, you can buy some time to set your financial affairs to rights. But you have to go about this in the right way.

“People are often too scared to admit they’re in trouble,” says Slot. “The first step is to be honest with yourself and be ready to seek help.”

Face up to debt
Slot recommends that you sit down and assess how much debt you have. Then work out how much money you have to repay it.

If you are likely to struggle with this, then enlist the help of a debt counsellor.

The best thing to do is to approach your creditors and try to reach an agreement with each in terms of how much you will pay every month in order to settle the debt. It may be that creditors will extend the period of repayment, or agree to let you pay a lesser amount each month.

The important thing is to be honest with them and explain your position. It’s quite likely they will show understanding rather than hostility, because they ultimately want to receive that money from you. If you avoid them, however, there’s a good chance they will resort to legal means to recover their money, which will make your life a lot more difficult.


A debt counsellor can help
If you feel you cannot approach your credit providers or that you are over-indebted and are not sure how to take steps to extricate yourself, consider seeking the help of a debt counsellor.

About 7 000 South Africans apply for debt counselling every month, so you are definitely not alone.

But you have to be serious about taking steps to repay your debt and ultimately re-establishing a good credit record. This process will help you clear your name and enable you to access credit later – but only when you are debt-free.

Once you are under debt review your assets are protected. Stanley, the City Press reader we wrote about last week, used administration (today that would be debt counselling) to protect his home from being attached by creditors. He was then able to sell his home for a profit and settle his debts early.

However, this protection falls away the minute you stop paying your monthly repayments, so you have to be committed to getting out of debt.

Before you engage a debt counsellor, ask if he or she has a good relationship with credit providers like banks, and ask upfront what fee will be charged. Always ask for a copy of any agreement signed for your records.

A debt counsellor will negotiate with your credit providers on your behalf in order to restructure your debt repayments. He or she will sit down with you, assess your financial position and help you to draw up a realistic budget that you then need to stick to religiously.

You don’t have to go without food, and of course you must still pay your water and electricity bills – but from then on, settle your bond repayments, bank card and store card debts.

But bear in mind that if you can’t pay your debts, even with the services of a debt counsellor working out a repayment plan, the alternative is insolvency.

Your debt will not be scrapped and if you cannot meet the terms of a lower-interest agreement you will unfortunately lose the concessions and you will not be protected.

Counselling vs administration
Debt counselling is a type of mediation process for consumers who may be over-indebted.

The consumer is protected from legal action while under debt review and cannot access credit during this period. All debt has to be included – this can include a house and motor vehicles. Debt counselling is conducted in terms of the National Credit Act (NCA).

Going under administration means that a magistrate’s court appoints an administrator to manage the debtor’s financial affairs and debtors are usually over-indebted. Total debt may not exceed R50 000 and assets cannot be included. Generally speaking, this option is a last resort and was the only option for over-indebted consumers before the NCA introduced debt counselling. There were many unsavoury practices carried out under debt administration and very little protection for consumers as the fees were unregulated. Today customers would apply for debt counselling, which falls under the National Credit Regulator and has set rules and fees.

I’ve been retrenched. What now?
If you have been retrenched, notify your creditors as soon as possible.

Let them know you can’t meet payments due to circumstances beyond your control.

Now ask a debt counsellor to apply to the court to allow you breathing space to sort out your life. You’ll be able to make low or no repayments in this time and when you find another job you will be able to get back on your feet.

Note, though, that the interest on your debts will continue to accumulate – the courts cannot freeze that. So you are only really postponing payment, which must be resumed within a reasonable period.

If you simply cannot meet your repayments and you are blacklisted, remember that you can approach the credit provider to amend your listing once your debt has been repaid. It is good practice to inform your creditors of your retrenchment and how you will address meeting your obligations.

If you have a good payment history and have managed to repay your debts in full, it may be possible to remove a blacklisting.

I’ve repaid debts. What now?
The moment you have repaid your debt, or resumed normal payments that will enable you to clear your debts, you will be able to get a clearance certificate removing your name from the credit bureau within seven days.

“In terms of the debt review process, the debt review is listed with the credit bureau and will be removed once the debt has been repaid. The main reason for this is to prevent the consumer obtaining more debt,” Slot explains.

Assuming you have not had any judgments against you and you met your financial obligations responsibly and timeously, you should be able to obtain that
all-important clearance certificate.

However, as Stanley discovered, the bureaus do not always clear your name immediately.

You are entitled to one free credit check a year so use that to follow up and make sure your name has been cleared.

Tips
» Remember that every time you skip a payment it is reflected on your credit record. Rather than miss a payment pay what you can, no matter how little.

» A poor credit record prevents you from accessing credit. If you have a high risk rating, lenders will turn you down. Lenders may enquire about your payment history for up to five years, so do your utmost to strive for a clean record – and keep it clean.

» If you are over-indebted, a debt counsellor will be able to check if a creditor is guilty of reckless lending. Were you granted a loan even though you had a slim chance of repaying it? If so, the matter will go to court and if the courts make an order of reckless lending you might not have to repay the debt or alternatively repayment is frozen for a specified period. During this period fees and interest are suspended in full. This means you don’t have to pay fees and interest during the suspension period. The system protects you, the consumer

, from reckless lenders.

» The National Credit Act (NCA) entitles you to access one free copy of your credit profile every year. Visit one of these websites to obtain your free copy: www.creditexpert.co.za; www.compuscan.co.za; or www.xds.co.za

» If you have a complaint about a debt counsellor or credit provider whom you think is not abiding by codes of conduct, you can approach the National Debt Mediation Association on 0 0861 116 362.

If the issue remains unresolved, you can then approach the credit ombud on 00861 662 837.

» If you are looking for a debt counsellor, go to the Debt Counsellors Association of South Africa website for a list of approved debt counsellors: www.dcasa.co.za

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