Address your debt crisis

2014-02-16 14:00

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Miya wrote to us recently for help ­because she was overwhelmed by her dire financial situation and wanted to know where to start. She should be commended for making the effort to address her situation before she ­becomes over-indebted.

Over-indebtedness occurs when your expenses exceed your income and you have more debt than you can afford to repay. If you are not already over-indebted, you may consider debt consolidation to try to manage your debt.

For example, you could approach your bank for a ­personal loan and then use that money to settle your debt, which may include store cards, credit cards and your ­vehicle finance if the balance is low. Then you have one creditor to repay and if you have a good credit record, you could negotiate a favourable interest rate.

However, debt consolidation is not recommended if you are not disciplined and able to exercise restraint. It is pointless to consolidate your debt if you are merely going to run up more expenses on your credit and store card ­facilities. Rather close the store accounts or ask the store to suspend your credit facility until further notice.

Another danger is that people obtain a personal loan on the basis that it will be used to consolidate their debt, but then blow the money on other things. This is likely to end with you becoming over-indebted.

If you opt for debt consolidation, you can ask your bank to pay your creditors off directly. This removes the ­temptation to spend the money on purchases rather than using it to settle your debt.

“You have to be very wary of debt-consolidation ­products that grant you enough finance to pay off your loans and extend further credit to you,” says Reana Steyn, deputy ombudsman at the Credit Ombudsman’s office.

While the debt-consolidation option may reduce your debt to a single payment that is lower than all your ­combined debt repayments, this is more than likely linked to an increased payment term. Calculate what the total repayment will be and weigh this against your current ­credit repayments.

“One creditor, one repayment and one debit date can be a good option if you struggle with administration. But bear in mind the duration of the repayment period, the affordability and, above all, don’t increase your debt ­unnecessarily,” cautions Steyn.

Santie Schindehutte from the National Debt Mediation Association says: “We haven’t seen one consolidation loan where the consolidation solved the problem in the long term. The problem is the person’s behaviour and money attitude.”

The association conducts workshops for indebted ­people to help them understand what triggers their ­spending habits and then works with clients to adjust their spending behaviour.

Recent statistics from the National Consumer Regulator show that just less than 50% of South Africa’s credit-active consumers are struggling with debt. The number of consumers with impaired records has increased by 71?000 to 9.76?million, up from 9.69?million in the previous quarter.

Tackle debt head-on

If you were just barely managing to make ends meet, the recent rise in interest rates could well push you into the territory of over-indebtedness. Start tackling the problem as soon as possible rather than putting it off for later.

You should be revising your budget regularly, so draw up a new budget and cut out the nonessentials. Reduce the number of times you eat out, or take advantage of ­specials at family ­restaurants where, for example, your ­children can eat for free on Sundays.

Debt review: The last resort

If you have trimmed your costs and cannot find a way to meet all your financial commitments, debt review is your last option.

Kedilatile Malakalaka, manager of debt counselling at the National Consumer Regulator, says: “The aim of debt ­review is to assist over-indebted consumers who are ­struggling to meet their financial commitments by ­providing budget advice, negotiating with credit providers for reduced payments and ­restructuring debts.”

Debt-review services are offered by registered debt counsellors. Malakalaka advises that you confirm that your debt counsellor is registered by checking their details with the regulator. You can also verify the debt counsellor’s registration by asking for the registration certificate, which should display the regulator’s logo, a clear name, ID number and the regulator’s registration number of the debt counsellor.

“It should be noted that debt review is not a payment holiday and that you are still liable to pay your debts at reduced instalments,” cautions Malakalaka.

You should have a distributable income, which will be used to offer reduced payments to credit providers.

For many consumers already in debt, the idea of ­contracting the services of a debt counsellor may seem prohibitive because there are fees involved. However, debt-review fees are dependent on the consumer’s disposable income and are capped.

Although your debt counsellor is responsible for negotiating revised payment agreements with your creditors, it is important to note that your debt counsellor is not ­authorised to collect or distribute your repayments.

“These funds, including the debt-counsellor fees, must be paid to a National Consumer Regulator-accredited ­payment distribution agency, and not directly to the debt counsellor,” says Malakalaka.

There are currently three accredited payment distribution agencies: DC Partner, Hyphen Technology and the ­National Payment Distribution Agency.

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