Facing your debt head-on

2014-11-24 07:00

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About 50% of people reading this article will have fallen behind on their debt repayments. Maya Fisher-French advises on how to take action before it’s too late

Six months ago, Marike Barnard received her debt clearance certificate and became debt free after committing herself to a review process four years earlier.

Like so many South Africans taking advantage of the easy access to credit in the early 2000s, Marike had taken on a significant amount of debt, which she had managed to repay until she lost her job.

“After I had taken on all the easy credit, I lost my job and fell behind on payments,” says Marike, who faced another challenge when she fell pregnant in 2009. Suddenly, she was an unemployed single parent.

Many readers can probably relate to Marike’s story. We were encouraged to take on debt while the times were good and didn’t realise we had no buffer against the unexpected, like a job loss or unplanned pregnancy. But unlike many debt-ridden individuals, Marike decided to face her debts and take action.

“I could not keep my head above water. Being a single mum was very hard. Interest rates were killing me as I was already behind on payments. I had to look for help, and turned to Debtsafe in 2010.”

By applying for debt review through debt counselling company Debtsafe, Marike was able to come to an agreement with her creditors.

“I paid one amount to Debtsafe and I knew my debts were covered every month. The creditors did not bother me any more and I only worked with one person.”

Apart from receiving help to deal with her creditors, the real benefit for Marike was she faced her financial crisis and educated herself about money.

“It gave me control over my finances. I do not apply for any debt easily and I learnt that cash is king!”

While the process was challenging and required commitment, Marike turned her finances around within four years.

Ian Wason of DebtBusters says that what many people do not realise is that debt review is not a death sentence; and, if the plan is adhered to, it can be a complete financial rehabilitation programme.

“Because you are meeting your agreed monthly repayment, your payment profile improves. By the time you are out of debt review, you have a relatively clean credit record and the review listing is removed,” says Wason, who adds that many customers settle their debts within two or three years.

Paul Slot of debt counselling firm Octogen says although a debt review may be structured over five years, most clients who commit to the process are debt-free far sooner than that. It is all about taking control.

Get help before it is too late

The sad reality is that most people only ask for help once they are forced to. Despite the fact that about 10?million people in the country are falling behind in their monthly repayments, only a fraction of these try to get help before it is too late.

While debt review/counselling can help an over-indebted consumer rehabilitate financially before legal action is taken, you don’t have to wait until you are about to lose your home or car before getting help.

Slot says in many cases consumers who ask for help will only do so when all credit providers have said no to new debt.

“When this happens, they have missed a few payments and have on average 11 credit agreements. For some reason, consumers are under a misconception that an additional loan or consolidation loan will ‘solve’ their problems.”

He says this misconception was in part created by credit providers allowing people to roll over their debt

by providing bigger facilities, and because consumers don’t want to plan ahead and they wait too long before they ask for help.

Slot says consumers who get help when they first experience financial difficulty are able to resolve their financial issues without having to go into debt review.

Octogen provided a service to a company where customers were contacted when the first debit order was returned and offered help to create a budget.

“Income and expenditure were analysed and in many cases, a budget adjustment was sufficient to resolve the issue and debt review was not required,” says Slot, who adds experience showed that often all consumers needed was a plan.

Each consumer received a budget assessment and a report with 12 possible action points. The report was discussed with the consumer and in many cases a “recovery plan” was possible.

The project was tracked over a 12-month period and what they found was that consumers who received financial advice were 14 times more likely to pay their debts than customers who were not assisted.

“The reason for this is that the consumers on the project accepted and received help before it was too late. They implemented the advice and, more importantly, they contacted us for more help when they got stuck,” says Slot.

According to Wason, only about 25% of people who contact DebtBusters actually need the legal protection of debt review. Most of the time it is simply a matter of taking control of their finances.

Unfortunately, many people are just not disciplined enough.

Wikus Olivier of DebtSafe says an average of 45% of people who sign up for debt review fall out of the system within the first three to six months.

“Many consumers entering the process are not committed enough to see the process through to the end, and the process fails because of missed payments.

“The benefits offered by the debt review process through the National Credit Act are wonderful, but only

if consumers stick to their payment plans and do not miss any payments.”

Where to get help

If you are serious about ridding yourself of debt and financial stress, you do not have to wait until you are faced with debt review – you just need to be committed to the process.

Many debt-counselling companies realise the need to offer assistance to consumers who do not necessarily need debt review, but who do need help getting their finances in order.

Octogen will assist any consumer with a monthly budget planner assessment at no cost. Each consumer will receive a copy of their personalised report by email after the results have been discussed by phone. The report will highlight the proposed action points for consumers.

DebtBuster will obtain a credit history for the consumer. If the consumer is able to meet their repayments without debt review, the consultant will make recommendations on how to achieve this. DebtBuster provides free financial education through its website, www.smartcents.co.za.

DebtSafe does not offer formal services to prereview consumers, but does offer free advice and guidance through all communication channels. Their website, www.debtsafe.co.za, offers calculators, budgeting tools and advice forums.

Life insurance company 1LifeDirect sponsors financial education website The Truth About Money, which offers a financial education course through Boston Campus.

If a consumer is in financial difficulty 1LifeDirect will sponsor the course for free. Visit truthaboutmoney.co.za for more details.

There are people and companies out there that can help you out of your financial

Mediation versus debt review

There are pros and cons to both options

You do not necessarily have to enter debt review to negotiate a repayment plan with your credit providers. The National Debt Mediation Association (NDMA) provides mediation services by helping the indebted consumer to negotiate a repayment with their credit providers outside of debt review.

NDMA chief executive Magauta Mphahlele says, for example, the association managed to negotiate a 47% reduction in monthly instalments for one of its clients who was struggling to meet her repayments. Her debt repayments were reduced from R11?712 to R5?546 a month, providing her with extra cash to meet her day-to-day expenses and to settle other smaller debts faster.

“Being a single mother of two children, her only option was to restructure her debts and reduce nonessential expenses.

“Once her financial position improves, she can go back to paying her normal instalments.

“In doing this, she avoids legal action, which could attract additional legal fees and a highly tarnished credit report,” says Mphahlele.

There is a debate around the pros and cons of debt mediation versus debt review. Debt review offers legal protection through the courts. But this protection is only in place as long as you are meeting your monthly repayments, so proponents of mediation argue this protection is not significantly greater than the agreement reached through mediation.

If you have already received a court order, you cannot enter debt review but you can still use mediation.

Mediation can be more flexible because you can reinstate your payments as soon as your financial situation improves. There is also no listing of debt review on your credit record.

You can also still apply for further credit, although a benefit of debt review is that it makes further credit extension a non-negotiable. Go to www.ndma.org.za for more information.

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