Many middle- and higher-income earners are drowning in debt as they rely ever more on unsecured loans to keep themselves afloat as salaries and the economy in general continue to deteriorate.
People facing this squeeze usually think they have two options – keep their heads in the sand and hope something will change, or face the facts and take action. However, another option is debt counselling, where you can select to go under debt review.
While this may carry stigma or be viewed as a “failure” – the truth is, no one needs to know. You don’t have to tell your friends or even your employer.
This option is preferable to waiting to default and having a judgment made against you. Once you are in default, the collection and legal fees start to mount and the debt that you were already struggling to repay could easily double.
In a nutshell, once you enter debt review, you are protected from legal action by creditors and a debt counsellor provides a court-issued agreement in terms of a repayment plan.
Benay Sager, chief operating officer at DebtBusters, explains that, once you’re in debt counselling, all the relevant fees are built into an affordable monthly repayment amount, so you pay a single amount every month to an independent payment distribution agency that is regulated by the National Credit Regulator (NCR).
This payment is then distributed to the creditors included in the debt counselling agreement for the duration of the plan.
Once under debt review, you may not apply for any credit until all the debts, as per the court order, are settled. On finishing the programme, the debt counsellor will issue a clearance certificate confirming that all the accounts listed under the debt counselling agreement are fully paid.
Home loans are the exception and do not need to be fully paid, but they must be up to date. The debt counsellor will ensure that the credit bureaus receive the certificate.
MAKE SURE YOU HAVE THE RIGHT DEBT COUNSELLOR
If you are considering debt review, note that not all debt counsellors are equal. While there are many satisfied customers who have gone through debt counselling, there are just as many who have had negative experiences.
Make sure you are working with an ethical provider who is a member of the Debt Counsellors Association of SA and/or the National Debt Counsellors Association.
- Always act in the best interests of their clients;
- Use a registered payment distribution agency;
- Use (and believe in) the NCR-approved debt counselling rules system (DCRS);
- Have debt counsellors registered with the NCR;
- Do not sign customers up without written, signed consent; and
- Provide continuous client support.
QUESTIONS TO ASK
Do you use the DCRS? City Press has received many complaints from debt counselling customers who discover that it could take more than five years to settle their debt, and that they’ll end up paying more than if they had not entered debt counselling.
The use of the DCRS is an important question to ask before signing up with a debt counsellor because not all debt counsellors use it.
The DCRS has been developed through negotiations between credit providers and debt counsellors. The goal of the DCRS is to settle the unsecured debts within a maximum of five years. In many cases, credit providers agree to a significant interest rate cut to meet the rules.
Although the DCRS is recommended, it is not required by the National Credit Act and some debt counsellors do not use it.
Instead, they lower the monthly payment by restructuring the debt over a longer period, even up to seven years. The debt counsellors who do not use the DCRS may not be negotiating a better deal for their client and, over that time, a client could end up paying far more than if they had not entered debt review.
The reason for this may be that it allows them to earn more legal fees.
What is the process? City Press readers have complained that they have either been put under debt review without their explicit consent or that the debt counsellor has not kept them informed.
You cannot enter debt review unless you have signed form 16, which gives the debt counsellor power of attorney to contact all your credit providers to calculate whether you are overindebted and to negotiate a repayment plan.
As soon as you have signed form 16, the debt counsellor issues form 17.1(b), which immediately protects you from any legal action brought by your creditors.
On receipt of form 17.1(b), credit providers are required to provide a certificate of your outstanding balance within five business days. The debt counsellor then undertakes an assessment to see whether you are overindebted. It is important to note that you can still cancel the debt review process at this stage.
If you agree to the process and are found to be overindebted, a debt counsellor issues form 17.2(b) within 10 business days after receipt of the certificate of balance from all creditors. This includes a repayment plan, which could include interest rate concessions from your creditors.
It is important to note that, once form 17.2(b) has been issued, you cannot automatically exit debt review, although you can change debt counsellors.
A good debt counsellor would provide the revised repayment schedule for your approval. At this stage, you can assess whether they have negotiated a good rate and that you will be debt-free within five years. If you are not happy, you can move to another debt counsellor to renegotiate your repayment plan.
The next step is to apply to the magistrates’ court or the National Consumer Tribunal. The magistrate declares the consumer overindebted based on the recommendation from the debt counsellor. The debt counsellor should inform you of the court date.
If your finances have improved by this stage and you are no longer overindebted, you must still go to court, but you can provide this new information in the court application and instead ask to be declared “no longer overindebted” based on the debt counsellor’s recommendation. If the magistrate agrees that you are no longer overindebted, the debt review is terminated.
Once the court order has been issued, you may not exit debt review until all your debts (except a home loan) under the court order are settled.
What is your policy on credit insurance? City Press has received complaints from readers who are paying credit insurance to both the credit provider and the debt counsellor. Credit providers are entitled to insist on credit life insurance as it protects against retrenchment and death, but the consumer has the right to choose the insurance policy, provided it meets the requirements of the credit provider.
Some credit providers offer credit life cover for free if you are under debt counselling (Lewis Stores is an example). Some debt counsellors also offer credit life products, but you need to confirm that they are a registered financial services provider.
You should also insist that they only replace credit life insurance where the credit provider product is more expensive. If the debt counsellor sells you a credit life product, you should insist that they cancel the credit provider policy. If the credit provider will not accept the debt counsellor policy, you will be paying double.
David O’Brien of debt counselling firm Meerkat says that, to avoid the problem of overpaying, he only offers to replace the credit life policy, where the customer will save money.
Meerkat also offers the service where it cancels the credit provider policy to ensure that the customer receives the benefit of the money saved each month, and is able to settle their debts faster.
WHAT TO DO IF YOUR COUNSELLOR GOES AWOL
The National Credit Regulator (NCR) has a website that shows you if your debt counsellor is registered – https://www.ncr.org.za/register_of_registrants/registered_dc.php.
There are currently only 1 657 registered debt counsellors, but there are also 2 059 counsellors who have not maintained their registration for various reasons. Only a registered debt counsellor can help you.
If your debt counsellor is not registered, not contactable or not providing you with the required service, you can transfer to another debt counsellor. Approach a new debt counsellor and complete the application form. Then, after the transfer has registered on the NCR’s system, which takes about a week, the new debt counsellor will be on your record.
According to David O’Brien of debt counselling firm Meerkat,
- If the court or the National Consumer Tribunal order has already been issued, you have no choice but to stick to the agreement. You can, however, accelerate the repayments so that you settle the debt sooner.
- If you transfer to another debt counsellor before the court order has been issued, the new debt counsellor will reassess your case, which may result in a different or better payment plan, or even find that you are not overindebted, but they are entitled to a new fee for that process. The new debt counsellor will then complete the legal process and have the order issued.
- If your previous debt counsellor is contactable, you can ask them for a refund of any fees for work that has not been done, however, it is not advisable to switch to a different debt counsellor because you have been promised a lower repayment – these promises are generally not fulfilled.
- If your debt counsellor provides poor aftercare service, O’Brien says you are fully entitled to pay your creditors directly as per the court order and not through the debt counsellor. However, you need to keep an eye on the monthly amounts, as these often change between credit providers as the plan matures over time. Remember that you are responsible for meeting the terms of the court order. The payment distribution process manages that administration and can also be cheaper than the bank fees if you manage all the payments yourself.
- If you have been paying directly and have settled all your debts, you need to ask your creditors for a paid-up letter for each account. If your original debt counsellor is not contactable, you can change to a new debt counsellor to issue the clearance certificate. Some debt counsellors offer this clearance certificate service to non-customers. The debt counsellor may charge a fee – this can vary, but is usually about R1 000. You could also apply to the National Consumer Tribunal to obtain a clearance certificate.
- If you are working through your original debt counsellor, the fees paid would already include obtaining a clearance certificate. This is issued to all creditors, credit bureaus and the NCR’s debt system so the debt review flag can be removed.