More to debt review than meets the eye

Johannesburg - The South African economy has faced significant headwinds over the past year or so and the situation is likely to continue in the short to medium term. Aside from slow real GDP growth and the lag in creation of real, sustainable jobs to reduce unemployment and poverty, inflationary pressures are beginning to erode consumers’ disposable income.

Recent statistics from debt management firm Debt Rescue and Statistics SA show that South Africans spend 75% of their salaries on paying debt. 

In addition, a debt industry survey showed that 51% of the participating respondents were unable to meet their minimum debt repayment requirements every month. The consequences are enormous, not only because these individuals will have to double up their payments in the next month, but interest may be charged on the balance thereby plunging them into further debt.

With rising food and fuel prices and increasing interest rates, the situation is set to get worse.

Debt expert and MD of DebtSafe Wikus Olivier states that “it is usually at this point where a person realises he or she has a problem and then tries to 'fix' it by borrowing money; either from a bank, cash loan franchise or even family and friends.”

A more preferable approach would be to contact your credit providers and arrange for an alternative repayment plan the moment you realise you’re unable to cover your monthly debt repayments. Should you still find yourself drowning in debt, it may be necessary to contact a debt counsellor for debt review, asserts Olivier.

Debt review is aimed at individuals who are unable to cope with monthly financial responsibilities. Debt review immediately protects you against legal actions from creditors. The debt review company takes all legal issues and negotiations from your shoulders so that your life is kept intact; having a roof over your head, a car to drive, food in the cupboard and the essential needs of your family covered.

Once an individual signs up for debt review, their various accounts will be consolidated into one payment which will be shared among that person’s credit providers. DebtSafe argues that this will gradually allow the individual to get out of debt.

I, on the other hand would be circumspect when approaching a debt review agency for debt consolidation. Firstly, you’d have to be extremely naïve to believe that the primary reason these agencies are in business is to help indebted individuals get out of debt. Like any other business, they are profit-maximisers and are in the debt review business to make money. They seek a return on their ‘investments’ - paying off the accounts of their debt review clients, in return for a consolidated repayment plan, which will invariably include interest charges.

One of the benefits of going under debt review is that your creditors cannot attach your property or other assets to recover the outstanding debt on an account. Your debt counsellor would take over this responsibility by negotiating a repayment plan with them. However, consumers should be aware that the debt counselling process is a serious matter.

Although it allows consumers who qualify to consolidate their debt and repay it at (often) reduced monthly instalments, this will take them much longer to pay off all their original debt. This differential between the original term of the debt contract and the extended one with the debt review agency is the profit margin that they make.

Debt review proceedings are circumstantial and should only be taken if all other sensible options have been exhausted. I’m not suggesting in any way that individuals requiring debt counselling ditch the debt review process if they are in financial difficulty with no other alternative. Rather, I propose that consumers scrutinise their debt review contracts by preferably getting legal advice to ascertain the true cost of going into debt review; weigh up the pros and cons of going into debt review and finally make an informed choice based on their personal circumstances.

One thing is certain - we’re likely to see more and more South Africans going into debt review as many households struggle to keep pace with the inflationary and rising interest rate pressures we’ve witnessed in the 1st quarter of 2016.

* Dumile Sibindana is the editor of Banker SA and a columnist for Forbes Africa magazines. Follow him on twitter @zizi_dumile

*Add your voice  by sharing your debt  experiences, debt-busting tips and insights. Have a question? Ask our experts.

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