Worse off after debt review

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A Fin24 user's balance on her car  is now twice as much as when she bought it brand new six years ago. She writes:

Five years ago, the best option for our financial problems was debt review. However, now the balances on all our accounts are much higher than they were back then. I can't understand how this could help us get back on track.

Everyone is always telling me is it is because of interest. I understand but please, isn't there someone who can help me sort this out?

I am very desperate now because my car's balance alone is about twice as high as when I bought it brand new six years ago. Please tell me what to do.

Friedl Kreuser, an attorney and manager at 6cents, a division of Summit Financial Partners, responds:

I can understand how frustrating it must be to feel that your situation is only getting worse when you are trying to do the right thing. There are ways of addressing this, however.

I'm sure you understand by now that debt counselling is intended to reduce your monthly debt instalments to an amount you can afford.

In order to do this, your debt counsellor has to propose that your credit providers stretch the term of your loan, so that you can pay less per month.

It is very important, however, that interest rates must be proportionally reduced when repayment terms are stretched, otherwise you end up paying much more on the debt than you originally would have - as you explain happened in your situation.

So the reason you are owing more than when you started is because your interest rates are proportionally too high. There are a few reasons for this:

1. It is possible that your debt counsellor proposed reduced interest rates to your credit providers, but they refused to consent. If this is the case, your debt counsellor must refer the matter to court.

However, if the credit provider opposes the court application, the court unfortunately cannot force an interest rate reduction. In this case, your debt counsellor must try to negotiate with the credit provider until they consent to a reduced interest rate.

Alternatively, the debt counsellor should try to apply the Debt Counselling Rules System for payment proposals, which most credit providers have pre-consented to.

2. It is possible that your debt counsellor has created an ineffective payment proposal. If this is the case, contact the National Credit Regulator - 0860 627 627 - and ask to be referred to a new debt counsellor.

3. It is possible that neither your debt counsellor nor your credit provider is able to reduce the interest rate any further without making a loss on the debt, because the amount you have to offer is simply too low to match the minimum interest rate.

If this is the case, there is no easy answer. Unless your credit providers are feeling charitable and agree to reduce interest to zero, there is not much else you can do but pay what you can while you urgently try to reduce or pay off your debts.

The way to do this is to try to increase your income or reduce your expenses and use the surplus to pay more towards your debt, or to use any lump sums of money - from bonuses or sale of assets - to pay off your debt faster.

I hope this helps.

- Fin24

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