8 Things You Should Know About Debt Counselling
For those who find themselves in the unfortunate position of being over-indebted, the situation can be equally confusing and stressful.
Compounding the problem, this only serves to make it more difficult for such people to take control of their finances and make their way out of debt. For some, this results in a perpetual financial struggle that can have devastating effects not only on personal finances, but on personal life as well.
While the above situation is one that more often than not appears hopeless for those who find themselves in it, there are in fact many proven ways that people can get out of debt and become financially secure once more. Sometimes, all it takes is a guiding hand to clear up some of the confusing and frightening aspects of being over-indebted, and help with the formulation of a sound debt management plan.
Seeing the importance of this need within South Africa, the National Credit Act (NCA) introduced state-mandated debt counselling in 2007. Since then, over 500 000 people have applied for debt counselling in an effort to take control of their finances. The advantage of being accepted for this kind of counselling, in addition to receiving professional financial help, is that it offers some protection from harassment by creditors as well as against the repossession of your property, and allows for you to be financially rehabilitated at the end of the counselling process without any further negative impact on your credit record. These advantages account for the popularity of debt counselling among those experiencing great financial difficulty. However, before diving into the application process, it’s important to understand a few key aspects of the debt counselling process in order to determine if it is right for you.
You may not qualify for debt counselling
First and foremost, it’s important to realise that not everyone is eligible to qualify for debt counselling. The first requirement is that, under the terms of the NCA, you must officially be classified as ‘over-indebted’. This means that you must be unable to pay off your debts in a timely manner, leaving you at risk of sinking further into unmanageable debt. If you do not meet the NCA criteria for being over-indebted, then the likelihood of being accepted for debt counselling is quite low.
There are costs involved
Entering into debt counselling is not free, and neither is the application process. While fees are carefully regulated by the National Credit Regulator (NCR), and are clearly laid out in the official guidelines so that all potential applicants understand the costs involved, application and rejection fees do apply, as well as the counsellor’s own fee and required follow-up or ‘after-care’ fees. While the counsellor’s fee, being the largest, cannot exceed R6000 or your first restructured repayment instalment (whichever is the smaller amount), these costs do add up and should be taken carefully into consideration when deciding on whether or not to enter into debt counselling
Some debts may not be included in the review process
The debt counselling process involves the review and restructuring of your current debts, and offers some benefits (such as protection from creditors) while this review is taking place. However, some debts, such as those for which legal action has already been launched, may not be included in the review process, leaving you vulnerable as a result. This consideration highlights the importance of applying for debt counselling as early as possible to ensure that all your debts are included.
Protection from creditors is not absolute
While one of the major benefits and purposes of the debt counselling process as laid out by the NCA is to protect consumers from harassment and legal action by creditors while the review process is underway, there is unfortunately a loophole in the legalities of the process that allows for creditors to ‘withdraw’ after a period of sixty days by issuing a notice to the borrower, the debt counsellor, and the NCR. After doing so, these creditors are then free to initiate legal proceedings regardless of whether or not the borrower in question has completed the debt counselling process.
Debt counselling offers protection against further indebtedness
One of the greatest advantages of debt counselling can be found in its extension of the ‘in duplum’ common law, which in its original form puts a limit on accrued interest once this amount has reached a level equal to the amount originally owed. For a person in debt counselling, even further restrictions are placed on the amount of interest a creditor can charge on an account in arrears, making it more difficult for such mounting costs to drive you further into over-indebtedness.
There is no option to access more credit
Once a borrower is in debt counselling, the NCA regulations stipulate that registered credit providers may not issue any further loans to the person in question (with the possible exception of a debt consolidation loan, which does not lead to further indebtedness). This means that, until you are issued a debt clearance certificate by your debt counsellor (a process that can take anywhere from months to years depending on the amount of debt you owe) you will be restricted from taking out any further loans, restricting the availability of funds quite significantly.
Different debt counsellors offer different services
Due to the popularity of the debt counselling system, the number of debt counsellors offering their services to the public has increased dramatically in recent years. Of course, this means that competency, education, and qualification levels can differ greatly. Finding a good debt counsellor, then, can require some searching, and requires great care to ensure that the person you choose will be able to help you effectively.
Debt counselling does not automatically get you out of debt
A common misconception when it comes to debt counselling is that it provides an easy way for people to shift responsibility for their debts onto someone else’s shoulders (in this case, the debt counsellor). While debt counselling does provide much needed assistance to the over-indebted, the responsibility for paying off debt remains squarely on the shoulders of the borrower, who should by no means neglect that responsibility.