Each month around 70 000 people face legal action for being in arrears with their debts.

This is so despite reports that reveal a slow-down in the number of people being taken to court by banks and credit providers for non-payment of their loans.

According to Paul Beadle, managing director of www.justmoney.co.za, consumers are waiting too long to tackle their debt problems and should seek the help of a debt counsellor as soon as they realise they cannot meet their monthly repayments.

“The number of people applying for debt counselling via our website is increasing every day, but often it is as a result of being declined for other types of lending, such as a new credit card or a personal loan,” says Beadle.

“Consumers are trying to tackle their payment problems by taking out even more debt, which just makes matters worse. People must not put their heads in the sand about their debts; ignoring the problem could lead to bankruptcy and being blacklisted for years.”

DebtBusters.co.za is dealing with around 100 new clients a month, hailing from all walks of life and struggling with average debts of around R60 000.

Luke Hirst, managing director of DebtBusters.co.za, says that debt counselling is the only solution for many people, but they must also change the way they manage their debts and money. “Debt review is a last chance to avoid administration or sequestration, but it is essential that people stick to their revised debt repayment programme,” says Hirst.

“If a client fails to maintain their revised debt plan, or they go out and get more credit and add to their debts, then they will lose their debt review status and the lenders to which they owe money will be able to proceed with legal recourse to reclaim all outstanding debts.”

The six step process

Step one: Finding a debt counsellor

It is vital that you use an NCR (National Credit Regulator) approved debt counsellor. Some unqualified and unscrupulous individuals have set themselves up as debt counsellors only to rip people off by overcharging clients and failing to deliver the service they promise. All legitimate debt counsellors have a registration number that you can confirm with the NCR.

Registered debt counsellors must advise you of their charges up-front, so don't be afraid to ask. There is usually a registration fee to cover the counsellor’s initial costs involved in checking the consumer’s credit status, which has been set at R50 excluding VAT per person.

Step two: Fact finding

The debt counsellor needs to collect all the information relating to your situation, including all your debts such as loans, bonds and credit cards, as well as details of your income and other expenses. You must be open and include everything the counsellor asks for to ensure that they can help you. Hiding any expenses or debts will only make the process slower and harder.

You will also need to provide documents including:

  1. Your ID, plus, if you are married, your spouse’s ID and your marriage certificate.

  2. You and your spouse's most recent salary slips.

  3. You and your spouse's last month's bank statement and the most recent statement of accounts from all your credit providers.

Step three: The debt counsellor’s assessment

Using this information the debt counsellor will assess whether you qualify for the debt review programme, based on criteria set by the NCA (National Credit Act), which states:

“A consumer is over-indebted if the preponderance of available information at the time a determination is made indicates that the particular consumer is or will be unable to satisfy in a timely manner all the obligations under all the credit agreements to which the consumer is a party.”

An initial calculation is made based upon:

  • Your net income after statutory deductions, less

    • essential living expenses (rent, food, fuel etc)

    • less monthly debt repayments

If it is clear that even after reducing your monthly living expenses to absolute essentials you will still have a deficit at the end of each month, then the chances are that you will be found over-indebted.

However, debt counsellors will look at your entire financial circumstances to satisfy themselves that you are truly over-indebted. For example, do you have access to additional financial assistance from family? Are debt repayment levels a result of owning or leasing assets beyond your means? If so you may be required to downscale or sell some assets. Are you really reducing living expenses to the bare minimum?

Step four: Debt restructuring and payment

If you do qualify for debt review, you must give your signed consent for the counsellor to contact your credit providers and negotiate your debt repayments down to amounts that you can reasonably afford. If agreement cannot be reached with the credit providers, the case will need to be heard by a magistrate’s court for a final decision.

Once the debt review programme is agreed to you will need to set up a savings account into which your salary will be paid, as well as cancelling debit orders with the credit providers. Each month a set amount will be transferred from your savings account to a PDA (Payment Distribution Agency), which will pay your credit providers the agreed monthly repayment figure.

While under debt review you are not allowed to incur any further debt, such as taking out a new loan or credit card or using a bank account with an overdraft facility. If you do manage to take on more borrowing, you will lose your debt review status.

Step five: After debt management

Once you have completed the debt repayment plan and all the debt is paid off, the debt counsellor will issue you with a clearance certificate as well as advising the credit bureaux to update your credit report to show that you are no longer under debt review.

Step six: The costs

Your debt counsellor takes their payment from your first debt repayment whilst under debt review, up to a maximum of R3000, and a small trailer commission from each month that you remain on the debt review plan, up to R300.