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Debt review dread

Jul 10 2012 12:24

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WITH South Africans having more access to debt than ever before, it is not surprising that more than 9 million consumers are currently over-indebted.

As a Fin24 reader’s question suggests, it can be very easy to fall into the debt trap - but it can be just as easy to avoid it in the first place.

A Fin24 reader asks:

I just want to know if it’s wise to go under debt review because I’m struggling with my debts. I’m on maternity leave so things are hard.

I tried to apply for a debt consolidation so that I can pay off all my accounts and have one account that I’m paying back, but they said that I do not qualify due to affordability and being blacklisted – I’ve made payment arrangements but one company has garnished me regardless.

So what should I do in this situation? I would appreciate any assistance given.

Clark Gardner, CEO of Summit Financial Wellbeing, a company delivering financial wellbeing solutions for the past 10 years, advises:

The reader has raised a number of financial challenges many South Africans are often confronted with, including the challenges of maternity leave, the merits of debt consolidation as a debt relief solution, the dangers of garnishee orders and the decision to go under debt counselling.

Each topic will be addressed separately to explore the reader’s personal options holistically.

Maternity leave

Firstly, earning less income while you are on maternity leave can make it very difficult to keep your debt payments up to date. Your first task is to make sure you are accessing all available avenues to maximise your income during this period.

This includes claiming benefits from the UIF if you are receiving partial or no income from your employer. Most personal loans also come with credit life insurance, which can include benefits that pay out in case of disability, retrenchment or death.

Find out from all your personal loan and short-term insurance providers if you have access to any maternity leave benefits under credit life insurance. If you are still short of disposable income, contact your credit providers to reduce or freeze your debt repayments for the duration of your maternity leave.

Many credit providers will allow up to four payment-free months, often referred to as a payment moratorium or payment holiday. Ensure you confirm any agreement in writing with the credit provider.

Debt consolidation

Secondly, debt consolidation is increasingly being used by consumers as a debt relief mechanism. The concern is that not all credit providers are settling third-party claims directly and rather rely on the desperate consumer to exercise discipline to settle their debt with the consolidation payout.

Further, not all consolidation loans are in the best interest of the consumer. The risks of consolidation loans include the following:

• The interest rate or fees on the consolidation loan could be higher than that of the debt being settled;

• If an asset like a house is used as security for the loan, you could lose your asset if you miss payments;

• Paying an additional initiation fee on the consolidation loan;

• Paying credit life fees on debts that were previously not subject to credit life;

• Your repayment term could be extended so that you will be paying off your unsecured debt over five years or more; and

• Until the consolidation loan is paid off, it is highly unlikely that you will qualify for wealth-enhancing debt such as a mortgage loan.

Garnishee orders

Thirdly, the garnishee order is unfortunate and could perhaps be challenged.

It is a widely abused mechanism that exists in a structurally weak system that shifts all the control to the credit provider. At the risk of over-simplifying the legal issues, a garnishee can be summarised as when the magistrate's court provides the credit provider with an order that forces your employer to make deductions from your salary to repay your outstanding debt.

The court, however, relies on the collector or credit provider to inform your employer that it is time to stop the deductions when your debt has been settled. The unfortunate result is that most credit providers or collectors allow deductions to continue even after the debt has been settled.

Your options

Lastly, the best way to explain whether debt counselling is the best option for the reader is to explore the alternatives:

• Default and ignore your creditors. This will merely result in further debt judgments, followed by garnishee orders or repossessions.

• Negotiate reduced instalments with your credit providers. This is usually possible where you have only a few credit providers and can still afford to pay at least 80% of your original instalments.

• Apply for administration in terms of section 74 of the Magistrates Court Act. This remedy only applies for debts totalling less than R50 000, results in a judgment that tarnishes your record and exposes you to abuse and over-deductions due to administration being an unregulated industry.

Rectifying the abuse of an administration is expensive as you will need an attorney to rescind the order.

• Apply for sequestration. This is an expensive remedy usually requiring about R20 000 in attorney fees and at least 20 cents in the rand being distributed to your credit providers from the sale of your assets.

Looking at these options, it is clear that South Africa does not offer many effective solutions to an over-indebted consumer.

Debt counselling is currently the solution with the least downsides. It is designed to reduce debt instalments to an affordable level by decreasing interest rates and extending repayment terms.

A debt counsellor is merely a facilitator and has a duty to have the repayment plan confirmed by a court order.

Your credit report will reflect that you are under debt counselling, but once your debt counsellor issues a clearance certificate, this will be cleared from your credit record.

This means that you will once again qualify for wealth-creating debt such as mortgage loans. It is also a highly regulated industry with strict guidelines prescribing what the debt counsellor can and cannot do. The debt counsellor’s fees are also specified and limited by the regulations.

The biggest danger of debt counselling lies in the quality of the debt counsellor. If the debt counsellor does not adhere to the strict legal time lines, process or legal process, credit providers may terminate their arrangements.

Payments should be made to credit providers via a payment distribution agent and never via the debt counsellor.

In summary, ensure you access all the available maternity benefits, stay in contact with all your credit providers, challenge your garnishee order and use a good debt counsellor if you are severely indebted.

 - Fin24

* Do you have any pressing financial questions? Post them in our Money Clinic section and we will get an expert to answer them.

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money  |  debt  |  debt review
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