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.
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
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
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
Further, not all consolidation loans are in the best
interest of the consumer. The risks of consolidation loans include the following:
interest rate or fees on the consolidation loan could be higher than that of the debt
• 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;
credit life fees on debts that were previously not subject to credit life;
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 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.
Lastly, the best way to explain whether debt counselling is
the best option for the reader is to explore the alternatives:
and ignore your creditors. This will merely result in further debt judgments, followed
by garnishee orders or repossessions.
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.
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
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 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
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.
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