Johannesburg - If your want a quick, painless fix to your debt worries, look further than debt counselling.
A big surge in debt counselling applications is expected in January as struggling households face up to December excesses, but experts caution that a debt review is no panacea.
Since debt counselling was established in 2007, you can contact a counsellor if you can't afford debt repayments. The counsellor will go through your affairs and decide whether you are over-indebted. This means your expenses are more than your income.
The counsellor will then work out a repayment plan - proposing smaller instalments over a longer period or postponing repayments - that will be submitted to your creditors. If they don't agree to the plan, the counsellor can go to the Magistrate's Court and force them to accept it.
More than 140 000 people have already applied for debt counselling, out of the estimated 8 million South Africans who have debt problems.
The debt counselling process has had some teething problems, particularly due to a shortage of counsellors as well as legal uncertainties (only a fraction have gone through the court process).
But it also has big benefits for those under siege from creditors. If you go under debt review, your creditors cannot start any legal proceedings against you for 60 days. Your counsellor takes over dealings with your creditors and will negotiate a repayment plan with them.
Once under debt review, you only make one monthly payment - to a payment distribution agency - that in turn pays all your creditors.
And, compared to other more hard-core options - like sequestration - your credit record can be salvaged fairly quickly. When all your debts are paid off, your record is cleared as part of the debt review repayment plan.
There are some drawbacks:
Debts will take longer to pay off: "The debt counselling process is a serious matter and although it allows consumers who qualify to repay their debt at reduced monthly instalments, it will take them much longer to pay off all their original debt," warned George Nyabadza, general manager: marketing at WesBank.
Your debt counsellor will usually arrange to decrease your payments, but the payback period will be extended; for short-term debts that can be up to seven years.
More interest: Because the repayment period is longer, you may end up paying more interest on your debt.
"The overall interest bill will increase due to the extension of the term; however, many creditors are now reducing their interest rates to help the over-indebted consumer," said Luke Hirst of debt management firm DebtBusters.
Cost: Debt counselling will cost you 100% of the monthly amount you will pay back as part of your debt repayment plan - up to a maximum of R3 420 for a single applicant and R4 560 for a joint application inclusive of VAT. Debt counsellors are also entitled to 5.7% of the monthly payment up to an amount of R342.
It's hard work: The most common mistaken belief is that a debt review is a get-out-of-jail-free card, said Rudi Visser of DebtBusters. In truth, you will have to demonstrate to the court a willingness to curb your spending and make lifestyle changes - like giving up pay television and other luxuries.
Debt counsellor incompetence: Nyabadza said WesBank receives daily complaints from consumers who have suffered losses due to negligence and mismanagement of their affairs by debt counsellors.
"Another general complaint is that debt counsellors, after receiving their fees, do not always complete the debt review process as their fees are paid upfront; the consumer's problem is therefore not resolved," Nyabadza said.
He said a common mistake made by consumers under debt review is to entrust their debt counsellor with the distribution of their funds among their various creditors, instead of insisting that a payment distribution agent be appointed for the purpose.
"This has too often resulted in consumers losing money," Nyabadza said.
Hirst agrees that many debt counsellors in the market are poorly equipped to assist over-indebted consumers.
"That is why you need to use an established debt counsellor who has well-trained consultants, and a back office that can help clients throughout the process. The consumer should always ask the debt counsellor what payment distribution agency (PDA) is used to distribute the client's funds, and whether this PDA is registered with the National Credit Regulator."
No more debt: During the debt review, you are not allowed to take on any more debt, including a home loan. Failure to adhere to this will mean the whole plan will be cancelled and your creditors can take action.
What to do?
Debt counselling should really be a last resort, said Hirst. Clients should first contact the credit provider to see if it can assist.
Nyabadza agrees. "Consumers must, regardless of their financial institution, always approach their bank first should they be in any financial difficulty, or foresee any difficulty in the future, before seeking alternative solutions."
You should only consider approaching a debt counsellor or debt management firm if you can't work things out with creditors, or if you feel you have too many credit agreements.
But make sure your counsellor is reputable, and registered with the National Credit Regulator.
In addition, registration as a member of the National Debt Mediation Association is recommended, as the counsellor will then be equipped to assist clients with budget advice, support and mediation with financial institutions and other credit providers, said Nyabadza.
If you are unsure who to use, it may be best to ask your credit provider to recommend a debt counsellor, said Hirst.