MONEY CLINIC | I cannot meet my debt review obligations. What is the worst that can happen?

A Fin24 reader under debt review and unemployed since the start of the year is struggling to keep up with her financial obligations. Seeking the advice of an expert, she writes: 

I started debt review around the latter part of 2017 and never missed a single payment up to December 2019. Since January 2020 I have been unemployed and still am. I always kept debt counsellors in the loop all the way, until my termination. All my creditors were advised accordingly and I still communicate with them.

However, some are more harsh than others. I do understand their prerogative to go back to the original contract agreement in the event of DR default. I also know that they can consider not going back to the original contract agreement. In other words changing the interest rates can be considered discretionary on the part of the bank.

For the record in November 2020 I will be 60 years old.

I am a qualified finance manager and have failed to acquire employment. Covid-19 has not helped and I do not think the situation for me and thousands more who are unemployed, will get better.

Effectively, I am unable to meet my financial obligations. I have tried with assistance from family to make some payments where I could. Unfortunately this is not always possible. I am fully committed to meeting my financial liabilities and commitment if only I can start earning an income. If I cannot secure an income soon, I will be unable to meet my commitments. I have done my best to pay my bond, which is a secured loan. This is up to date. It is the short-term personal loan and card loans that I am really struggling with.

Assuming I cannot meet those short-term obligations, what is the worst that can happen?

Benay Sager, Chief Operating Officer at DebtBusters, responds:

The consumer’s question is a common one as many South Africans are really struggling to make ends meet. In this case, the consumer who is under debt review is struggling to meet some or most of her debt repayment commitments as a result of loss of income. Her question is: what is the worst that can happen?

One has to remember that one of the primary benefits of debt review is the reduction in interest rates and monthly repayment amounts that debt counsellors can usually secure on behalf of the consumer, providing real cash flow relief. For a consumer under debt review, the reduction in interest rates is substantial, so losing this concession due to inability to pay is a big blow for the consumer.

If this concession is lost, often creditors revert back to original interest rates and monthly payment amounts, which are beyond the means of those consumers who applied for debt review.

Many consumers under debt review have been faced with this situation. At DebtBusters we have been urging all credit providers to consider each case based on its merits. The consumer’s debt counsellor should have notified the creditors that the consumer is struggling to pay her debt as soon as they were made aware of this situation, and should have asked for essentially a payment pause for a number of months.

Assuming this happened, generally creditors honour such a request with up to three months’ of payment pause – meaning, they give the consumer a break for three months and then extend the duration of debt review by three months to make up for this. Often three months is long enough, but in this case would not have been, so it is possible that a further extension was requested by the debt counsellor for another three months. Whether a subsequent request is honoured by creditors really depends on each creditor and type of debt – this is difficult to say.

In the current situation, it is clear the consumer’s unemployment continues to this date. She has done her best to stay up to date with her bond, which is great, as one always wants to protect the assets. If debts are not paid beyond the payment pause period, it is really up to each creditor to decide what to do. Creditors do not have to revert back to original interest rates and repayment amounts, but they can if they choose to do so.

Our advice for this consumer is to keep paying some amount (however little it might be, even a few Rand) towards her debt, and inform the creditors and the debt counsellor that she has the intent to continue this journey.

Creditors will generally make a plan for a consumer who genuinely wishes to pay back their debt, but they need to be kept informed regularly. Creditors might also be open to renegotiating debt repayments across even a longer period, so we would urge the consumer to take these steps (in conjunction with her debt counsellor).

Questions may be edited for brevity and clarity.