Advice

Understanding money – options when you’re struggling with debt

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It’s common cause that too many South Africans struggle with debt. National Credit Regulator data shows that 40% of the 25 million active credit users are behind on their payments.

That proportion has probably become worse since April 2020 explains DebtBusters’ Chief Operating Officer Benay Sager, because the data was released before the Covid-19 crisis.

He says that there are options for consumers who are having difficulty repaying debt, but people are often not aware of what these are.

Consumers who are unable to repay debt because something unforeseen occurs such as getting retrenched, losing their job or not being able to work because of an accident or medical issue should contact their credit providers as a first option.

It is important to work with the credit provider to explore possible alternatives, especially if the consumer owes money on an account that does not have an asset (house or a car) associated with it.

If there is an asset involved and the consumer is unable to make payments, an option is to voluntarily return or surrender assets that have been bought using secured loans, leases or instalment agreements.

Usually this happens when people realise that they are no longer able to make the payments or that they might default on future payments. This is a bitter pill to swallow, but for those who may not really need the asset, it may be a good option to generate some cash.

When you inform the credit provider that you wish to return the goods, they have 10 working days to provide an estimated value. You then have a further 10 working days to decide whether you want to go ahead or withdraw the notice.

It’s important to understand that if the credit provider isn’t able to sell the goods for enough to settle what you owe, you’ll still be liable for the outstanding amount.

“Something to remember is that if your payments aren’t up to date your options are limited, so it’s best to act before that happens,” says Sager.

Debt consolidation is another way to manage debt. It involves taking out one longer-term loan in order to pay off a number of smaller debts such as personal loans, credit or store cards.

Consolidation loans usually have fixed interest rates making it easier to budget and manage your financial affairs. Having one loan also means you’re less likely to miss repayments. Bear in mind though that most consolidation loan interest rates are upwards of 20%, which make them costly.

Consolidating debt may also save some money on service fees. Depending on how the loan is structured it could also improve your cash flow by requiring smaller payments over a longer period. You do need to consider that you’ll be paying interest over a longer term too and often the interest payments over the course of the loan will cost more than the amount borrowed.

Debt counselling entails the restructuring and management of debt repayments with lower monthly amounts and lower interest rates, based on what the consumer can afford and is done through the aid of a National Credit Regulator-registered debt counsellor. Unlike other solutions, it does not add to the consumer’s debt, but rather reduces the debt burden. The aim is to protect your assets from creditors and offer significant cashflow relief while providing an affordable repayment plan.

Sager says debt counselling is poorly understood and there is a lot of misinformation and scaremongering about the process. Consequently, people are wary about considering this option because they worry about being stigmatised or not being able to access credit in future.

“In fact, South Africa has a world-class debt counselling system that is both highly regulated and very successful.”

The benefits of debt counselling include:

  • Preventing repossession of assets: You will receive legal protection, so assets such as your house and car will be protected from repossession. A reputable debt counsellor will ensure you receive expert assistance throughout the process.
  • Paying what you can afford: The terms and interest rates on your debt will be renegotiated based on what you can afford to pay back.
  • Simple process: The debt management plan will consolidate all your debt repayments into a single payment making it easier to manage. This is a single debit order or debicheck per month that will cover all your debt repayments – it is a far easier way of paying back debt compared to paying all creditors separately.
  • Getting your finances in order: You will receive help to enable you to budget effectively.
  • Stopping embarrassing or threatening phone calls: Once debt counselling process starts credit providers are not allowed to chase consumers for payments – the repayment is managed by the debt counsellor through a well-regulated process. Harassing phone calls at odd hours should stop.

Debt settlement provides the option of settling your debt with a lump-sum payment. Usually people are able to do this when they receive a windfall payment such as a bonus or income tax refund.

While consumers can do this on their own, a qualified professional can help navigate this landscape. They will also manage all the administration such as obtaining the settlement letter, the negotiations, the paid-up letter and updating the credit bureaus.

“The reality is an economy that was already struggling is now reeling from the impact of Covid-19 and many more consumers are going to find themselves financially stressed. When this happens knowing which courses of action are open to you and understanding which is best suited to your circumstances gives you options to resolve the situation,” says Sager.

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