By Emsie Martin
During the past year many people were forced to look at debt counselling. This is the process a client goes through when he cannot meet his monthly obligations toward creditors any longer. The debt counsellor will negotiate a new repayment agreement which the client can afford to pay each month.
At the end of the new term the client will have no more debt, as during the process the client may not incur any new debts. The big advantage here is that at the end of the term you are debt free! This is better than refinancing your home every three years and just creating more debt, or just getting a bigger overdrawn facility on your credit card each year. Your debt will just grow year by year.
When should you apply for debt counselling?
If there is a deficit between your income and expenses every month and you aren’t able to eradicate the deficit by living more frugally, you are a candidate for debt counselling. In other words, you have already spoken to your creditors about restructuring your debt by lowering interest rates or extending your repayment agreement. If you have already cut your expenses such as electricity, water, food, clothes and insurance, already asked family and friends to help you and you have no way out, you are a candidate for debt counselling.
Anyone can apply for debt counselling, as long as the person receives a monthly income. This is important as you have to make a new offer to your creditors instead of the usual payments. The amount is calculated by subtracting all your essential expenses from your net income. These are rent, food, water, electricity, insurance, school fees etc. The amount remaining is distributed equally between all the creditors or offered as payment. Your budget is shown to each creditor as motivation for the new amount being offered.
The biggest mistake most people make
The biggest mistake most people make is waiting too long to apply for debt counselling. It is human nature to hope that things will be better tomorrow, but usually the situation doesn’t improve. Things just get worse.
If you wait too long before applying for debt counselling, it will give the bank time to take legal steps. As soon as the bank has done so, they are not so willing to negotiate as they would have been if you had been up to date with your accounts.
What to do before applying for debt counselling
- Write down all your income and expenses. If there is a monthly shortage, do the following:
- See if you can cut any of your non-creditor expenses. These include fuel, telephone, DStv, food, clothes, water, lights, insurance, restaurant meals etc.
- The next step is to talk to each of your creditors. First talk to the creditor holding your bond. If you are still up to date you will have substantial bargaining power. Ask for lower interest or extend your repayment term.
- If you have lost your job, ask the bank for a payment holiday of three months until you have found a new job.
- Ask the financer of your car for lower interest and a longer term.
- If you still have a monthly deficit on your budget, go to each of your credit card providers to negotiate. Do the same with all your loans.
What happens if I do nothing?
If you pay short on your accounts every month, your creditors will begin taking legal steps. In the first three months the creditors will try and convince you to bring your account up to date. When they see this is not working, their file will go to their collecting department. If they see you are still not reacting, your file will be given over to their lawyers. The lawyer may send one more warning, after which he will issue a section 129 notice informing you of the pending summons and shortly afterwards a summons will be sent.
You can oppose the summons, but you will incur expensive legal costs. The creditor’s lawyer will then inform you of the court date. You may then defend yourself there. If the court resolves in favour of the creditor, the latter will obtain an attachment order or garnishee order from the court.
The lawyer will hand it to the bailiff, who will then come to your place of work or your home to execute the court order. The court order is valid for 30 years, but it will only appear on your credit record for five years. During this time it will be very difficult to obtain credit, and it will also reflect badly should your employer do a credit search on your name and see the entry on your credit record.
Contact a debt counsellor and apply for debt counselling before it’s too late!
The Solidarity Guild for Financial Practitioners is a community dedicated to bringing professionals who offer services in the financial industry into contact with one another and to be the watchdog that tackles problem areas in the profession with feasible solutions.
The Guild also offers a network to members whereby they can liaise with one another, share best practices and do business.