As part of the National Credit Act, we saw the introduction of a debt counselling process for South Africans who cannot meet their debt repayments.

The idea of debt counselling is to help over-indebted people find their way out of their financial situation so that they can take control of their money again.

If you are battling with debt, it may be your way out of a tight spot without having your goods repossessed or getting blacklisted by a credit bureau. It’s usually a time-consuming process, but when it’s over, you’ll be free of debt and have a clean credit record.

Debt counselling is a process where an over-indebted consumer applies to have his or her debt restructured.

That way, he or she is more able to pay household expenses and still keep up with their debt payments at the end of the month.

It’s a good option if you are really in a tight spot with debt and finances, but you should consider other ways of dealing with your debt before you enter the debt counselling process.  You could, for example, ask your creditors – the people who loaned you money – to change your repayment terms.

Drawbacks of debt counselling

Debt counselling has some disadvantages so you should only really investigate it when you have no other options.

1. It usually involves reducing your monthly payments on your debts, it will take longer for you to settle the amount you owe and you will pay more interest as well.

Ultimately, you could spend up to seven years servicing a short-term debt, like a clothing account or a cash loan. If you are lucky, you may have creditors who will reduce their interest rates to you help, but don’t count on it.

2. Debt counselling is not free, so you do lose money by entering the debt counselling process. It will cost you up to a maximum of R6000. Debt counsellors also receive a 5% monthly after care fee capped at R400.

3. Don’t think of debt counselling as an easy way out – it is a tough process that demands commitment and sacrifice from you.

You will have to show the court that you are serious about paying off the money you owe and making the lifestyle changes to achieve this goal. For example, you may need to downgrade your car or give up that DSTV subscription.

4. The second drawback is that while under debt counselling, you are unable to get more credit and you cannot make further use of your credit facilities.

Creditors are then not allowed to take any legal action against the consumer while they are under debt review.

5. All debt counselling applications end in court – this is to get a consent order for the new agreement. The consent order insures that the creditors stick to the new repayment arrangement and may not take legal action against the consumer.

Despite much effort, creditors may not agree to the proposals made on behalf of the consumer. In that case, an application will have to be made to a court to consider your financial circumstances and possibly force your creditors to accept less than what they want.

The Magistrate's court has jurisdiction/ legal authority to hear the application for a debt rearrangement order and your debt counsellor has to bring an application to get such an order as soon as reasonably possible.

The court order is required even when all your creditors have agreed to the payment arrangement as it means they cannot go back on or back out of the reduced payment arrangement.

6. Any account where legal action has commenced before a client applies for debt counselling cannot be included under debt review, most client wait too long before approaching a debt counsellor.

Still want debt counselling?

Before you go the route of debt counselling, speak to your creditors and warn them you are battling to meet your obligations. If they are not willing to help, approach a debt counsellor.

To ensure your counsellor is reputable, check that he/she is registered with the National Credit Regulator. If you are unsure who to use, contact the NCR to check for a debt counsellor in your area.

Debt Counselling should not become a lifestyle but rather a platform used when going through a financial strain.

As soon as you are able to get back on your feet and repay the original contractual instalment and after the debt review has been cancelled by the debt counsellor you should be able to apply for credit – and hopefully be a little wiser going forward.

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