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Debt review: Pros and cons to consider before applying

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For many consumers in South Africa, the year 2022 brought increased financial strain as consumers struggle to keep up with rising inflation and debt – worsened by aggressive interest rate hikes.

According to a DebtBusters debt index, consumer demand for debt counselling shot up 30% during the third quarter of 2022, compared with the same time last year. The increased demand played out in the context of flat wages, the erosion of consumer spending power and unsustainably high levels of unsecured debt, DebtBusters head Benay Sager said in a recent report.

Debt counselling was written into South Africa’s National Credit Act (NCA) about 15 years ago to assist over-indebted consumers buckling under the pressure of debt.

The debt relief measure seeks to negotiate for reduced repayments and overall debt restructuring for these consumers, essentially helping them to settle their debt and better their credit standing, without the need to take on more credit.

Although debt counselling forms part of South Africa’s NCA, no consumer should be forced to enter debt review and customers should be aware it is not “a quick fix”, Sager told Moneyweb.

“It is not a payment holiday. What consumers may not know about debt counselling, is that once you commit to the process, it’s in your best interests to pay off all of your unsecured debt. It’s a long-term commitment,” he said.

The National Credit Regulator (NCR) does not make provision for a consumer to cancel debt review once they have been assessed and found to be over-indebted. Consumers will have to stay the course and settle all debts under review in full before a debt counsellor is permitted to issue a certificate clearing them from debt review.

Most debt counsellors in South Africa used the industry-wide Debt Counselling Rule Set (DCRS), which allows voluntary concessions such as excluding certain charges, adjusting contractual fees and interest rates and other repayment terms.

“For debt counsellors who use the DCRS, the industry agreement is, if needed – and this is not a guarantee – to allow the consumer to repay their debt within a reasonable amount of time, and the unsecured [credit] interest rate, could be lowered to as close to 0% as possible, in agreement with the creditors,” Sager said.

He said credit on vehicle financing can be lowered to an interest rate of the repurchase rate plus 2%, which is the minimum that can be offered. The same applies to a bond (home loan).

“For bonds, because they are longer term, they are treated a bit differently. As soon as someone finishes up the other types of debt in debt counselling, their bond repayments go back to the original amount,” said Sager.

Under debt review, consumers are barred from taking up new credit, as they will be flagged at credit bureaus, although that does not equate to being blacklisted.

“In exchange for your getting your debt repayments restructured, you’re committing to not applying for further credit until you finish the programme, because you need to demonstrate you can repay your debt,” said Sager.

Consumers are also not placed under debt review for free. Based on a consumer’s affordability levels and the size of their debt, a counsellor determines a monthly lump sum that is distributed to the creditors, the debt counsellors, the legal process as well as payment distribution agencies tasked with collecting consumers’ monies and distributing them to the credit providers.

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