Rise in South African consumers applying for debt review – here is when you should consider it

3sixtycircle Blog

FNB warns that applying for debt counselling should be carefully considered as there are both advantages and consequences to this debt relief option.

The financial services company said it has seen a spike in customers applying for debt review, year-on-year relative to customers following its normal collections process.

“However, customers need to be aware of the restrictions as well as the likely costs before automatically turning to the debt review as a solution,” said Jonathan de Beer, head of collections at FNB Credit Card.

Debt review was introduced in 2007, with the National Credit Act 34 of 2005, and allows consumers who are over indebted a process of re-structuring and managing their debt over a  period of time.

“The main reason was to help over-indebted customers who may have encountered life changes such as a reduction in salary or income,” said de Beer.

Statistics compiled by debt management firm, Debt Rescue show that South African consumers owe the bulk of their monthly salaries to creditors.

The group found that consumers owe as much as three quarters (75%) of their monthly pay to creditors, while almost 60% of the population are struggling to meet their monthly payments for their home loans and credit card payments.

Only 23% of South Africans have any money left at the end of the month – with the other 77% left flat broke at the end of the month, with no hope of saving any money.

More than 11 million of South Africa’s credit active consumers are described as over-indebted. Findings from Debt Rescue in 2015 showed that the average South African had R70,000 in debt.

Read: Good habits to help you get out of bad debt

Advantages

“There are advantages to going into debt review,” said de Beer. “One of the major advantages is that a debt counsellor can, on behalf of the customer, negotiate with all their creditors a repayment amount the customer can actually afford.”

Through this process, the credit bureaus are advised by the debt counsellors that the customer has applied for debt review and the customer’s credit profile will be updated accordingly, instead of credit providers pursuing with summons and judgements, which negatively affects the customer’s credit rating.

Consequences

“Initial costs of debt review can be high,” warned de Beer. “There are once-off upfront fees and monthly after-care fees.”

A consumer who, for example, has an initial balance going into debt review of R54,452.38 with an instalment of R971.88 over a 60 month period, the debt review fees can amount to R11,300 over the course of the debt review period.

FNB advised consumers to discuss the entire process with the debt counsellor and to also consider restructuring options other than the formal legal process through the courts.

“It is possible to get a consent order through the National Credit Tribunal at lower fees,” FNB said.

“It is difficult to withdraw from debt review, once a consumer has entered the process. Should they want to withdraw, they would need to go to court to get an order stating that they are no longer over indebted or they will be required to settle all outstanding unsecured debt. There would also be a withdrawal fee payable by the consumer, prior to a clearance certificate being issued,” de Beer said.

The financial services company stressed that while under debt review, customers can’t incur any further debt, so no further credit may be granted. However, they can nolonger make use of any of their credit cards, store cards, overdraft facilities or even purchase a vehicle during this time.

Other alternatives

Managing financial matters and borrowing responsibly should be the first priority for all consumers.

“Taking on too much debt, particularly for non-essential or luxury items is not wise,” said de Beer. “Saving for such items is not only cheaper in the long run, but also ensures that consumers avoid falling into a debt spiral.”

Consumers are encouraged to enquire about the total cost of the credit over the full term in order to understand the costs and obligations associated with taking credit.

There are other alternatives that consumers can consider before choosing to go the debt review route.

“One of the most common problems when it comes to customers in debt is that they avoid the issue, instead of talking to the financial institutions,” said de Beer. “It is usually in the best interest of both the creditor and the customer to make an arrangement.”

Most creditors are open to discussion and agreeing to repayment arrangements.

“Another alternative, and one that customers are often not willing to consider, is a change in lifestyle,” said de Beer.

In some instances, going through debt review is a sensible way of getting back in control of finances. If deciding on this route, consumers should do lots of homework and are encouraged to shop around for experienced, reputable and effective debt counsellors with a track record of serving consumers well.

  NCR Actual example
Once off fees Restructuring fee R6,840
  Application fee R57
  Credit check fee R57
  Legal fees R855
Monthly Fees Monthly after-care fee (24 months)
 R1,329.53
  Monthly after-care fee (for the remaining period)  R1,163.34
  Payment distribution  R1,961.06
    R11,293 93