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Over Indebted - Debt Review Drawbacks - Debt News
If your want a quick, painless fix to your debt worries, look further than debt counselling. - NEWS24
A big surge in debt counselling applications is expected in January as struggling households face up to December excesses, but experts caution that a debt review is no panacea. Read Below...
Drawbacks to Debt Review
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.
Bad Debt Increasing
The number of consumer accounts increased from 69.53 million in the previous quarter to 70.73 million in the quarter to June 2013.
The latest figures released by the National Credit Regulator (NCR) showed a quarter-on-quarter increase of nearly 200 000 consumers with impaired credit records.
The Negatives of Debt Review
More interest: Because the repayment period is longer, you may end up paying more interest on your debt.
"The overall interest bill will increase due to the extension of the term; however, many creditors are now reducing their interest rates to help the over-indebted consumer," said Luke Hirst of debt management firm DebtBusters.
Cost: Debt counselling will cost you 100% of the monthly amount you will pay back as part of your debt repayment plan - up to a maximum of R3 420 for a single applicant and R4 560 for a joint application inclusive of VAT. Debt counsellors are also entitled to 5.7% of the monthly payment up to an amount of R342.
It's hard work: The most common mistaken belief is that a debt review is a get-out-of-jail-free card, said Rudi Visser of DebtBusters. In truth, you will have to demonstrate to the court a willingness to curb your spending and make lifestyle changes - like giving up pay television and other luxuries.
Forced Sequestration
When credit providers take legal action against a client they might find that the client doesn’t have any substantial assets and that the client is a “person of straw”. Then the credit providers might take it upon themselves to sequestrate the client.
Debt Review Reality
Debt counsellor incompetence: Nyabadza said WesBank receives daily complaints from consumers who have suffered losses due to negligence and mismanagement of their affairs by debt counsellors.
"Another general complaint is that debt counsellors, after receiving their fees, do not always complete the debt review process as their fees are paid upfront; the consumer's problem is therefore not resolved," Nyabadza said.
He said a common mistake made by consumers under debt review is to entrust their debt counsellor with the distribution of their funds among their various creditors, instead of insisting that a payment distribution agent be appointed for the purpose.
"This has too often resulted in consumers losing money," Nyabadza said.
Hirst agrees that many debt counsellors in the market are poorly equipped to assist over-indebted consumers.
"That is why you need to use an established debt counsellor who has well-trained consultants, and a back office that can help clients throughout the process. The consumer should always ask the debt counsellor what payment distribution agency (PDA) is used to distribute the client's funds, and whether this PDA is registered with the National Credit Regulator."
No more debt: During the debt review, you are not allowed to take on any more debt, including a home loan. Failure to adhere to this will mean the whole plan will be cancelled and your creditors can take action.
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.
