/ 6 June 2014

When the worst happens

When The Worst Happens

Retrenchments are happening, the price of food and other essentials is going up and paying the bills is becoming more of a challenge.

“The average South African household has a debt to disposable income ratio of approximately 75%, meaning many households are unfortunately on the wrong side of this average,” says Kerry Fynn, chief executive of AlphaWealth. 

“As a nation we aren’t alone in this global affliction, but with our relatively high interest and inflation rates, ours is perhaps harder to manage than most. As a borrower and not an investor, the magic of compounding growth is working against you. 

“This is exacerbated if the interest rates you are borrowing at are higher than normal bank rates — the reason why micro-finance lending can be so dangerous. Simultaneously, our low growth and high inflation rates mean our gross income is not increasing the way we need it to and our net income is actually shrinking after the effects of inflation. The consequence is that with too much debt we are simply squeezed into an untenable situation.” 

For some the worst has already happened — death or retrenchment of the primary breadwinner is catastrophic and not easy to manage or recover from. For others the bills are getting harder to pay and things are about to hit breaking point. 

Craig Gradidge, investment and retirement planning specialist at Gradidge Mahura Investments, says: “It is important that people take action sooner rather than later. People have a tendency to avoid uncomfortable and difficult situations. Financial distress often leads to shame as people are exposed to leading lifestyles they can’t afford. However, it is important that people seek advice and counseling while they still have options and can take corrective action. 

“If there are children in the picture, protect the house so those kids have stability and the security of a roof over their heads. Lose DStv, gym contracts, clothing accounts and other luxuries fast. The ability to prioritise and sacrifice is key in getting out of financial difficulty.

“While you still have work or regular income, consider your monthly income,” comments DebtSafe counselor Wikus Olivier. “Consider your monthly expenses and then draw up a budget, which will enable you to build up a reserve fund to absorb the essential expenses during a time of crisis. Your dependence on credit facilities during an emergency becomes reduced and enables you to recover a lot quicker.”

Paul Roelofse, certified financial planner and consumer advocate for the Financial Planning Institute of South Africa, says: “If you are spending more than you are earning then you should rather cut back than borrow money to maintain your standard of living. Debt is not the answer because the cost of the interest will increase your cost of living. This gets worse when interest rates rise as they apply to credit cards, overdrafts, personal loans, bonds and car repayments.”

Managing your debts

If you cannot pay your debts, says Johan Maree, chief executive of FNB Credit Card, “contact your bank and notify them as soon as possible of financial difficulties. This way the bank, in most instances, will be able to assist with a special repayment plan. This is a much better alternative than avoiding the situation, which could result in you being listed with the credit bureaux and possibly restricting access to credit in the future. Some banks are able to offer their customers debt solutions that will further assist in providing some relief on their budget before a payment is missed.”

The same applies to other creditors, says financial consultant and instructor of the UCT Basics of Financial Management short course Gareth Cotten: “Contact your creditors and let them know that you will be behind that month. As a creditor, this is more preferable than having to chase a debtor for weeks or months only to be told that you cannot pay. Then, it’s time to take a long, hard look at your income and expenses. If you can’t pay your bills, your expenses are exceeding your income, plain and simple.”

Financial Junction director for financial management and taxation Lynn Marais says: “Your debts can be restructured by extending terms of repayment and lowering the monthly payments. Your monthly obligation can be lowered by 50%; this restructuring process is usually then made an order of the court. As long as you pay in terms of the court order you are protected from legal action by creditors. Once you have completed the process or feel you are no longer indebted, you may notify your debt counselor to pay your normal instalments.”

Ryan Belgrove, executive financial planner at Standard Bank, says: “Debt counselors tend to be expensive. This would be your last resort. Your bank has financial planners who would assist in helping you set up a repayment plan that will best suit you.

“Should you find yourself in the inevitable position of being retrenched, losing your monthly income and not being able to afford debt counseling, you can always personally negotiate with your creditors and ask for reductions in outstanding amounts due,” Marais says. 

“Obviously not all creditors will agree to these reductions, depending on the particular severity of the debt, but most creditors will. This is beneficial to you because it will enable you to pay off your debt in arrears faster than what you originally would have. 

“You need to do a thorough budget showing all your accounts and debt as well as your monthly expenditure, present this to your creditors andcredit providers and request that they assist in suitable affordable repayment proposals. Negotiate with your major credit providers first, your vehicle finance company and home loan credit provider, requesting immediate lower instalments. Embarking on sorting out your debt can be a terrifying experience, but most creditors and credit providers are open to assisting and offering help and education.”

Finding employment

Godfrey Madanhire, life coach and professional motivational speaker, says: “It’s easier to get another job if you have a job, and your mindset needs to be on getting some work, even if you bounce around between a few jobs for a while. Get some form of money coming in. This makes a huge difference.” 

Fynn says: “Not all debt is created equal and if you are over-indebted, there’s a good chance your debt is to multiple lenders. Write down the total owing to each lender, the term of the debt and interest charged. Rank them according to the most expensive. Concentrate on settling the most expensive debt first and working your way down the list. If you have managed to improve your net disposable income and can demonstrate this to your bank, you may be able to increase your senior debt, which is by far the cheapest. 

Then, he says, “Give yourself a reasonable amount of time to reverse your position from being a net borrower/spender to a net saver/investor. Let the magic of compound growth work for instead of against you for a change. That’s how fortunes are made.”

Tips for managing debt

Rowan Burger, head of alternative products for Momentum Employee Benefits says it is important to prioritise your debts. 

“Pay off those with higher interest rates first. In terms of multiple credit card debts, stop using all but one credit card while you pay off these debts. Cut them up if needs be.

“If you are having trouble paying off your water or electricity bill, contact the provider. Some of them will have a plan in place that allows you to settle your bill in instalments.

“Take note of your spending: For one month, write down everything you spend. This is your key to getting out of debt. Avoiding more debt starts with knowing what you are spending your money on. Make a budget based on your spending record, cutting things that you deem unnecessary. Then stick to it.

“Use the savings you have made from your areas that you have cut on your budget, and put this towards paying off your debts.”

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