Little by little: Though there are costs involved, by consolidating debt and extending the repayment period, debt counsellors can reduce what you pay and help to dig you out of debt. (Fanatic Studio/Science)
Debt counselling is a way for consumers to dig themselves out of a debt trap but it does not come without costs.But thanks to pending legislative changes, consumers who cannot afford counselling will get some relief.
Debt counselling, or debt review, which falls under the National Credit Act, is aimed at helping those who struggle to meet debt repayments. It allows people to consolidate their debt and reduces monthly repayments but over an increased period.
The counselling does, however, include fees that are outlined by the National Credit Regulator (NCR), such as a R50 application fee, a once-off administration fee of R300, a once-off restructuring fee of a maximum of R8 000 for an individual applicant and R9 000 for a joint application. But it does help to prevent the loss of assets, such as cars and homes.
According to Neil Roets, the chief executive of Debt Rescue, if a person is R50 000 in debt and has an income of R7 500, with monthly debt instalments of R2 400 at an average interest rate of 15%, the debt would be repaid over approximately 24 months.
But if a person cannot afford this and decides to go to a debt counsellor, the monthly instalment could be reduced to R1 500 over 48 months. Fees for the debt counsellor would amount to about R6 000 over the period and would be included in the monthly R1500 instalment fees.
“Debt counselling fees are regulated by the National Credit Regulator … and there are clear guidelines in terms of what [providers] can charge,” said Roets.
Kedilatile Legodi, the NRC’s manager of debt counselling, said the charges enabled counsellors to fund the costs of running their operations.
“Debt counsellors are expected to operate in a professional manner and to have proper infrastructure and capacity to run their businesses,” she said.
The fee structure enabled consumers to pay for the services without having to borrow money to do so, she said. Also, consumers under debt review were protected from legal action by their creditors and had an added safeguard against the loss of assets such as cars and houses, Legodi said.
But some consumers who cannot afford debt counselling will now be able to get it for free under the National Credit Amendment Bill, which is currently waiting for the president to sign it into law.
The Bill recognises that not everybody can afford current debt restructuring.
“Existing natural person insolvency measures are not accessible to all consumers,” it says, adding that “not providing suitable alternative measures subjects these consumers to unjustified and unfair discrimination on socioeconomic grounds”.
The Bill is aimed at consumers with unsecured credit agreements amounting to no more than R50 000 and who receive an average income of no more than R7 500 a month.
Those who qualify will be able to apply to the NCR and have their debt restructured over five years. If this is not possible, the Bill permits the suspension of credit payments for up to two years. If after two years the consumer is still not able to make repayments, it allows for a percentage of, or all of, the debt to be extinguished.
The Bill also empowers magistrates to reduce interest charges to as low as 0%. But if the debt is cancelled, the individual cannot get credit for six to 12 months.
Credit providers remain concerned about some aspects of the Bill. Marguerite Jacobs, the Banking Association of South Africa’s general manager of legislation and regulatory oversight, supports measures to help over-indebted consumers but believes the assistance should be done through existing mechanisms, which have been proven to work.
She said the scope of the Bill should be reduced by decreasing the income threshold to the level of minimum wage, currently R3 500 a month.
Michael Lawrence, the executive director of the National Clothing Retail Federation of South Africa, said the Bill created uncertainty in the credit business.
“It ignores a number of realities and we have already established that, in this country, it is difficult to prove persons’ total earnings. It will therefore make it unattractive to consider lending money to people who are supposed to be new to the credit market and have lower levels of income,” he said.
Trade union federation Cosatu has welcomed the Bill. Matthew Parks, Cosatu’s parliamentary co-ordinator, said: “We support it because we think it’s a reasonable way of providing some form of debt relief to the most poor, especially those who have lost their jobs.”
Tshegofatso Mathe is an Adamela Trust business journalist at the Mail & Guardian