Can you access credit while under debt counselling?

Debt counselling is a legal process that helps you get your finances back on track. Because you’re not permitted to access credit while undergoing the process, you may wonder what would happen in an emergency.

In this article, we consider the options.

Tip: Debt consolidation combines your debts into a single, affordable monthly payment. Find out more here. 

Why is your access to credit restricted?

Once you enter the debt counselling process, your debt counsellor will negotiate with your creditors and develop a payment plan that will allow you to pay off your debts over time.

To safeguard you and your creditors, you cannot apply for any further loans until the process is complete. Any creditor who lends to you during this time is guilty of reckless lending, says Mmadikwa Phoshoko, a monitoring officer at the National Credit Regulator (NCR).

“If you’re over-committed, there is simply no room for a new creditor in the repayment plan your debt counsellor has drawn up for you,” explains Phoshoko.

“All available money must go to your existing creditors, in terms of the court order granted.”

What happens in an emergency?

Phoshoko says it’s not uncommon for debt counselling clients to struggle to pay their debts in the event of an emergency.

“Although the payment plan drawn up for you invariably incorporates a ‘contingency amount’ to help you save, many people use these funds because of the high cost of food, rates and so on,” she says. “This leaves them vulnerable in a crisis.”

Should a crisis occur that would prevent you from honouring your debt obligations, it’s important to advise your debt counsellor immediately, Phoshoko notes. While your creditors are not obliged to make allowances, your debt counsellor can issue a Form 17.3, informing your creditors of a change in your financial circumstances.

Creditors are encouraged to respond in good faith, and in a reasonable manner. This may include allowing you to defer payments.

“A creditor could, for example, extend the loan term for a month and ask you to pay an additional R200 or R500 the following month,” says Phoshoko.

In raising these additional funds, it’s important to note that you cannot opt for a pawnshop loan. These arrangements entail exchanging an asset for cash, with the aim of buying it back again when you can afford it. This would be considered taking on additional debt. 

You could consider accessing funds in other ways, such as selling your assets. However, this might affect the debt restructuring process, and you may no longer be considered over-indebted.

“In addition, if you sold your house, but this didn’t release enough cash to pay off what you owed, you’d still be bound by the court order in place,” Phoshoko warns.

Saving tips

Although saving during tough times is difficult, it pays to have an emergency fund, says Phoshoko.

Cebile Zibi, head of marketing at Momentum Money, says the Momentum Money App allows you to save for emergencies without having to put down a minimum deposit. There is no notice period, and you can quickly transfer funds from a savings wallet to a payment wallet.

“This product, which offers a competitive interest rate, can help you improve your money management practices,” Zibi explains.

She recommends focusing on streamlining your finances. “Your aim should be to get out of debt quickly, so cut out any luxuries.”

Phoshoko recommends paying more than the monthly interest due, to expedite paying off the capital owed.

“If you get a bonus or a tax rebate, don’t spend it,” she says. “Pay off your debts as soon as possible and set up a debit order for your savings, otherwise you’ll never have enough money left over to save.”

Boost your earnings

Another way to win financially while in debt counselling is to try to earn more through a side hustle. 

If you have an in-demand skill, such as accounting or fixing cars, advertise this to your network, or try your hand at selling items you’ve baked or handcrafted. You can rent out a camera or sports equipment, or a suit or evening dress that you seldom wear.

Hire yourself out to queue for others, babysit or pet-sit, or offer technical support to the less tech-savvy. If you’re young and fit, consider starting a small furniture removal business or becoming a personal trainer.

Find out what your community’s needs are and see how you can set out to meet them. There are great possibilities if you think creatively.

Tip: Debt can have a negative effect on your credit score. View yours for free today.