Part 3: Debt rehabilitation explained

Struggling to pay your debt can be a stressful situation, and sometimes a lonely one too.

For some, it’s because of embarrassment and not wanting to admit to family and friends that they need help. Others are simply uneducated about the assistance available to them, and how to access it.

In the third part of our Debt-ucate series we explore which debt rehabilitation solutions are available, and what they entail.

Tip: If you find yourself stressed out by not being able to afford your debt repayments, click here.

You may or may not be familiar with some of the debt rehabilitation programmes that exist, but very few of us understand what these entail.

The misconceptions are many, and these include that you’ll never be able to access credit again, that it’s not an option if you have judgements against your name, or that you’ll have to appear in court.

“Debt rehabilitation is one of the most helpful, but also most misunderstood financial solutions,” says DebtBusters, a leading debt management company.  

To help demystify the various debt solutions, the following provides a breakdown.

Debt counselling

Debt counselling is a formal debt solution introduced by South Africa’s National Credit Act (NCA) of 2007, and is regulated by the National Credit Regulator (NCR).

It’s a programme specifically aimed at, but not exclusive to, the overindebted. It’s focussed on developing and implementing a restructured debt management plan that reduces your debt to a single monthly payment.

This plan is then presented to, and agreed upon by, the creditors involved. Following that, the debt counsellor obtains a court order confirming the new payment plan, making it legally binding. At this point, all that’s left for you to do is to start making payment.

The debt counselling process is a complete debt solution that aims to assist you not only to pay off your debt but also to learn how to better manage your money. For this reason, those under debt counselling are not allowed access to any further credit while under this process.

What are the benefits of debt counselling?

• Cash relief: Debt counselling allows for a restructured plan that caters for all of your debt under a single reduced monthly payment. This means that you’re no longer paying an array of creditors, but simply meeting one manageable payment, which immediately frees up some much-needed cash.
• Creditors handled: Anyone who’s struggling with their debt understands what it is to be hounded by creditors wanting to know when you’ll make the next payment. Through debt counselling, your debt counsellor liaises with your creditors on your behalf. This means you no longer have to dodge phone calls from unknown numbers.
• Legal protection: Once you are enlisted in debt counselling, your assets are protected from repossession. This is a common and real fear for many who are struggling with their debt.
• Expert help: This process gives you access to a trusted and trained debt counsellor who can answer any questions you may have both at inception and during the programme.
• Better budgeting: Through the debt management plan you are given information and resources to budget effectively. This is something with which most consumers struggle.

How to choose a reputable debt counselling provider

Debt rehabilitation programmes are easily accessible through an array of debt counselling providers. But the unfortunate reality remains that not all providers can be trusted.

“It’s unfortunate that a handful of illegitimate debt counsellors are charging exorbitant fees over extended periods, instead of assisting consumers to pay off their debt,” says DebtBusters.

“These providers are tarnishing the industry and making people hesitant to trust not only other providers, but also debt rehabilitation in general,”

To avoid falling victim to bad debt counselling companies, be sure to contact the NCR to find out if your chosen supplier is registered there, as stipulated by the NCA. Debt counsellors should have a registration number, which can be verified by phoning the NCR on 0860 627 627.

Also, check that the debt counsellor’s fees are in line with those outlined by the NCA. Check out the debt counselling company’s website to gauge the level of professionalism. Also, ensure that the company uses a reputable payment distribution agency (PDA). Lastly, if the debt counsellor is unable to explain the process in its entirety, move on.

Debt consolidation

Debt consolidation has grown significantly, with increasingly more providers, both institutional and non-institutional, offering the service.

The purpose of debt consolidation is to reduce your overall monthly repayments by making a single payment to one provider or lender. This is generally at a substantially reduced interest rate, and over a more manageable repayment period.

While this solution is the most common choice among South Africans who are struggling to maintain their debt payments, not everyone qualifies.

“What consumers fail to understand is that debt consolidation is still a loan, so the same qualifying criteria applies as when you’re applying for further credit. This means your credit record and score are also taken into consideration by the provider,” notes DebtBusters.

“This means that if you’re overindebted with a very low credit score, you may not qualify.”

Furthermore, debt consolidation is not a complete debt solution, as is the case with debt counselling. This means that, should you fail to pay your consolidated payment, or take on further credit that you’re not able to manage, you may end back in the same position.

This puts you at risk of being hounded by creditors, and potentially having your assets repossessed, as there’s no legal protection offered under this solution.

Debt settlement

This solution is for consumers who’ve received a lump sum of money and wish to settle all or part of their debt.

Applying for debt settlement through a trusted debt counselling company means that debt consultants will negotiate with your credit providers in order to attain discounted settlement amounts on all of your debts, such as credit cards, store accounts, and personal loans.

While consumers can contact creditors directly for settlement amounts, they may not have the negotiation expertise required or the time to navigate the administration.

A registered debt consultant, on the other hand, will manage the client’s entire debt settlement, from negotiation to the issuing of paid-up letters.

For more information about available debt solutions suited to you, click here.