How Does Debt Counselling Work?

We have all heard the term debt counselling before and some of us have either made use of it or are thinking about making use of debt counselling in order to get out of that tough situation called debt.

When you are in debt or should I rather say over-indebted in some cases, you might want to get the help of a professional and trained individual (known as Debt Counselors) to help you deal with your debt.

A debt counsellor will look into your financial situation and then make recommendations to Credit Providers. Remember that you might not qualify for debt review, in which case the debt counsellor will then assist you to work out a better budget in order to repay your debt effectively.

So what exactly is Debt Review?

Debt Review can be described as the whole process of being assessed by a debt counsellor.

The process will of course start with your application and end with the issuing of a “Clearance Certificate”, once all of your debt has been settled. Basically, they do an assessment of your finances to determine whether you are eligible/ qualify for debt counselling. The processing time can also vary depending on the amount of debt you have to repay.

If you are thinking about getting debt counselling, there are a few things you need to keep in mind:

You might not qualify for debt counselling.

In order for you to be able to qualify for debt counselling, you need to be over-indebted (as defined by the NCA). What this basically means is that you are unable to repay your minimum monthly instalments.

A debt counsellor will determine if you are over-indebted or not. If determined that you are NOT over-indebted, your debt counsellor can help you to work out a budget that will help you repay your debt effectively. The other option that you could choose is to negotiate with your creditors, to “rearrange” your debt – meaning that you will then be able to pay a reduced monthly instalment over an extended period of time.

Debt counselling is going to cost you

Unfortunately, debt counselling is not free. There are some costs involved, so make sure you know what you are getting yourself into. All the fees will be disclosed to you upfront and you will also receive it in writing.

The fees are as follows:

An Application Fee

Anyone who applies to a debt counsellor for a debt review will be charged a fee of R50.

A Rejection Fee

If there is determined that you are not over-indebted, you are liable for a rejection fee of R300.

A fee of the Debt Counselor

This is also known as a restructuring fee.

The fee can be a maximum of R6000 (normally it’s less) or the first instalment of your restructured repayment plan – whichever is the lesser amount. What this basically means is that for example: if your instalment is less than R6000, then your debt counsellor cannot charge you more than the instalment.

After-care fees

You will also be required to pay a monthly after-care fee. This amount is paid to your debt counsellor and is usually five per cent of your monthly instalment (a maximum of R400) which will be paid every month for 24 months. Thereafter it will decrease to three per cent, until you have paid off all your debt.

No access to more credit

While you are in the process of debt counselling, Credit Providers are prohibited from lending you money. Unless it is a consolidation loan and it does not result in more debt.

Once you have been issued with the clearance certificate, only then will you again have access to more credit. But remember, all the credit is probably what got you into debt counselling in the first place. In many situations, it could always happen that due to the fact that we are just so happy and grateful for help (especially when you are in a bad financial situation), that we forget one of the golden rules to any business transaction – ASK QUESTIONS.

Whether you just want to know more about the whole debt review process or if you are sceptical that you might be dealing with an incompetent debt counsellor, here are a few questions you could ask them, to set your mind at ease. Remember knowing your rights will give you a measure of protection.

1. Are they a member of the Debt Counselors Association?

All DCASA members are required to sign a code of conduct. Any complaints will be dealt with by the association and if a member should act against the code, they will lose their membership.

2. What is their Registration number?

This is also known as an NCRDC number. Debt counsellors must be registered by the regulator. If you would like to vary their number, you can call the NCR call centre.

3. Which payment distribution agency do they make use of?

This is very important. The Debt Counselor helping you should work with an accredited payment distribution agency (PDA).

How does the Debt Review process work?

This is a very good question. By asking this, it will help you to establish how the debt counsellor operates – do they work through the whole process or do they take shortcuts. Just keep in mind that you must know exactly how the debt review process works and what it involves before you ask this question.

Do they use an accredited debt counselling system?

Good debt counsellors (people trustworthy and competent), will make use of software systems in order to help them determine the level of indebtedness they are in. Keep in mind that if this is not done accurately, the debt repayment proposal (known as the restructured repayment plan) that they draw up for you could contain mistakes.

The following systems are accredited:

• Simplicity and Care
• Maximus
• DC Express
• Debt wise
• Eminence DC Software

Now that we know what questions you should ask and what things you must keep in mind when considering debt counselling, let’s take a closer look at the steps involved in debt counselling.

1. The first thing you need to do is to apply

Together with your application, you should also provide details of your monthly income by means of a copy of your payslip, your monthly budget and also debt commitments to the debt counsellor. Furthermore, you also need a copy of your ID and the latest statements of all your debts.

2. Initial assessment of your finances

Once the debt counsellor has your information, he/she will do an initial assessment of your finances to determine if you are over-indebted. They will then arrange a consultation with you to discuss everything. Be advised that the consultation could either be a face to face or over the telephone.

3. Your budget and existing debt commitments

During the consultation, which is the next step, the debt counsellor will confirm your budget as well as your existing debt commitments. They will then help you to work out a new budget in order to determine the amount of money that will be available for the debt repayment.

This is also when the debt counsellor will give you the details regarding all the costs involved, as well as a temporary debt repayment plan. Please note that this will be the time when you officially apply for Debt Counselling.

 4. Confirm your debt with Credit Providers & the Credit Bureaus

The next step that follows would be that the debt counsellor will contact all of your Credit Providers and the Credit Bureaus to verify/confirm your debts with them. This will result in you being listed on the Credit Bureaus as being under debt review. Unfortunately, this WILL happen, there’s no other way, and until you have repaid all of your debts in full, you will remain being listed. Once your debt is paid off, only then will your listing be removed. Where it's possible your debt counsellor will negotiate with your Credit Providers for the proposed debt repayment plan.

5. Credit Providers must accept the proposed repayment plan

If they do, it will be made an order of the court by the local Magistrate’s Court. It is referred to as a “Consent Order”. A consent order can be seen as a voluntary agreement between two or more parties. But keep in mind that if one if the Credit Providers does not accept the repayment plan, the debt counsellor then will have to submit it to a Magistrate for an order in terms of the NCA (National Credit Act).

Unfortunately if one of the Providers rejects the plan, you will need to go to court.

6. Your final debt repayment plan

In the last step, the debt counsellor will then give you the final debt repayment plan. This plan is then also submitted to a Payment Distribution Agency (PDA).

By doing this, the goal is to collect a single payment from you and to ensure that the correct amount (like described in the final repayment plan) is paid to all your Credit Providers on a monthly basis. You will continue to pay this amount until all of your debt has been paid in full. Just remember that where it is applicable, there might be interest and some legal fees.

Although there are no real disadvantages when it comes to debt counselling, except maybe the fact that you won’t be able to get more credit, there are a few advantages:

• There will be no permanent record of you being under Debt Review.
• There is only one regular monthly payment.
• A good debt counsellor will give you good advice on how to cut back on expenses.
• By working with the problem heads on, you can experience some relief from all the stress of being in debt.

So if you feel that you are way over your head with debt and are thinking of getting debt counselling, this should help you to understand the process a little better and also give you some sense of security, as you know now what questions to ask your debt counsellor.