Everything you need to know about debt counselling

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So, you’re in debt and looking for an affordable and hassle-free way out. If you’re considering debt counselling or consolidation, Samke Mhlongo unpacks what’s in store for you.

One of my catch-up sessions left me disturbed as a client I have been coaching for a year on the best way to structure a car loan, still isn’t in a position to buy a car. Why? Because months after contacting her debt counsellor to advise that she now has a higher salary and can afford to pay all her debts herself, they hadn’t granted her a certificate of discharge releasing her from being under debt review! I’ve always had a general idea of what debt counselling is. But, after some digging, I realised that this arrangement was much more serious, and sadly more open to abuse than most people realise.

 Debt counselling vs consolidation

These two concepts are very different. Debt consolidation is where you take out one big loan to settle small loans. Say you find it difficult to make payments on your store account, personal or student loans and overdraft. You may consider taking one big loan to settle these four small ones, and then be liable for only one affordable payment. You apply through a bank, and no additional parties are involved. Under debt consolidation, you are still able to take out new debt such as a credit card or vehicle finance, provided you can afford the repayments on them as well. Debt counselling on the other hand is the option you would take where even if you were to apply for debt consolidation, you would not be able to afford that one lower repayment as well as your living expenses. You apply through a debt counsellor, and they negotiate for you to pay lower instalments on your existing loans, based on what you can afford. The counsellor (make sure they are registered with the National Credit Regulator) then approaches the different credit providers requesting that they accept the lower, but now guaranteed upon, payment. Once the credit providers confirm this, the application is submitted to the debt counsellor’s attorneys who then present it to the Magistrate’s Court to have you formally placed under debt review. The benefit of being under debt review is that the court order protects you from creditors coming to claim more than the agreed minimum amount. The downside is that it will also take a court order for you to be discharged from being under debt review, allowing you to apply for new credit again. This sounds simple, but getting out is proving way more difficult than getting in!

Thinking of debt counselling?

Many people assume that debt counselling is a get-out-of-jail-free card, but it is far from that. Gerald Mwandiambira, a certified financial planner and wealth manager at Sugar Creek Wealth, says you must avoid debt counselling at all costs. This is because many people approach him for assistance in getting out of debt review where their debt counsellors simply refuse to assist them to do so. “You must remember that debt counsellors get paid a monthly fee only for every client that is still under debt review,” he explains. So, the higher the number of clients under debt review and the longer they are under it for, the more money the debt counsellor earns. But, not all counsellors are in the business of keeping their clients under debt review, according to Jonathan Marks of Debt Restructure. Also an NCR-registered debt counsellor, Jonathan he argues that you have the option of applying directly to the courts for a discharge order, without going through the debt counsellor. “Any individual wanting to be discharged from debt review should complete a 17W withdrawal form (obtainable from any debt counsellor), and submit it to the Magistrate’s Court together with supporting documents to prove that they can afford the full instalments on their remaining debt,” he says, adding that you have the right to do so as soon as you no longer feel the need for protection of being under debt review.

 SEE ALSO: How to better manage your debt 

Getting out of review

There are two ways of doing this. The first and simpler way is through your debt counsellor, either once you have settled your debt or they agree that you are now in a position to pay the normal instalments on your remaining debts. The second way is when you apply for the discharge yourself; this is when you haven’t settled all your debts but are able to afford the full instalments. But, the second option is expensive as you need to appoint a lawyer to present your case at the Magistrate’s Court. “Discharge applications can cost anything from R6 500 to R15000 per matter,” Gift Mncube, attorney of the High Court practising under Mncube Attorneys Inc, advises. “I would advise readers to avoid debt counselling at all costs,” he says.

In closing

As you can see, debt counselling is a serious matter that cannot be taken lightly nor be seen as an easy way of escaping your debt obligations. Consider it very carefully before doing so or even better, manage your finances as such that you never have to go under debt counselling.