Debt counselling is an expensive route
DEBT counselling should be the last resort for debt-trapped consumers, says Mmadikwa Phoshoko, debt counsellor at legal insurance firm Legal and Tax.
The debt counselling process was introduced as part of the National Credit Act in 2007. The consumer applies to have their debt restructured so that they can pay household expenses - and still be able to pay off some debt at the end of the month.
Consumers use debt counselling because creditors are not allowed to take any legal action against the consumer while they are under debt review.
"It's a good option if you are really in a tight spot with debt and finances, but you should consider other ways of dealing with your debt before you enter the debt counselling process," says Phoshoko.
"One option is to ask your creditors to change your repayment terms."
Debt counselling has some disadvantages.
"Because it usually involves reducing your monthly payments on your debts, it will take longer for you to settle the amount you owe and you will pay more interest as well.
"Ultimately, you could spend up to seven years servicing a short-term debt, like a clothing account or a cash loan. If you are lucky, you may have creditors who will reduce their interest rates to help you, but don't count on it," she warns.
Another disadvantage is that debt counselling is not free.
"It will cost you up to a maximum of R6000. Debt counsellors also receive a 5% monthly aftercare fee, capped at R400," she says.
"Don't think of debt counselling as an easy way out - it is a tough process that demands commitment and sacrifice from you.
"You will have to show the court that you are serious about paying off the money you owe and making lifestyle changes ... like downgrading your car or giving up that DStv subscription."
Another disadvantage, she adds, is that while under debt counselling, you are unable to get more credit.
All debt counselling applications ends in court - this is to get a consent order for the new agreement.
"Creditors may not agree to the proposals made on behalf of the consumer, then an application will have to be made to a court to consider your financial circumstances and possibly force your creditors to accept less.
"Before you go the route of debt counselling, speak to your creditors and warn them you are battling to meet your obligations.
"If they are not willing to help, approach a counsellor," says Phoshoko. - firstname.lastname@example.org