You owe it to yourself

13 Mar 2009

Red warning lights are going off for many South Africans who are sinking deeper into debt. The economic decline, interest rate hikes and petrol, food and electricity price increases — which have outpaced salary increases — are all increasing the pressure.

Paul Slot, director of audit firm Octogen, estimates that almost 400,000 consumers are overindebted and in serious trouble — and the numbers are increasing at an alarming rate. A person should be spending no more than 35% of monthly income on debt repayments. But the average figure on debt repayment is 48% of monthly income. If you spend more than 50%, you are in hot water.

Perhaps one of the most frightening aspects is the toll debt takes on people's health and emotions. New Culture Africa chairman Hermanus Le Roux says: “Financial stress reduces productivity, is a major cause of serious health problems and a stressor in relationships. People are dealing with creditors and debt collectors who pursue them relentlessly.”

Consumer Assist CEO Andre Snyman has set up a 24-hour call centre. “Counsellors are dealing with people who are often desperate and emotional,” he says. “We have noticed that the hits on our website rise sharply after midnight. We are in the process of adding psychological counselling to our offering.”

According to Slot: “Many did not foresee a dramatic downturn in the economy. We are receiving calls from people from all walks of life. The kind of mistakes they are making is to take out a loan to pay their debt, which only increases their debt. They have three to five credit cards, but they pay the minimum and end up accumulating large debts. Ninety percent of people don't have a budget.”

The SPCA says 2008 was one of its worst years. Financial hardships are even forcing some to give up their pets.

But there is hope. Debt counselling may be the lifeline that prevents one from going under. It's part of a process called debt review, created by the National Credit Act, in terms of which a consumer can be declared overindebted and have his or her debt obligations rearranged with court approval. The intention is to give that consumer a second chance to remain in the economy and not become bankrupt.

“Debt counselling is not administration, sequestration or debt consolidation,” says Le Roux. With administration and debt consolidation you hand over control of your finances to a third party and end up paying debt over a long time. With sequestration, your assets are sold off to cover your debts, leaving you without any assets and unable to obtain credit.

Mr X, an engineer, had a good job and home. He moved to another town, rented out his home and bought two more houses. He also had a couple of loans and expensive vehicles. Then he had a costly divorce. When the economy started to nosedive, he lost a valuable client, and found himself in deep debt. He could see no way out. He approached a debt counsellor, who worked out a credit payment plan with his credit providers. He sold a house with a small shortfall, traded down on his cars, cut back on his lifestyle and found more work. All 18 of his creditors agreed to his repayment plan. He settled 10 out of 18 credit agreements within 18 months. All he had needed was the breathing space to get back on his feet.

Debt for which legal action has commenced has to be excluded from the process. Once you have applied for debt counselling, your credit providers cannot begin any legal action for 60 business days. This is to allow time for the debt review process to be completed, but is not a payment holiday. If you do not make your repayments on time, the process will be cancelled.

You will be listed at a credit bureau as being under debt review, but once you have cleared your debt, it will be removed from your record. You will then be able to access responsible new debt.

Every debt counsellor interviewed agreed there was a huge need for education regarding financial wellness. Snyman says his firm is receiving more and more requests from employers concerned about overindebted employees.

“Debt counselling needs to go hand- in-hand with financial wellness training,” Snyman says. “BMW adopted research from Germany that showed that debt counselling reduced debt among employees. Between 2006 and 2008, it saw a 53% reduction in debt and a 34% decrease in absenteeism among workers.”

Mr Y owned five properties, which he rented. In one month, two tenants said they were no longer able to pay their rent. Their difficulties had a knock-on effect and Mr Y found himself in arrears with his bond repayments.

Many multiproperty owners are in difficulty because of increased interest rates and a slow property market. Mr Y consulted a debt counsellor, who was able to negotiate a plan for him that helped him stay afloat.

In the fourth quarter of last year 35 000 homeowners had been in arrears for more than four months. This figure has risen from 8 000 in the third quarter of 2008, according to the Alliance Group. “Among certain creditors there is still resistance to debt counselling,” says Snyman. “Every creditor wants its money back first, as it fears it will lose out in the process. It would make more sense to send those 35 000 homeowners for debt counselling than repossessing their houses in a depressed market.

“Debt counselling is about bringing people back into the economy with a better understanding of sound financial principles. It means that creditors will recover part, if not all, of their money, even some interest. The alternative is expensive legal action with very little or no recovery of the debt.”

Slot agrees that the biggest mind shift needs to be among creditors. “The role of the credit provider is crucial. Some credit providers have centralised the debt counselling process with a mandate to operate effectively. But sometimes the message is not filtered down the organisation or the various product houses, leading to frustrating communication problems.”

Le Roux says that if you are looking for a debt counsellor, you should check that the person has been trained and registered by the National Credit Regulator. His most important advice is to act sooner rather than later. The quicker you act, the faster debt counselling can get you out of trouble.

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