Categories: DebtNews

Debt Counselling Explained

Published by
Lethabo Ntsoane

Debt Counselling is a service that adds value to the credit status of many South Africans. According to TransUnion South Africa, defaults and distressed borrowing is at 50% as of 2021 making South Africans one of the worst borrowers in the world. Furthermore, comfort borrowing has decreased from 4% in 2019 to – 17% in 2020, and this is mainly due to the effects of Covid-19. 

Debt Counselling provides profound services for those that are under debt distress. By making use of debt Counselling services, you will be able to get out of debt and you will be en route to becoming a responsible spender. 

What is Debt Counselling?

Debt Counselling involves the provision of guidance on customer credit, money management, debt management, and budgeting. Debt Counselling provides services that assist debtors to avoid being blacklisted and to become good debtors. Services that are provided by debt counsellors are available to those struggling with debt repayment. 

Who are debt counsellors?

Debt counsellors are companies that help individuals or companies to avoid blacklisting if they are struggling with debt. Their role is to negotiate with creditors on the borrower’s behalf to reduce credit interest rates and waive late fees. 

Are Debt Counsellors Regulated?

Debt counsellors are supposed to register with the National Credit Regulator, therefore, they are regulated by the National Credit Regulator (NCR) as mandated by the National Credit Act of 2007. The NCR ensures that debt counsellors adhere to the consumer rights of the individual undergoing Debt Counselling. 

When using debt counsellors make sure they are registered with the NCR to ensure your safety from scams and frauds. You can use debt counsellors that are recommended by the National Debt Counsellors’ Association (NDCA) and you can expect these debt counsellors to:

  • be registered with the National Credit Regulator,
  • be affordable and offer reasonable legal fees to clients,
  • provide monthly statements and continuous client support,
  • use a registered payment distribution agency to ensure clients funds are protected, and
  • use the NCR approved debt counselling rules system.

Debt Counselling Process

The debt counselling process takes part in 5 steps. These steps are explained below. 

Step 1: Client Application

This is a step that a client-first takes to get in touch with a debt counsellor. Clients get free debt assessment to determine their level of debt and whether or not debt counselling is a solution that they should use. There are other alternatives available for borrowers and debt counselling may not be the best solution for every borrower who is over-indebted. 

Debt Counselling is for those that cannot afford to meet their current debt obligations and have been missing out on payments. Otherwise, if that’s not the case, services such as debt management, debt rescue or debt mediation can be utilised instead of debt counselling. After the debt assessment process, a potential client can choose to start the application process formally. 

Step 2: Client Protection

After a successful application, a debt counsellor starts working on protecting the client from creditors and the credit bureaus. Creditors and credit bureaus will be informed via the national Regulator’s debt help system that a client has applied for and is undergoing Debt Counselling. 

This shows that a client is starting to rehabilitate and he/she is about to get their affairs in order. Creditors will view this action as an act to the right part. Now creditors will deal directly with the debt counsellor. As the borrower, you won’t be harassed anymore. 

Step 3: Rates Negotiation

Financial status changes on a regular basis for the good, the bad, or the ugly. When finding yourself looking for the services of a debt counsellor, it is rare to find that your finances have been positively impacted. Debt counsellors will renegotiate with creditors on the amount that you will pay on a month to month basis. 

The new quoted amount will be affordable to you and will cater for your current financial status. A fixed repayment duration will be negotiated. Interest that has accumulated on your credit account will be renegotiated in your favour. 

Step 4: Quoted Monthly Figure

Debt Counsellors will help determine an affordable repayment figure and terms. The figure is based on striking the balance between the ability to make timely payments and the overall debt. The figure comes as a single monthly instalment. 

You will make a payment to the debt counsellor via debit order or debit check. The money paid will be distributed to creditors that are included in the debt counselling plan for the duration of the plan. The repayment may last up to 5 years but may last for a couple of months depending on the amount of debt and repayment schedule. 

Step 5: Issuance of a clearance certificate

After repaying all the creditors, a clearance certificate will be issued to you. This certificate confirms that you have successfully paid all the accounts listed under the debt counselling plan. A clearance certificate will also be sent to the credit bureaus so that an update can be made in favour of your profile. 

Benefits of using a debt counsellor

Debt counsellors come with a debt management plan to help clients with their debt issues. With a consistent monthly payment, clients are able to benefit from using a debt counsellor. At some point, clients’ accounts end up getting paid up and they can now afford to get new credit or restore their old credit. 

By using the services of a debt counsellor you, 

  • Become debt-free within 5 years,
  • Payments are simplified by making one payment every month,
  • Credit Score gets improved,
  • Get reduced interest rates,
  • Can get a late fee waiver, and
  • Get lower monthly payments.

Conclusion

 Debt Counselling is a tool that can be used to unload debt that one cannot cope with. Making use of a debt counsellor may be necessary if one is over-indebted. The good thing about debt counselling is that before the debt counselling process commences, a debt counselling company contracted will first run a free assessment of whether or not one needs a debt counselling service. Therefore, the service is only available to those that need it.

Lethabo Ntsoane

Lethabo Ntsoane holds a Bachelors Degree in Accounting from the University of South Africa. He is a Financial Product commentator at Rateweb. He is an expect financial product analyst with years of experience in reviewing products and offering commentary. Lethabo majors in financial news, reviews and financial tips. He can be contacted at lethabo@rateweb.co.za

Published by
Lethabo Ntsoane