If you have too much debt and struggle to pay your creditors on time each month you may qualify for debt counselling, also called debt review. This is a legal process where a debt counsellor draws up a plan that allows you to pay off your debts and have money to live on. It’s a great way to become debt free – but there are a few important things you need to know about how it works.
1. Not everyone qualifies for debt counselling.
The debt counsellor will look at your income, expenses and debt and see if you qualify for debt counselling. You have to meet these criteria:
- You have to be over indebted. Simply having a lot of debt doesn’t qualify you for debt counselling, not being able to afford your debt does.
- Creditors cannot have legal action against you. If they have, it might be too late to enter debt review. So, it is best to approach a debt counsellor before creditors take action.
- You have an income. In debt counselling you make a payment each month to your debt counsellor so they can pay your creditors, which means you are unlikely to qualify for debt counselling if you are unemployed.
2. Your monthly debt repayment is reduced
A debt counsellor will draw up a budget, also known as a payment plan, that allocates money to your expenses and your debts. They can negotiate with your creditors to accept a reduced monthly repayment making sure you can afford this amount and have enough left to live on.
3. Your creditors won’t take action against you
When you are in debt counselling, your creditors cannot approach you for payment or take legal action against you. When you have paid off your debts you are issued with a Clearance Certificate stating you are out of debt counselling.
4. You pay a fee to the debt counsellor
Debt counsellors provide a valuable service and are paid for this service. Fees include an application fee (R57.50), which you may need to pay upfront, and an ongoing administration fee. The administration fee is usually deducted from your monthly instalment. For example, if you pay R2 000 a month to your debt counsellor they may take a R175 fee for their services and use the R1 825 to pay your creditors. Debt counsellor fees are regulated by the National Credit Regulator.
5. You cannot take on any more credit
When you enter debt counselling you agree to pay off your debts as per your payment plan and not take on any additional credit as long as you are in debt review, which can be a few years. Your credit record will show that you are in debt review which will mean you don’t qualify for further credit. When you have completed your debt review and have a Clearance Certificate, then only can you apply for credit.
6. It takes longer to pay off your debt
Debt review takes a burden off your shoulders because it usually means your monthly repayments are a little lower. While this is a relief, it does mean that you will be paying off your debts over a longer period.
7. Debt counselling is not the same as debt consolidation
Debt consolidation is simply putting all your debts into one loan and paying this off each month. Debt counselling is an ongoing process of paying off your debts each month at a negotiated lower amount.
Commitment to debt counselling pays off
Debt counselling is an alternative to worrying about making payments, skipping payments and using one loan to pay another. Many consumers have been helped by debt review and completed the process with a clear credit record. But it does take a commitment to pay each month, live within your means, and stick to your budget.