Four Options for Consumers Who are Over Indebted

South African consumers are more cash-strapped than ever before and there is nothing worse than running out of money before month-end.

It is no surprise that consumers are reeling under the cost of spiralling prices with Stats SA reporting that fuel is 37% more expensive than it was a year ago and that food inflation has hit a 46-month high.

Alain le Roux, Debt Specialist at Cyber Finance explains that if you are relying heavily on credit to get through the month it may be time to seek financial assistance.

Le Roux explains the four options available to help you select the best debt reduction path for you and your family.

Option 1: Administration 

Debt administration is a legal process that will reduce your monthly instalments and, in this way, give you more cash in your pocket money, in your budget or more living expenses. The process involves extending the repayment term of your debt agreements, but it can only apply to finance agreements that are less than R50 000. Debt administration is not always the best option and can be quite expensive.

Key points that apply to debt administration include:

• The outstanding debt on each individual finance agreement that you have cannot cumulatively be more than R 50 000 to qualify.
• Interest rates can only be reduced to 15.5%.
• Payments that the debt administrator pays to your credit providers on your behalf are only made every 3 months.
• High monthly fees of 12.5% are being charged by administrators.
• Debt repayments are deducted from your salary by your employer on the instruction of the court which means your employer will be aware of your financial situation.
• Repayment terms can be very long and can be extended indefinitely which will cost you substantially more in the long run.

Option 2: Sequestration

Sequestration is expensive because it involves approaching a court for permission to sell off your assets to either reduce or pay off what you owe. The court will appoint a person called a curator to manage your money.

• You are forced to sell your personal assets such as your home, car, furniture, and valuables to repay your debt. Whether you will need to sell some or all or your assets depends on various factors. Ultimately it depends on how much the asset is sold for. For example, if your total amount owing is R800 000, the municipal property valuation on your home may be R600 000, but it may achieve only R400 000 when sold at an auction by the curator. The Curator’s goal is to get as much cash in hand as possible through the sale of your assets so that he can negotiate a reasonable settlement with your creditors.
• The process can cost you upwards of R30 000 in legal fees.
• Sequestration is not an option unless your credit providers agree and they generally will accept no less than 15% of what you owe them or a minimum of 22 cents in the rand.
• Rehabilitation from sequestration is only possible after a period of five years even if your total debts are settled earlier. To be rehabilitated from sequestration will cost additional legal fees because it involves a court application.
• You cannot borrow money, qualify for a home loan or even take out a cell phone contract while you are under sequestration.

Option 3: Debt Consolidation

Debt consolidation involves adding all your outstanding debts, such as credit cards, store cards, microloans and personal loans, together and taking a single loan to cover the total debt. You then make a single monthly repayment. In essence, you take a bigger loan to pay off your existing loan repayments. While debt consolidation, can work in some cases, in others it may become a debt trap.

• You need to have an excellent credit record with the credit bureaus in order to apply for debt consolidation. If you skipped a few payments on a clothing store account, credit card or even a cellphone contract you will probably not qualify.
• Debt consolidation loans are the most expensive of all loans. When consumers apply for a consolidation loan, chances are they are already in financial trouble and pose a high risk to creditors. That is why credit providers will charge a higher rate which may well be the maximum permissible interest rate allowed in law. Other charges that apply include a once-off initiation fee, monthly administration fees and service charges.
• You can only qualify for debt consolidation up to R 250 000 depending on your credit risk profile. For example, if you are granted a consolidation loan of R150 000 at 24% interest over 60 months, which loan includes credit life insurance, an initiation fee, administration fees and service fees, you would have created a NEW Debt of R323 995.
• There is no legal protection of your assets, so if you miss a payment, you could lose your home, your car or any movable property.

Option 4: Debt Review

A more pragmatic and less drastic way to tackle your uncontrolled debt is to approach a debt counsellor who will renegotiate the terms of all your outstanding debt agreements with your credit providers. Reputable debt management companies, such as Cyber Finance, must be is registered with the National Credit Regulator. They also have to operate within the rules and guidelines set down by the Regulator. A debt counsellor will assess your financial situation and negotiate with your credit providers to restructure your debt in the following ways:

• Reduce each monthly debt repayment instalment to an amount that you can afford to pay.
• Lower the interest rate on each debt to almost 0% under the debt counselling rules system, which can save you thousands of rands in future interest costs.
• Negotiate to extend the debt repayment terms for each account that you have.
• After the above has been done you pay a single affordable monthly payment towards ALL your debt.
• You will be protected against any further legal action while under debt administration.
• Your single payment is made via an NCR-regulated and approved payment distribution agency.
• Once your single monthly repayment has been made, credit bureaus will be notified, and credit records will be adjusted.
• When all your accounts are settled, you are issued with a Clearance Certificate and the debt review flag will be removed from your name.
• Debt counselling fees are regulated by the National Credit Act No. 34 of 2000.

In a nutshell

All of the above debt management strategies have pros and cons that need to be carefully considered by an individual. If you’re struggling with debt or your debt is out of control, make sure you choose the right solution for your specific needs, concludes Le Roux