Debt has become a way of living for many individuals and families. The culture of "enjoy now, pay later" is a part of our lives. And it is actively promoted by retailers and credit card companies alike.

What is debt?

Debt comes in many forms: credit card, store cards, bank loans, salary advancements, micro loans from friends, family or loan sharks. Fundamentally, debt is money that you owe to someone else.

Debt can be good and bad, but the one thing all forms of debt have in common is that they need to be “serviced” until the debt is cleared. In other words, you need to make regular payments (monthly in most instances) until you have repaid the loan plus the interest owed.

In most instances the interest you owe is calculated monthly, so the longer you take to pay off the debt, the more interest you pay. What many people forget is that the interest compounds monthly, so if you miss a repayment, the interest you owe will increase month on month.

Should you invest or pay off your debt first? Ask yourself these 3 questions first

What happens when you’re stuck in the debt trap?

Debt can, quite literally, lead to ruin. People often refer to a debt trap, but the technical term is over-indebtedness. This is when the cost of paying back your debt exceeds your monthly disposable income, and as a result you’re not able to repay the money you owe, and you end up skipping payments on some accounts in order to pay others.

People caught in the debt trap often find themselves taking on new debt to deal with old debt. People will use credit cards and overdrafts to pay debts, buy food and other necessities. Credit providers will start sending you letters of demand and summonses and may even repossess what you bought if you fall too far behind. You can lose your furniture, your car – or worse, your house – if you default on paying back what you owe.

What is debt counselling?

Debt counselling is a debt relief measure and is provided by debt counsellors who are registered with the National Credit Regulator (NCR). Debt counsellors assist consumers stuck in the debt trap by restructuring your debt. They do this by negotiating with credit providers for reduced payments.

If you do seek out debt counselling, make sure to check that the debt counsellor you’re dealing with is registered with the National Credit Regulator (NCR).

The outcome of the debt counselling process is a repayment plan, which is designed to be affordable to you but also acceptable to all your credit providers. Good debt counsellors should be able to negotiate a 40% reduction in your monthly debt payments. That means debt counselling can effectively make it easier for you to afford your monthly debt repayments, but will increase the term of the loan. That way, they’re making sure the credit providers are repaid what is owed, albeit in a longer time frame.

What is the debt counselling process?

The debt counselling process normally takes between 30-60 days. All registered debt counsellors have to follow the prescribed steps that are overseen by the National Credit Act:

Step 1: Debt Assessment (Day 1). This is when you apply for debt counselling. This process requires you to share personal information with the debt counsellor, often via an online debt assessment form. The debt counsellor will then use the information you provide along with information from a Credit Bureau to get a clear view of your debt. The assessment process can sometimes incur a small fee (see fees below), which is often waived.

Step 2: Notify all Credit Providers (Day 1-5). The debt counsellor will then notify all of your creditors. You will then be listed as under debt review on the credit bureaus. This is important for them to know, because when you’re under debt counselling, you won’t be able to apply for more credit until you have repaid your debt or when a clearance certificate is issued. Repayment terms will be negotiated with all credit providers. Your interim payment plan will be loaded at your Payment Distribution Agency (PDA).

Step 3: Assessment of Outstanding Credit (Day 6-30). Credit providers will confirm your outstanding balances. Your debt counsellor will then inform your credit providers that you have been accepted (or rejected) for debt restructuring. You will need to sign debit order cancellations for your original credit agreements and then make new payments that align with your repayment plan.

Step 4: Repayment Plan (Day 31-60). Your debt counsellor will then draft a repayment plan and distribute it to all your credit providers, who will either accept or reject the repayment proposal. This process will continue until all your creditors have agreed to the repayment plan, which will then be submitted to your PDA. Your PDA will then collect a single payment from you and distribute the payment to all your credit providers.

Step 5: Court Order (after 60 days). The debt counsellor will set a court date for submission of your repayment plan and a signed affidavit that you agree to stick to the repayment plan. During this court date, your debt counsellor aims to get approval for the proposed repayment plan.

What are your rights and responsibilities when applying for debt counselling?

It’s important to remember that as a consumer, you have rights. Make sure you know what they are before you go into the process:

  • You have a right to apply for debt counselling.
  • If the application for debt counselling is rejected, you have the right to request, and be provided with, the reasons why.
  • You have the right to a written outline of the fees that apply to you before you apply for debt counselling.
  • You have the right to a full oversight of the debt counselling process before applying for debt counselling.
  • You have the right to receive distribution statements from your debt counsellors and PDAs on a monthly basis.

But with rights come responsibilities. As part of the debt counselling process, you are responsible for:

  • Ensuring you provide your debt counsellor with full and correct financial information at the time of application.
  • Making the monthly repayments you agreed to with the debt counsellor.
  • Following up on monthly payments made to the PDAs.
  • Making sure you understand the process, applicable fees and implications before going into debt counselling.

What does debt counselling cost?

The cost of the debt counselling is outlined in the guidelines published by the NCR and have been in effect since 1 August 2011. If you’re applying for debt review with a debt counsellor, these are the fees you are expected to pay:

  1. An application fee of R50, although some debt counsellors do not charge an application fee,
  2. A rejection fee of R300  if the debt counsellor determines that you are not over-indebted;
  3. A restructuring fee equal to the first instalment of the debt re-arrangement plan up to a maximum of R6000, payable with the first instalment.
  4. A monthly fee – called the “after-care fee” – of 5% of the monthly instalment of the repayment plan up to a maximum of R400, for a period of 24 months. After 24 months, that fee is reduced to 3% of the monthly instalment, to a maximum of R400, for the remaining period of the debt rearrangement plan. The after-care fee only starts in the 2nd month.
  5. Should you withdraw from the process before the first instalment, you will be required to pay a withdrawal fee of 75% of the restructuring fee.
  6. A legal fee of R750 for the court order. The legal fee may only be deducted in the 2nd month once the restructuring fee has been paid.

Should your debt counsellor fail to submit proposals to credit providers or refer the matter to a tribunal or a magistrate court within 60 business days from the date of you submitting your debt review application, the debt counsellor will have to refund 100% of any fees paid (excluding the application fee).

What are the advantages and disadvantages of debt counselling?

When you’re in a debt trap  it can feel impossible to get out. In that case, debt counselling might be your only option.

It still helps, however, to arm yourself with knowledge and understand both the advantages and disadvantages of debt counselling:

Advantages of Debt Counselling

Disadvantages of Debt Counselling

Your monthly debt repayments will be reduced to a rate that you can afford. 

Your repayment timelines will be increased, so you’ll be paying back your debt for a longer time. 

Creditors can no longer take action against you, repossess your property, or call you demanding payment. 

You won’t be able to take out any more credit while you’re under debt review until you’ve repaid all your debt and received a clearance certificate. 

You will only need to make one monthly debt repayment to one provider, as opposed to many.

There are fees to be paid, but by law they’re kept as low as possible. 

When you’re under debt review, you can’t apply for any more credit. That’s why it’s important to have an emergency fund in case you have an unexpected cost you can’t take a loan out for. A good debt counsellor should factor this into your repayment plan.