What are the advantages and disadvantages of debt counselling?

Debt review is a financial lifeline for many individuals who find themselves struggling to service their debt as well as make ends meet. It's a structured and regulated process that helps consumers manage and eventually eradicate their debt burdens. The National Credit Act (NCA) introduced debt counselling in 2005. Since 2009, Debt Sage has been helping many consumers become debt-free by taking advantage of debt counselling. In this article, we'll explore the significant benefits of debt review and how it can be a game-changer for those seeking financial stability and a path to debt-free living. If you are considering applying for debt counselling, it is important to understand what the benefits of debt counselling are before signing up. 

ADVANTAGES OF DEBT COUNSELLING

1. Debt Consolidation - Simplified Payments 

One of the primary benefits of debt review is the consolidation of multiple debts into a single, manageable monthly installment. Because of debt consolidation, instead of juggling various due dates, interest rates, and payment amounts, debt review streamlines your obligations. Debt counselling consolidates your debt into a single manageable payment that pays all your debt. This simplifies your financial life and makes it easier to budget effectively. This convenience can never be underestimated.

2. Legal protection from creditors

When you enter debt review, you gain legal protection against creditors' harassment, legal actions, and repossessions. The debt counsellor approaches the magistrate courts on your behalf to obtain a court order which makes binding the debt restructuring plan that was negotiated with the credit providers. This stops any repossession activity from credit providers, lawyers or debt collectors demanding payment.  The court order provides peace of mind, allowing you to focus on the journey to debt recovery without constant pressure from creditors.

3. financial education

This is probably the most important advantage of applying for debt counselling. Debt review often includes financial counselling and education resulting in your money habits improving. The ability and or skill to manage money is largely behavioural. When you have applied for debt review one can no longer have access to credit and has to use the income or cash that they earn to cover household expenses without recourse to borrowing. This teaches you to use cash for any purchases and generally to spend less. Once this is mastered, you are on your way to build wealth. Financial education and counselling equip you with the knowledge and tools needed to make sound financial decisions and avoid future debt troubles.

4. Lower interest rates 

When you enter debt review, the debt counsellor negotiates with the credit providers to lower the interest rates on your debts. Interest is a more significant portion of the repayments and when reduced it goes towards paying off the principal balance, helping you become debt-free quicker. The restructuring plan involves relooking and reducing interest rates with credit providers. This benefits the consumer from the savings on previously higher interest rates and charges. Interest rates for credit cards, retail/ store cards/ personal loans can be reduced to 3-5%.

5. flexibility 

One of the benefits of debit review is flexibility. If you win lotto, you can pay off your debt and subsequently exit debt review. If you come into some money, you can easily pay off or increase your monthly repayments or contribution amount. This implies that during the period your financial situation is difficult, you can make lower monthly instalments negotiated by your debt counsellor and then pay additional amounts when your finances improve. This allows one to pay off debt sooner and exit debt review quicker.

6. Temporary Flag

The consumer is flagged under debt counselling but there is no permanent record of having undergone debt counselling on credit bureaus. Credit bureaus do not keep the consumer's record as having been under debt counselling. When the debt counsellor has issued the consumer’s clearance certificate, the consumer's record with credit bureaus is expunged. In terms of the National Credit Act 34 of 2005, a debt counselling order reflects on one’s credit report within the period prescribed in section 71(1) of the Act or until a clearance certificate is issued. 

7. debt elimination focus

You cannot apply for new credit while under debt counselling. When one is over-indebted it is critical that they stop borrowing and focus on eliminating debt. If too much debt or the financial situation is causing one stress, then the logical and wisest thing to do is to stop borrowing and concentrate on paying off the debt. This is the only way one can be rehabilitated when faced with huge debt and debt counselling gives one that focus.  Once a consumer has finished paying off their debt, a debt counsellor issues them with a clearance certificate implying that they have satisfied all their obligations under debt counselling. The consumer's listing on credit bureaus is lifted and is able to apply for new credit.

8. Clear Path to Become Debt-Free

The ultimate benefit of debt review is the opportunity to become debt-free. By consistently following the repayment plan and managing your finances more wisely, you'll see your debt shrinking. This can be a source of immense relief and motivation, knowing that you're on a clear path to financial freedom

9. Affordable Monthly Payments

One of the most immediate and tangible benefits of debt review is that it results in affordable monthly payments. The process is customized to your financial situation, ensuring that you are left with enough to cover your essential living expenses.

10. Extended Repayment Terms

To make monthly payments more affordable, debt review extends the repayment terms. This does mean that you'll be in debt for a more extended period, but it also significantly reduces the monthly financial strain, making it easier to manage your cash flow. The debt repayment terms are usually extended to a period of 60 months implying that you should exit debt review in 60.  How long will l stay on debt review explains further the key issue of tenor under debt review.

 

DISADVANTAGES OF DEBT COUNSELLING

There are disadvantages to applying for debt counselling. Here we discuss the disadvantages of debt counselling.

1. new credit agreements blocked 

In terms of section 88(1) of the National Credit Act No. 34 of 2005, you must not enter any further credit agreement whilst under debt review. Although, this is listed as a disadvantage, however, it is actually a positive because one's focus when they are over-indebted should be on eliminating debt rather than accumulating more debt.

2. Debt Review Termination

If the consumer misses his or her monthly payments while under debt counselling, credit providers terminate the application and institute legal action. It is important that the consumer sticks to the amount that was agreed to on the court order.

3.  Not all debts are covered  

Not all accounts can be accepted on debt review. If there is a judgment (summons) on a home loan or motor vehicle, accounts cannot be included under debt counselling.  Furthermore, you cannot include debts arising from unpaid levies, school fees, municipal levies etc. These are debts that no credit agreement was entered into originally. 

4. Cannot rescind a court order 

Once a debt review court order has been obtained a consumer cannot terminate or withdraw from debt counselling until all debt is paid as per court order.  As part of the debt review process, the consumer can no longer approach the court to rescind the court order or apply for an order which declares that the consumer is no longer over-indebted. This is in line with the latest debt review court ruling.

4. Dual application when married in COP

If you are married in COP and your partner is struggling, you both have to apply. This is largely because of the type of marriage that one is in and being married in COP means that you and the partner are accountable for debts accumulated during the marriage.

5. Extended repayment terms

You might take longer to pay off your debt due to paying lower monthly instalments. When your finances improve while under debt review, it is important to increase payments. The more that one pays the earlier they can exit debt review. 

6. fees become payable

Fees become payable while under debt counselling in month 1 and the National Credit Regulator sets these fees. Legal fees also become payable in month 2. Legal fees vary from one debt counsellor to another. Most of these fees are however worked into the repayment plan.

If you are deep in debt, the advantages outweigh the disadvantages of debt counselling. Debt review is a powerful tool for individuals facing overwhelming debt. Its benefits extend far beyond just easing the burden of monthly payments; it offers a structured path to financial recovery and a debt-free future. If you find yourself struggling with debt, consider reaching out to Debt Sage to explore how we can help you regain control of your finances and build a more secure financial future. Remember, financial freedom is within reach with the right approach and commitment to managing your debt responsibly.