Battered by unemployment and salary cuts in 2020, millions of South African households entered the new year struggling to get by. Some are not even able keep up with their children’s school fees, let alone repay their debts.

As early as in the second quarter of 2020, the number of consumers’ accounts that were one or two months in arrears had started rise, according to the National Credit Regulator’s Credit Bureau Monitor. While the regulator has not published data beyond this period, credit bureaus who track these developments faster have been sounding the alarm.

TransUnion reported that delinquencies increased across all credit products in the third quarter of 2020 and debt counsellors seen a 40% increase in consumers making debt-counselling enquiries this January.

Not everyone who has enquired about debt counselling has signed up for it. Understandably so. It can be a complicated process and its pros and cons are well documented.

Surprise fees charged by some companies in the past, overnight counsellors on social media requesting upfront payments and unfulfilled promises of quashing debts within a short period of time have not made the debt-counselling industry easy to trust.

The debt-counselling process should not start without a paper trail, including their debt counsellor’s registration details with the National Credit Regulator (NCR), a detailed financial assessment and debt-repayment plan.

What rules should your counsellor comply with?

Apart from the NCR registration, there are other rules and guidelines that reputable debt counsellors abide by. One of these is the Debt Counselling Rules System (DCRS). This is an agreement between debt counsellors, credit providers and the NCR that provides for voluntary concessions such as the exclusion of certain charges and the adjustment of interest rates and repayment terms, among other things.

What types of debt can counsellors negotiate interest rates on?

For starters, debt counselling only protects consumers from harassment from creditors only on debt agreements entered into under the National Credit Act (NCA). This means that business-related debts, student loans owed to the National Financial Aid Scheme and universities as well as outstanding school fees handed over to debt collectors cannot form part of debt counselling.

Debt owed to the SA Revenue Service, municipalities and outstanding TV licence fees are also excluded. Cellphone contracts debts might be included under debt review if the service provider agrees to that.

But even when it comes to credit agreements entered into under the (NCA) to which the DCRS system extends, the negotiation of interest rates for vehicle finance and home loans differ.

“There the provision is that the interest rate can be reduced to the repo rate plus 2%. In this case, it would be 5.5% as the minimum that one can get.”

What about the debt counsellors’ fees?

While it promises to get debt collectors off consumers’ backs, debt counselling is not debt forgiveness either and it comes at a cost. The National Debt Review Centre has published the fee structure here.

The once-off application and administration fees are regulated and due upfront and in full. Other fees are payable monthly and if a debt counsellor asks you to pay them upfront – especially when these are paid separately and not through the payment distribution agency registered with the NCR – it is likely a scam.

These monthly fees differ from one person to another and are based on affordability and the size of the debt. But between 90% to 92% of monthly payments that a consumer makes to the debt counsellor should in most cases go towards credit providers.

This means that these ongoing fees normally take between 8% and 10% of what consumers pay every month. Once the consumer has paid all fees due, they cannot be charged for any other additional fees.

When will you get your debt review clearance certificate?

Although the agreement under the DCRS system is that consumers under review will be able to repay their debts within five years, Sager said consumers can pay more than their agreed minimum repayment without incurring penalties and, because of this, many get their clearance certificates within three years.

To get the clearance certificate, the debt counsellor needs to receive paid-up letters to all credit providers. This may take some time depending on the cooperation of all creditors.

Once a clearance certificate is issued, credit bureaus also receive this information within a few working days. But consumers follow up with credit bureaus to make sure that they get “unflagged” from being overindebted.

While this is a celebratory milestone for consumers who would not have been able to get any new credit while under debt review, it does not mean credit taps will immediately overflow. The consumer must build their credit score from scratch again.

“So, with a little endurance and patience, they can apply for credit again in due time” 

Consumers need to be aware that debt counselling is not a quick-fix process. It is a journey to rehabilitate and reset one’s debt habits to avoid falling into the same trap again in future.