Here is some interesting news on the debt counselling industry.
Source:
http://blog.ecr.co.za/consumerwatch/?p=380#more-380
On paper, debt counselling is a great system, but in practice, it’s going horribly wrong, and none of the players are winning, least of all the poor debtors who are at the heart of it all.
And get this – 55 000 South Africans are now under debt review with a debt counselors around the country. And that number has jumped by 11 000 in just six weeks.
Everyone’s agreed that that’s just the tip of the iceberg. With looming large-scale job losses and an ever worsening economy, those impacted by the debt counselling process are gearing up for a flood of applications in the coming months.
Which is very bad news, because what was meant to be a cheap, uncomplicated way of restructuring an overindebted person’s debts so that they can pay them off and still have enough to live off, has proved to be anything but.
This is a very new process, so it’s perhaps not surprising that there are such nasty teething problems. On the one hand are the creditors who just want to be paid what they’re owed, and on the other are consumers who have gone way beyond the point of being able to keep all their creditors happy.
There’s culpability on both sides - banks and retailers who aggressively marketed their credit products, and signed up people who clearly wouldn’t be able to service the debt, and consumers who were just plain irresponsible in their spending habits, often on luxury items, when they knew they couldn’t keep their side of the bargain. So a compromise is called for.
And that compromise is the debt review process, devised by the National Credit Regulator, and part of the National Credit Act.
This is how it is supposed to work: a trained debt counsellors sits down with the debt stressed consumer, contacts all the creditors requesting information about the outstanding balances, then comes up with a new payment plan proposal.
Instead of going the usual garnishee order or repossesion route, the creditors agree to smaller monthly payments - sometimes just R30 or R40 a month - paid over a longer period, and in extreme cases, write off some of the capital.
The debtor’s sacrifice is surrending all luxury expenses - and that includes DSTV - as well as making their debt review payments religiously. They also lose the right to acquire any new credit while that’s happening. And the process could take many years.
So what’s gone wrong? Well the major credit providers and their lawyers have pounced on gaps in the National Credit Act to challenge the right of the Magistrates Courts to finalise the restructured payment agreements. The Regulator took the issue to the High Court and a ruling is due at the end of the month, but in the meantime, agreements sit in limbo because magistrates are waiting for the decision, which harms everyone, including the consumers, because interest is mounting.
And everyone’s blaming everyone else for the other problems:
- the counsellors are accused of being unprofessional, overcharging their clients, and not keeping to the prescribed timelines;
-the credit providers are accused of failing to co-operate by continuing to harrass clients under debt review and failing to provide the counsellors with accurate statements of what the clients owe, among other things;
-the payment distribution agents, who are paid lump sums by those under debt review, and are supposed to forward payments to individual creditors every month, are accused of sending payments but no statements, so the companies don’t know which account to credit, or statements but no money;
-consumers are accused of going on spending sprees just before they go under debt review; of wanting to hold on to their assets and their “luxuries”, and thinking they’re entitled to a short “payment holiday” when they go under review.
In short, it’s turned into a shambles.
The message that National Credit Regulator Gabriel Davel had for all the stakholders who gathered at a Midrand hotel to discuss the crisis this week, is that the National Credit Act is here to stay, as is the debt counselling process, and they’d better make it work for everyone’s sake.
He urged all the players to look past their own short term interests and to work together.
Otherwise, the credit providers will have to write off a massive amount of debt, he warned, and there will be huge numbers of debt stressed consumers who can’t live from month to month.
Ultimately it’s in the credit providers’ interests to help debtors get rehabilitated as soon as possible. Because until they get there, they can’t apply for any new credit.
Of course, while many consumers were just plain irresponsible, it could be argued that the credit providers are largely to blame for encouraging so many people to fall into the trap of compulsive, conspicuous consumption by literally throwing credit at them before the Credit Act kicked in almost two years ago. And of being reckless in lending to people who, if they’d bothered to check properly, had no way of servicing the debt.
Here’s a classic example. A local debt counselling practice, Ulwembu, was recently approached by a woman with a total outstanding debt of R478 000. On one credit card, taken out in 2006, she owes R43 000.
Suspecting that she was already heavily overdebted when she applied for that credit card, they investigated the paper trail and discovered that when she was granted that card three years ago, her total debt was R193 000 and her monthly installments due added up to R11 331 - R2000 more than her nett income.
All this was stated on the credit bureau report which the bank had requested when considering that credit card application, and yet all that a bank employee had circled on the report was the fact no judgements had been taken against her, and that she had a “good” payment profile.
Under debt review, it’s going to take her more than 20 years to become debt-free.
So where does the current chaos in the debt counselling process leave someone who feels they are over-indebted and wants to go under debt review?
Well, I’d say hang on until the High Court has issued its ruling, for one thing. It’s only a matter of weeks away.
And don’t go on a spending spree in the meantime.
Tony Richards, head of the Debt Counsellors Association of SA, told conference delegates that it wasn’t uncommon for people to buy a car a week before going under debt review or maxing out their credit cards.
Do your homework when choosing a debt counsellor – preferably speak to people who are already under debt review to get a direct referral.
Very important: Never stop paying your installments, even if it’s not the full amount, while your proposal is being negotiated and finalised.
I heard more than one credit provider say they have little sympathy for those who skip installments entirely.
Keep meticulous records of all your payments.
Ask your counsellor to inform debt collectors if debts have prescribed so that those amounts are not included in the total debt. For more on prescribed debt, go here.
Know that people under debt review take an average of five years to pay off their debts, and during that time, they can’t get any new credit at all. Not a cellphone contract, not a loan, not a clothing account.
It’s a very serious, challenging process, only to be entered into if you have exhausted all other means of solving your debt crisis on your own.
But the National Credit Regulator and his office are absolutely determined to see this process work, and to use the provisions of the credit act to clamp down hard on those who don’t play by the rules.
And after witnessing two days of hard talk at that conference, I got a real sense that all the stakeholders had got to the point where they ready to compromise for the greater good.
It goes without saying that consumers need to play by the rules too.
- Wendy Knowler
