If you’ve ever found yourself deep in debt and turned to the Internet for a solution, you would find a lot of information on a service called debt counselling. Also known as debt review, this process is designed to help over-indebted South Africans regain control of their finances by restructuring their debt according to a legally approved plan. But debt review isn’t the only game in town. Debt consolidation can also help you get out of debt.
However, debt counselling and debt consolidation work in very different ways, and the best solution for you will depend on how deep in debt you are and what options are available to you. In this article, we outline each concept, and which one to consider given your circumstances.
What is debt consolidation?
Debt consolidation works by merging all your debt (credit card accounts, store accounts, personal loans) into a single loan. Usually, a debt consolidation loan will have a longer loan term, which brings down your monthly instalments. This is a good option if you’re struggling to make minimum payments and just want a little breathing room (a lower monthly instalment). It does, however, require you to have a good enough credit score to qualify you for a debt consolidation loan. Check your credit score for free online and find out what you need to apply for a consolidation loan.
If you’re seriously deep in debt and have been missing payments for some time already, your credit score might already be too low to qualify you for a debt consolidation loan, and you might be over-indebted. In this case, debt counselling may be your only option.
How does debt counselling work?
The debt counselling process starts with you choosing and contacting a debt counselling company. Let’s assume that you’ve already approached a company and are about to start the debt counselling process. From there, the process is as follows:
Step 1: Provide detail
The first thing you are going to do is provide your debt counsellor with details of your income, monthly budget, and debt commitments.
Step 2: Debt assessment
To qualify for debt counselling, you need to be deemed over-indebted. So, in step 2, your debt counsellor will assess your total debt to determine if it is serious enough for you to need debt counselling.
Step 3: Create a new budget
Once it’s clear that you need help with your debt, you’ll have a consultation with your debt counsellor. In this meeting, you’ll be given a new budget designed around a new repayment plan. Once you’ve agreed to this, your application will be accepted.
Step 4: Negotiation of repayments
Next, your counsellor will contact your creditors to negotiate a repayment plan on your behalf. This plan may make use of negotiated fees, rate concessions and an extension of terms to put you in the best position to pay back all your debt.
Step 5: Plan approval
Debt review is a legal process, and in this step a court order makes the new payment plan binding. This protects you from potential increases in monthly instalments and commits you to meeting the new repayment plan.
Step 6: Implementation
You’ll start making payments according to your new repayment plan from your next payday. Only one payment is made every month to a payment distribution agency, who then pays your creditors.
Step 7: Complete
Once you’ve repaid your debt, you can request a clearance certificate from your debt counsellor. Even though this allows you to apply for credit again, think twice and remember the circumstances that landed you in hot water in the first place.
Ready to start on your journey to being debt-free?
Here is a list of National Credit Regulator (NCR) approved debt counselling companies in South Africa: