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Thread: When should you resort to getting debt counselling?

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    Site Caretaker Dave A's Avatar
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    When should you resort to getting debt counselling?

    Wesbank suggests that debt counselling is not always the best solution.

    I expected a slanted report, and right at the end I was not disappointed.
    It was also important for consumers receiving a monthly car allowance to continue to use the full allowance towards paying off their vehicle instalment.
    Other creditors that are having to take a knock while the wheels finance is getting its full slice might not agree

    Unsurprisingly creditors don't like debtors paying off their debts at a slower rate than originally anticipated. Of course creditors also have to balance the rate at which they're going to get paid against the prospects of getting paid at all. Sometimes getting paid slowly is the best of a bad set of options on offer.

    But the article did get me wondering - when should a consumer resort to the debt counselling option? After all, it's not exactly saving the consumer money - it's actually adding a cost.
    The trouble with opportunity is it normally comes dressed up as work.

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    Diamond Member tec0's Avatar
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    Well the truth is, it is exceptionally difficult to get out of debt. The reason is partly due to over spending and partly because of poor salaries. In the UK you can buy a good second hand car and pay it off in less than six months and the actual insurance will cost you more than your instalment.

    In South Africa, cars are at a premium price and it also an unavoidable debt even in the second hand market cars is just too expensive. So, now if you pay less on your car you will end-up paying more for it over a longer time frame so you don’t win and then there is inflation and basic running cost to consider. Thus a car is just basically a dead loss as an investment.

    So let us look at consumers buying power and their income. Once you realise that your buying power is basically zero for a person that earns between R1500 and R3000 however that being said a person earning between R5000 to R8000 cannot afford a place to live and a car thus living cost is still too high.

    So the basic spender earns between R10000 and R15000 per month and they are able to afford the basics “car, place to live, food to eat and medical aid. And then they will still have debt in the form of accounts thus these people are the bank’s target group.

    Now in layman’s terms the more money you get the bigger the loan and this is the real problem because of this banks got so weak that they cannot help the little person with a R10000 loan because the person that is earning more basically took the available funds against possible profit via repayment.

    Now you have mass job insecurity and mines closing everyday thus these monies are not returned to the bank and that starts the problem. With the bank needing to make their money back they will not allow for microloans like those back in 1980 to 1990 “small amounts to fix your car that kind of thing” lower income group do not qualify for a loan but they pay higher bank cost because of the bigger loans that was unpaid.

    If you think this is confusing it gets better. Because banks are more of connivance then a service most people will pay an amount on banking cost. This amount is taxable... the things they buy is taxable the things that gets sold is taxable so for every 1 item the government gets paid about 3 times and it is the consumer paying this tax and then don’t forget the hidden cost.

    So we can agree that the system is designed to milk the consumer dry as quickly as possible. Now the consumer must get a credit card just to do shopping and because they earnings is too low to survive. Now if the earnings are known to be that low why do banks give credit or loans to start with? It is a fact that the person asking for the loan will not be able to repay it due to the system to start with... but It is interesting to see how many times a day this process repeats itself.
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    Platinum Member Marq's Avatar
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    I think that, if the debt counselling option came off a genuine helping hand scenario then the sooner counselling and sorting the problem out come in, the better. Unfortunately the bit I have seen when it comes to these so called counselors, leaves the situation far from the desired.

    Naturally the person in debt is going to stretch this out as long as possible. Denial of a problem and the ever hopeful scenario that the situation will turn around is always an option. End result is often a struggle and trouble one.

    The counselor option appears to be far to exorbitant and places an even bigger burden on the debtor. Added to this the obvious reluctance of big companies and banks to come to the party (this wesbank story tells all) and we have a situation where there is only one loser.

    But to answer your question Dave - I do not think there is an exact answer. Maybe three months into a non or part payment situation as a guideline?

    Go Cash - No credit - wait and build up reserves for the things you want and need. Dont be a victim or put yourself into the situation where you can become one.
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    Site Caretaker Dave A's Avatar
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    Quote Originally Posted by Marq View Post
    Dont be a victim or put yourself into the situation where you can become one.
    Easier said than done for the typical small business owner, I think. A client lets you down or the economy catches a wobble and the walls can start closing in pretty fast.

    I was wondering if the dividing line really came down to self-disipline? A case of if you recognise you don't have the willpower to manage your budget, best you get help and the quicker the better. But the problem there is if you don't have that self-discipline, are you going to be able to recognise that and admit it to yourself?
    The trouble with opportunity is it normally comes dressed up as work.

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    Diamond Member wynn's Avatar
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    I have always maintained that the average 'South African Okey' is one paycheck away from disaster.
    Interest rates on Bonds whip up at the smell of a rates increase.
    Add to this top preforming State Monopolies such as ESKOM deciding to increase electricity by 45% a year for three years taking the average houshold consumption through the roof.
    Efficient Municipalities increase rates by 30%
    Money grubbing effenB charge R180.oo for bouncing a debit order for the lack of R20.oo easily transferable funds.
    This 'Okey is going to get into the 'Kak' pretty darn quick.

    Lets all go live in a managed 'squatter camp' steal electricity and water, don't pay rates and start our own 'stokvel' to replace the banks, then we can tell the powers to stick it.
    "Nobody who has succeeded has not failed along the way"
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    Diamond Member tec0's Avatar
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    Well as a well educated person trough the medium of trial and error I would recommend to always plan for the future. I don’t drive new cars and I don’t have expensive clothing. The truth is with proper planning you CAN structure your life around the basics and save-up for the luxuries.

    I have done this as a business owner and I always calculated growth and potential buying power. Then my contracts were always structured around a heavy deposit 40% so if something bad happened I could recover.

    I do the same thing with my personal life. I make sure that when I buy something that have 100% of the funds available but then I will structure my loan with a 40% deposit and then do double payments with the money I have left and my income thus I get good credit. More importantly I can clear the loan in a single payment “if your loan is connected to the bank” and it will not cripple me.

    Overspending can be prevented but when it comes to a house then things get difficult. Fact is banks put people in a default disadvantage and it is that default that is the real problems because the bank makes 200% profit on your loan. And that just BS
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    Platinum Member desA's Avatar
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    Quote Originally Posted by tec0 View Post
    I have done this as a business owner and I always calculated growth and potential buying power. Then my contracts were always structured around a heavy deposit 40% so if something bad happened I could recover.
    Wise advice, indeed. A colleague always advised of a similar contract structure - sometimes as high as 60/30/10 - order/sign-off at factory/after installation, or within 10 days, whichever sooner. This saved me many heartaches.

    On consulting work 50/50 - on order/before delivery of final report.

    I do the same thing with my personal life. I make sure that when I buy something that have 100% of the funds available but then I will structure my loan with a 40% deposit and then do double payments with the money I have left and my income thus I get good credit. More importantly I can clear the loan in a single payment “if your loan is connected to the bank” and it will not cripple me.
    Wise advice. Thank you.

    I have not been indebted for more than 20 years. I simply could not sleep at night.

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    I think tec0 got a good ake on things. Especially from a variable earning point of view as of SMMEs

    I think having a maxed out debt situation isnt as bad as it seems for people with set incomes.

    The bad news is you spend so much becuase of the debt you could almost earn a third of the amount and get by with more luxuries.

    From and employee point of view, if you owed absolute zero, some people live in RDP housing and dont have cars / etc. This means that you actually have to motivate yourself to get up in the morning. You can stand up and say, I got R10 left over just a bread for today is fine Im going to rather stay at home, unpaid leave is fine, just let em know and it takes long for em to fire me.

    So if you dont have any responsibilities, it is difficult for employers to position you in a vital role in the company. Else you pitch up when you feel like it. This could harm long term funding, so sometimes it is a way of creating a duty toward your employing company.

    My advice is to get debt counselling when your income is going to change significantly.

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    Its True

    I am a registered Debt Counsellor and find this thread very interesting.

    Firstly, I concur with the criticisms made by Wesbank and Marge of some debt counsellors. This behaviour is not true of all debt counsellors though. Lets talk through some of the issues.

    WHEN SHOULD YOU RESORT TO GETTING DEBT COUNSELLING?
    According to the Act you must qualify for the remedy of debt counselling - basically you must be proven to be over-indebted (unable to meet your monthly debt obligations timeously) and possess some means to resolve your debt. You do not necessarily have to be in default to qualify.

    Should legal action be instituted against you on a particular credit agreement, you cannot include that agreement in the debt review. There is currently uncertainty on at which point legal action is said to be instituted which will be resolved at the Supreme Court of Appeal soon.

    Considering the above, I would advise :
    - Due to the above uncertainty you want to act before any Section 129 letters are sent, which a credit provider (CP) is obliged to do before approaching the court. Remember the CP must send the letter, you do not necessarily have to receive it.
    - As such, the moment you see that you are going to default on any credit agreement, call the CP and inform him of your circumstances and try to work out a plan.
    - If you can relieve your plight by getting some leeway on one credit agreement then all's well.
    - Otherwise try speaking to all your credit providers and come up with an affordable plan
    - If they are not amenable to negotiation and you are moving into or already are in arrears on any accounts then contact a Debt Counsellor with great haste.

    FEES
    I saw the comment about exorbitant fees. From my understanding this practise of charging excessive fees does occur. To what extent, I am unsure. If done properly, the entire debt counselling process is very detailed, time consuming and costly. So what fees are appropriate? Guidelines actually do exist on maximum fees and they require an understanding of the distributable amount. This is simply your total nett monthly income less your monthly living expenses. So, it is the amount you have left after meeting your monthly expenses and which is available to service your debt. A debt counsellor operating within these guidelines is allowed to charge :
    - the distributable amount up to a maximum of R3 000 (excl VAT) for a single application, or
    - the distributable amount up to am maximum of R4 000 (exc VAT) for a joint application, and
    - a monthly aftercare fee of 5% of the distributable amount (up to a maximum of R300) for the first 24 months, then
    - a monthly aftercare fee of 3% of the distributable amount (up to a maximum of R300) thereafter.

    A common question is "Where does an already over-indebted consumer get such monies from?". A Debt Counsellor will draw up a repayment plan based on your affordability which will become an order of court. It is accepted that the first payment off this schedule is made to the debt counsellor, therefore no additional monies is required, the process allows for this payment from existing cash flows.

    I do agree that at first glance the above fees still do sound steep. I charged some of my clients much less and upon successfully completing the process realised that there is some merit to the structure of the fees and the benefits of a succesful debt review application make the fees seem miniscule. Happy clients do realise this.

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    WHY DEBT COUNSELLING IF ITS AN ADDED COST?

    Well, debt counselling is intended to remedy cash flow issues and not total capital debt. I belong to the National Debt Mediation Association which was founded by the credit providers to dispel allegations that they were obfuscating the spirit of the Act. The NDMA has a set of rules that are applied successively and could make a huge dent on the capital burden. The rules include interest reductions to prime and even to 0% and even holidays on bond repayments. If you are embattled, this could make a huge difference to your financial future.

    While the Act does not make provision for interest rate reductions, most CP's will consider it to get the debt to resolve within certain industry norms.

    Also there is the new and improved in duplum rule. It says that a consumer's total debt (interest + charges) shall not exceed the outstanding principle debt at the date of default. If you consider the interest paid on a normal mortgage agreement, then the implications of this rule are simply huge. It is being contested in the Supreme Court of Appeal, however, if the appeal fails this is going to be a ruling of major significance in all of our lives. Should you go under debt review, you would qualify for this rule and it could cut your debt by more than half.

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