Credit providers and debt counsellors have agreed to a five-point mediation strategy designed to free you from a debt trap.
The slow resolution of debt counselling cases has spurred credit providers and debt counsellors to adopt a drastic new approach - debt mediation - that will require over-indebted consumers to downscale their lifestyles significantly and to hand over their credit cards to debt counsellors to be cut up.
Peter Setou, the senior manager of education and strategy at the National Credit Regulator (NCR), says the regulator is finalising a report on debt counselling that points to a number of weaknesses in the process, including a lack of co-operation from credit providers, in particular the banks.
Ironically, the non-profit National Debt Mediation Association (NDMA), launched this week, is funded by the major banks.
Tjaart van der Walt, the chief executive of the NDMA (who was previously a bank credit consultant), says there are significant problems with the debt counselling system. They include:
# Credit providers and debt counsellors do not agree on how to interpret the National Credit Act (NCA), which governs the debt counselling process;
# Different interpretations of the NCA by the courts and capacity constraints in the courts; and
# Circular negotiations between debt counsellors and multiple credit providers over each debt repayment plan. On average, about eight to 12 credit providers are party to each case, all of which have to agree to a repayment plan before a consent order can be obtained from the National Consumer Tribunal.
Van der Walt says these problems mean that over-indebted consumers have had to pay more fees for debt counselling and legal costs, because their cases are not resolved within a reasonable period of time.
The latest Credit Bureau Monitor Report says 7.6 million credit active consumers had bad payment records in December last year.
By the end of April this year, more than 68 500 over-indebted consumers were registered with the NCR for debt counselling, and this figure is expected to rise to 150 000 by the end of this year.
Of the 68 500 consumers registered with the NCR, less than three percent have had their repayment plans sanctioned by a consent order since the NCA was introduced in June 2007.
However, Gabriel Davel, the chief executive of the NCR, says this does not mean that 97 percent of the cases have not been resolved.
"A number of cases have been resolved without the requirement of a court order," he says.
Davel says there are now about 900 qualified debt counsellors in South Africa.
"The major problem with debt counselling is that credit providers, and the big banks in particular, have not been complying with certain procedures, and I believe this is largely related to insufficient training of staff," Davel says.
If you apply for debt mediation, you will be assisted to restructure your debts according to a formula laid down by the NDMA. If you are not rehabilitated within five years, you can apply for debt counselling.
Neither debt mediation nor debt counselling are designed to have your debts written off. The aim of both is to enable you to reach a point where you can afford your lifestyle and where your expenses are lower than your income. You are considered to be over-indebted if your debt repayments and living expenses exceed your income.
Van der Walt says the NDMA should improve the debt review process, with the establishment of a national debt helpline, as well as a website www.ndma.org.za where you can access basic advice and details of debt counsellors.
Van der Walt says the credit providers affiliated to the NDMA represent 98 percent of the credit providers in South Africa. The remaining two percent are largely micro-lenders. The NDMA is supported by the NCR, the Ombud for Banking Services and the Credit Information Ombud.
MEDIATION VERSUS COUNSELLING
The main difference between debt mediation and debt counselling is that the approach used in mediation has been drawn up and agreed to by credit providers and debt counsellors.
With both counselling and mediation, once all your creditors have agreed to the debt repayment plan drawn up by your debt counsellor, your counsellor will apply to the National Consumer Tribunal for a consent order to implement the plan.
But if all your creditors do not agree to the plan, your debt counsellor will take the plan to a magistrate’s court, and the court will have to decide what is a fair repayment plan.
In this case, you could face further charges for the cost of hiring lawyers to represent your case in court. The delay will also result in your paying debt counselling fees for longer – while interest mounts on your unpaid debt.
Although the debt mediation process also allows your counsellor to seek a court order, the National Debt Mediation Association says you are unlikely to have to go to court, because most credit providers have endorsed the mediation process.
What it costs
Debt counsellors charge the same fees whether you apply for debt counselling or debt mediation.
If, after an initial assessment by a debt counsellor, you decide not to undergo counselling or mediation, nor to accept the proposed repayment plan, you will have to pay a cancellation fee of R300.
If you decide to undergo counselling or mediation and to accept the repayment plan, you will pay a maximum fee of R3 000.
Once the repayment plan has been implemented, you will pay a monthly after-care fee of five percent of your total monthly instalments, up to R300 a month, for the first 24 months.
Thereafter, the after-care fee will drop to three percent of your total monthly instalments, to a maximum of R300 a month, until you are issued with a debt clearance certificate by your debt counsellor.
If you, as an individual, earn less than R2 500 a month or if you have a household income of less than R3 000 a month, your debt counsellor can apply to the National Credit Regulator (NCR) on your behalf for a subsidy – up to R650 – of the debt counselling fees. You and your counsellor can determine how to apply the subsidy.
When you apply for debt counselling or debt mediation, your debt counsellor uses software that is linked to two payment distribution agencies that have been accredited by the NCR.
Once your repayment plan has been approved and agreed to by your creditors, your debt counsellor will send the repayment plan to the payment distribution agencies.
The payment distribution agencies will collect money from you and facilitate payments to your creditors.
Your debt counsellor is not authorised to collect payments directly from you or to facilitate payments to your creditors. If your debt counsellor suggests this, you should report him or her to the NCR.
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