November 1st, 2011
Debt Counseling – what is it and how can it help you?
All over the world, consumers shrink in fear at the word ‘recession’. For some, this will be an opportunity to make money like never before, but for most of us, it means financial hardship and often the loss of assets.
Whilst debt counseling is not legislated except in South Africa, where it has had a remarkable cushioning effect on the economy, debt counseling is nevertheless a real life line, as sophisticated banking systems in Europe particularly, are open to negotiation with heavily over-indebted consumers.
Here in South Africa, a registered debt counselor will for a small fee, help you confront your over-indebtedness head on. Most of us suffer from Ostrich Syndrome, preferring to ignore the fact the bills are piling up and the income is shrinking and not making ends meet. Before long, we lose everything and seldom point the finger at ourselves as it is always someone elses fault! In 95% of cases though, we only have ourselves to blame.
Once you accept you have a problem – there is a solution. Debt review, as it is also known, was designed to assist those who are over-indebted – ie expenses way exceed income, generally as a result of living on credit. Through the debt review system, consumers are able to consolidate their debt and with the assistance of a debt counselor, work out a mutually agreeable payment plan with their credit providers. This could take the form of extended payment periods and even in some cases, a reduction in the interest rate.
For this to work, the consumer needs to present ALL bills and accounts as well as proof of income. Income can be in the form of a salary/wage, annuity, rental income or a monthly sponsored amount from a friend or family member.
With this information, the debt counselor will determine how much you need for basic living expenses (electricity, fuel, food, insurance etc) and then with the balance, work out a repayment plan for the debt.
As the smaller debts are paid off, the excess funds are diverted towards the other debt, until such time as the larger credit items, usually mortgages and vehicle loans, are being fully serviced. In some instances, the amounts paid towards these accounts are in excess of the original payments and the loan is then able to be paid off sooner than the original term. Although, the credit providers do not necessarily applaud this approach as they lose out on ‘interest’.
The budget is reviewed on an annual basis and each salary increase is put towards servicing the over-indebtedness with a view to decreasing this and rehabilitating the consumer as soon as possible.
It is incumbent on the consumer to be honest. It does not help if you ‘hide’ funds away from the debt counselor, the person helping you to help yourself, in the belief you deserve to keep on living in the manner to which you had become accustomed.
Unfortunately, there often comes a stigma to being in debt review. It should be the other way around – a stigma for living on too much credit and not saving enough, but when the entire global banking system works on providing as much credit as possible to consumers, it’s no wonder.
Let’s start a revolution. Park the ego outside. Face your financial fears. Downscale, live within your means. Sleep at night and teach our children to save. I am not saying that we won’t ever need credit – vehicle and homes will probably always need to be financed. But having more disposable income to put down a bigger deposit, will mean the loan can be paid off quicker and on more favorable terms.
Setting an example now and teaching our children sound financial principles will ensure there is an economic future for them.
Isn’t that worth looking forward to?