FNB has warned that applying for debt counselling should be carefully considered as there are both advantages and consequences to debt review. FNB said it has seen a spike in customers applying for debt review, year-on-year relative to consumers following its normal collections process.
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Debt review was introduced in 2007, with the National Credit Act 34 of 2005, and allows consumers who are over-indebted a process of restructuring and managing their debt over a period of time. Customers need to be aware of the restrictions as well as the likely costs before automatically turning to the debt review as a solution.
The primary reason it was introduced was to help over-indebted customers who many have encountered life changes such as reduction in salary or income. Statistics compiled by debt management firm, Debt Rescue show that South African consumers owe the bulk of their monthly salaries to creditors. A study found that consumers owe as much as three-quarters of their monthly salary to creditors. Almost 60% of the population are struggling to meet their monthly payments for their home loans and credit card payments. Only 23% of South Africans have any money left at the end of the month – with the other 27% left flat broke at the end of every month, with no hope of saving money.
More than 11 million of South Africa’s credit active consumers are described as over-indebted. Findings from Debt Rescue in 2015 showed that the average South African had R70,000 in debt.
The main advantages are that a debt counselor can, on behalf of you, negotiate with all your creditors a repayment amount that you can afford. The way it works is the credit bureaus are advised by the debt counselor that you have applied for debt review, and your profile will be updated accordingly, instead of credit providers pursuing with summons and judgments, which negatively affects your credit rating.
Initial costs of debt review can be high; there are once-off upfront fees and monthly aftercare fees. FNB advised consumers to discuss the entire process with the debt counselor and also to consider restructuring options other than the formal legal process through the courts. It is possible to get a consent order through the National Credit Tribunal at lower fees.