Month 3 Is The Worst Time To Leave Debt Review
Some consumers who enter debt review change their minds and decide to leave the process. It is a kind of buyers remorse. We all have it from time to time. We make a decision but later realise we don’t need an item or where not informed of all the conditions. With debt review, consumers are sometimes contacted by product houses or collections agents from one or two of their creditors who make them collections offers (over the phone – not in writing, of course) that are seemingly less than that proposed by their Debt Counsellor. So, why pay more when you could pay less? All you have to do is leave debt review…
If this happens to you, should you think of leaving debt review just as it starts up?
It is important to remember that debt review is a legal process governed by the National Credit Act (NCA). When someone applies for Debt Review it starts a legal ball rolling. The NCA sets out certain timelines that have to be followed by a Debt Counsellor once they are approached by a consumer with a signed application form.
Once a Debt Counsellor gets a signed application they will register the consumer with the National Credit Regulator who will inform all credit bureaus that the consumer is under review. This means that, from that point until removed the consumer will not be able to access new credit. Normally this is irrelevant since even if the consumer did go apply for new credit, their situation would be too bad to actually qualify anyway.
‘even if the consumer did go apply for new credit, their situation would be too bad to actually qualify anyway’
At this point, it is still easy for a consumer to leave the process. They have not been declared over-indebted (or it has not even been averred by a Debt Counsellor) and they have made no restructured debt repayments yet. However once the credit providers are notified that the consumer does indeed qualify for debt review and the NCR is updated with that info, things start to become more tricky to leave debt review.
Once the review is done and the Debt Counsellor makes a proposal and starts working with the attorneys to get the matter before court, It is much harder for a consumer to just walk away from the legal snowball which has been cast down the hill. Additionally, it may actually not be worthwhile to do so anyway.
Some consumers say they want to leave debt review because of the fees. They feel that they can save money if they don’t have to pay the Debt Counsellor’s professional fees. Here is a quick example of how the fees can work if the consumer only has R1000 a month available to pay toward their debt (after taking care of the needed household stuff):
Month One: The restructuring fee. This fee is related to how much consumers end up paying. If a consumer only has R1000 to pay toward debt, then the restructuring fee is R1000.
Month Two: Let us say a friendly, affordable attorney only charges R1000 (or the second month’s instalment whatever it ends up being) for their legal fees to help with the matter. Fee: R1000
Month Three: A small charge of 5% will be allocated towards the Debt Counsellors accumulating costs so, R50
Month Four: R50 (for the next 2 years before reducing down to R30)
As you can see, at present, consumers pay the majority of the fees for the process in month one and two. This helps protect Debt Counsellors and Attorneys since some consumers have made it a habit of starting the process but later just falling out the process and not paying their debts (and thus the Debt Counsellor for their professional service).
Leaving Debt Review To Save On Fees Is a Mistake
In the example above, the consumer pays their normal ongoing monthly instalment, which the Debt Counsellor has figured out they can afford of R1000 each month. The fees come out of that figure and are not over and above. So in the first two months, the consumer pays R2000 in fees. From month 3 onwards they only pay R50 in fees. Over the next 2 years, they will only pay around R 1200 in fees in total. In fact, it will take another 2 more years after that for them to pay fees adding up to the same amount paid in the first two months in our example. So, 4 years professional fee payments to add up to those first two months.
Throughout the process, due to concessions made by kind credit providers the consumers will be saving around R60 on every account, they have in debt review, merely on account fees and so can save around R600 a month on average* just on these fees and still benefit even more from reduced interest rates – which most credit providers also offer. All while paying only R50 towards the Debt Counsellors fees (in this example).
What this means is that once a consumer passes month two and has made their payments their fees to the Debt Counsellor become negligible. So, leaving debt review will in no significant way “save money” on fees. The bulk has been paid and it will take years for the fees to add up to those two months. This makes month 3 onwards the worst time to try leave debt review to try to save money on fees. It is also less likely that a consumer will be able to do so since by month 3 the matter will be before court or perhaps even have been heard by the courts (for super efficient debt counselling firms) or Tribunal.
Beware of Collections Agent’s Offers
When a Debt Counsellor makes up a plan to repay debt, they look not only at what a consumer can afford but what will save them the most money in the shortest time period. This might also include paying a few rand more than the bare minimum to a credit provider to speed up the process and save the consumer on the cost of interest on the account. Thus when collections agents offer “better deals” they are probably not doing the same and are simply looking for a commission on the collection. They are probably putting the consumer in a much worse position by suggesting they pay too little each month.
‘when collections agents offer “better deals” they are probably … simply looking for a commission on the collection’
* based on most consumers having around 10 to 12 credit accounts when entering debt review.