What You Have Lost In The Last 5 Years
Inflation Is Robbing You
Over time the income you receive needs to increase to keep pace with inflation. For most people this is not happening.
Think back to 2016.
Remember the time before Covid-19 and before the lockdown? It may be lost in the haze of your lockdown fogged brain but once upon a time it was 2016.
If you compare your income now to back then you may find that you are earning more now than you did back then. Perhaps (and only perhaps) you received an annual increase or perhaps you changed jobs to a better paying position. Or maybe, like many people, you were hard hit by pay cuts at the beginning of the pandemic. Perhaps your salary is similar to what it was back then.
5 Years
Why focus back on 2016? Well, that was 5 years ago. Most debt review plans these days are calculated over a 60 month or 5 year period. This is a time period that most credit providers like to see in proposals for restructuring debt. It is a time period that is often used in proposals generated by the DCRS computer system when Debt Counsellors use it.
When a Debt Counsellor makes a proposal to court the court looks at (1) the consumers’ income, (2) their living expenses and (3) their proposed debt repayments. They then make a court order restructuring the debt.
‘credit providers seem to be under the very mistaken view that … consumers have more available funds than before and can thus pay more…’
Recently, credit providers have been pushing for Debt Counsellors to do official annual reviews of their clients’ situations (something most Debt Counsellors do on some level anyway). They would like to see a more formalised process and these credit providers seem to be under the very mistaken view that they may find that consumers have more available funds than before and can thus pay more towards their debts.
Why is This Incorrect 99% of the Time?
Over time the cost of living increases. We all know this. Petrol prices go up, followed by transport costs, followed by increases in the cost of products and food. As those prices go up businesses push their prices up so that they can pay their own increasing bills and perhaps pay their staff more (so that they can cover the increased cost of living).
Inflation percentages can shift and change over time and across every product and service but the rule of thumb is that it goes up. The price of everything increases.
Because debt review proposals are made up of 3 parts: (1) income (2) budget (3) debt repayments inflation has to be taken into account.
Are Salary Increases Matching Inflation?
The best available stats the industry has shows that consumers (in debt review) have been getting small salary increases but these have not kept up with the increase in the cost of living.
‘consumers have 21% less money each month to cover their monthly budget and their debts than they did back in 2016’
In fact, it seems that in real world terms consumers have 21% less money each month to cover their monthly budget and their debts than they did back in 2016 (5 years ago).
Since the debt repayments have not shrunk by a matching 21% this means that consumers have had to make more and more cuts to their spending each year.
Do Debt Repayments Need To Drop Annually?
As a result of the debt repayments staying the same throughout the debt review process consumers have to cut their spending and soon find that they are down to the wire.
They have little or no funds to save (and they should be saving little amounts towards big annual costs each month). What then happens is they become increasingly vulnerable to unplanned problems. These problems could be things like: theft of goods, a vehicle accident, medical bills, a loss of a portion of their income.
If any of these types of things happen they are at risk of falling out of the debt review process.
Are Consumers Making It Through?
About 20% of people who begin debt review never follow through with the process for more than a month or two (they may never even make a single payment towards all the hard work done on their behalf). A further 20% are quite likely to fall out of the process within the first year.
The remaining 60% often stay in the process for 36 to 60 months. Some leave the process because they are able to settle all their debts faster than expected but the majority face a battle to keep up the planned payments each month. It does seem however that the longer people are in the process the harder it becomes to get to the finishing line.
‘inflation is outstripping peoples ability to earn, which places them under more and more strain over time’
The fact that inflation is outstripping peoples ability to earn, which places them under more and more strain over time seems to correlate with this problem.
So the question is: Instead of annual escalations of payments towards consumers debts, should the computer systems being used for debt restructuring calculations look at reducing payments towards the 3rd, 4th and 5th year (and beyond)?
‘should …debt restructuring calculations look at reducing payments towards the 3rd, 4th and 5th year (and beyond)?’
This could possibly help offset the real world challenges that consumers in the debt review process are facing and help more people finish the process successfully.
‘the longer people are in the process the harder it becomes to get to the finishing line’
It is, unfortunately, unlikely that credit providers would agree to this idea even if it meant that more people would continue to pay their debts through debt review monthly. The banks computers are not designed to calculate things this way.
Could Annual Reviews Mean Annual Reductions In Payments?
That said, official annual reviews may open the door for annual trips to the courts to have the debt repayments reduced. This will create many thousands of rands in additional legal costs which the credit providers will have to bear with as this disrupts repayment plans annually. So, they would have to wait longer and longer due to those legal costs.
‘official annual reviews may open the door for annual trips to the courts to have the debt repayments reduced’
It remains to be seen if annual reviews remain a voluntary process done by most good Debt Counsellors or if the NCR ultimately begin to insist on them in some official form (perhaps via amending the National Credit Act but more likely in a guideline they issue).