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Credit Providers Unaware Of Inflation Realities?

The latest stats from massive debt review practice Debtbusters shows that their clients who applied for help in 2016 (so almost at the end of their review or just finishing their review) have not been getting significant increases in income over the last 5 years. In fact, when compared to the increase in the cost of living and inflation, these consumers now actually are trying to make ends meet with only 75% of what they had when the process began.

Why? Because the price of food, electricity, rental, communications etc have all gone up significantly each year for the last 5 years and their income has not kept pace. Now, Debtbusters have large client numbers and are able to track these stats with very reliable accuracy. Since they have such a large market share what is happening with Debtbusters clients is happening across the industry. 

‘these consumers now actually are trying to make ends meet with only 75% of what they had when the process began’

Almost all clients are now trying to struggle to make ends meet as year by year they are able to afford less and less based on their budgeted amount. All the while their debt obligations (as restructured by the courts when they entered debt review) have remained the same.

Last year, worldwide, many basic foods went up by as much as 100%. Even here in South Africa buying potatoes and tomatoes almost became “luxury” shopping as prices skyrocketed. Add to that the cost of transport going up as fuel prices around the world increase. Next pile on the massive increases Eskom is demanding to keep the lights on from April 2022 and it is clear to almost everyone that the cost of living is going up and up at a fast rate – faster than annual increases for those who perhaps received them recently. Many companies have actually cut back work hours, shifts or pay to stay afloat and employees who are eager to keep some income have had to grin and bear it.

Towards the end of 2021 there was once again a big push by credit providers to try to institute obligatory annual review of the amounts that the courts have ordered consumers to pay through their debt review. Basically, it is a call for Debt Counsellors to do a very large chunk of their work all over again each year. Why, you ask? 

Hopeful Optimism?

Some credit providers seem to think that consumers will be able to pay more because their income has maybe gone up each year. However, the stats as released by Debtbusters this month present a much more likely scenario: If Debt Counsellors accurately review each client’s case annually they will likely find a +-5% drop in consumers actual ability to pay what the court has ordered. This would then mean that the proposals should be reviewed downwards and the terms extended to allow the consumer to cover their basic needs at a rate consistent with the court ordered amount when they started.

The challenge is that credit providers, while pushing for reviews to try get more funds, have not expressed willingness to accept ever decreasing payments extending the terms further. They only seem prepared to accept larger payments and seem to not realise that inflation is outstripping consumers ability to earn more.

As a result, the “best” that can be hoped for is that information is gathered for a review by the Debt Counsellor, taking many hours and effort. The review will reveal the consumer should pay less but since the credit providers will not want to accept less they will reject proposals to that effect. Then the Debt Counsellor has to contemplate trying to enforce the findings of the annual review by taking the matter before a Magistrate or leaving things as they stand.

Who Pays For Annual Legal Fees?

To secure court orders or amend them annually will mean someone has to pay the attorneys. Credit providers have not expressed any willingness to forego debt review payments while these new annual legal fees are paid or to take reduced repayments over several months to allow for some of the debt repayment funds to be used for the amendment of the court order (positive or negative). These fees are significant and would further push out repayment terms by several months over the lifespan of the debt review.

So, who pays for these fees?

Setting Yourself Up For Failure

The idea of checking a consumer’s figures annually seems innocent enough. Some Debt Counsellors do a “soft touch” version of this anyway by periodically asking their clients if they are able to pay more and speed up the process. While this seldom happens it can be a way for consumers to save even more and get out of the process sooner. Where the debt review began and only one partner or breadwinner in the house had employment the figures can change dramatically when a second person in the home begins to earn.

But with no financial incentive for Debt Counsellors to do many extra hours of work for each client each year and with stats showing little realistic expectation that consumers will actually be able to pay more the entire process seems doomed from the beginning. Then you have to add on top of that, credit providers who are not excited to make further annual concessions (taking smaller repayments over longer terms) and with large legal costs needed to enforce such changes, if credit providers refuse to cooperate, the entire thing starts to look like a really bad idea.