In debt, what now?

In its basic form, debt can be referred to as “something that is owed, especially money” or “a state of obligation to pay something owed”.

Debt management is an integral part of every person’s lifestyle and unfortunately, if there are no debt management strategies in place, the level of debt can reach levels that make it difficult (if not impossible) to manage and could lead to a state of over-indebtedness.

Over-indebtedness is a term that is used when a consumer is unable to pay obligations under all his credit agreements on time. 

The first step is to analyse the debt to ascertain whether the debt is short-term, resulting from an unexpected emergency, or whether it is a long-term debt which has led to you not being able to meet your financial obligations.

Possible reasons why people get into debt include:

  • Mismanagement of funds
  • Undisciplined buying habits
  • Poor advice
  • Loss of income
  • Excessive lifestyle
  • Retrenchment

Once the debt has been identified, the next step in the process is to formulate a proactive plan of action to manage the debt. A plan that is not implemented however remains a dream, one therefor needs to act on the plan. An important aspect of managing debts is to communicate with your creditors in order to keep them informed of your situation. Creditors will have an understanding of your current position and more importantly, that there is a plan in place to repay the debt.

If the debt situation can’t be resolved though effective budgeting an option could be to apply for a loan from a bank to consolidate your debt and have one amount to repay. Although this is not an ideal situation, as you are just replacing one debt with another. There could be a benefit if the fees, interest charges and replacement terms are lower but often this is not the case, and you will be paying back more. You might also have a longer repayment term.  

If you are not able to manage and bring your debt under control yourself, you might need to explore alternative options such as Debt Counselling. A debt councillor can do a budget to calculate how much you can afford to repay your creditors and develop a repayment plan that is affordable and acceptable for all your creditors. They will negotiate with your creditors on your behalf.  Currently Debt Counselling is the first available option to consumers who are over-indebted. 

Only use a National Credit Regulator (NCR) registered debt counsellor whose status you have verified on the NCR website. It is important to note that Debt Counselling is a legal process. You will be listed at all registered Credit Bureaus as being under debt counselling and will no longer have access to credit.

A very important aspect to remember is that during the debt counselling process creditors cannot take legal action against you or issue you with a summons for as long as you make payments according to the debt repayment agreement.

If you fail to pay the agreed monthly repayment amount, this protection is lost. 

The inclusion of debt management strategies in the financial plan, is an essential part of the overall financial planning process. Speak to a financial planning professional who will educate you with regards to proper budgeting techniques, reducing debt and planning for a better future for you and your loved ones must be an integral part of the financial services that are offered to you as the client. 

If you have any questions send an e-mail to mymoney123@fpi.co.za

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