Thursday, 7 March 2013

The downside of Credit

First printed in Consumer News Namibia magazine - Feb 2013 edition

"Credit buying is much like being drunk. The buzz happens immediately and gives you a lift.... The hangover comes the day after." Joyce Brothers

Many consumers struggle to repay their debts. I have heard percentages as high as 70% of income is being used to repay debts. Many young people are ending up financing their lifestyle (which they cannot afford) through credit. Many consumers need help with restructuring their debts. The Namibian Financial Supervisory Authority (NAMFISA) is proposing a Financial Institutions Bill that will provide for debt counselling as part of the assistance to consumers.

Before discussing the new debt counselling I would like to add that there are other factors at work besides the servicing of debt; they include income volatility, legalised gambling, bigger medical bills and a cultural shift that has de-stigmatised bankruptcy and bad debts.

So what is the difference between the present administration order and the new debt counselling?
The idea behind Debt Counselling is to help clients reduce their overall debt with creditors in the most cost effective way. An Administration order can take a large part of your disposable income to offset the relatively high cost.

Debt Counsellors are proposed by the Financial Institutions Bill in order to specifically deal with people in trouble with their finances. These debt counsellors will have the support of and have to be approved by the Government. An administration order is presently used with the view to resolve an individual's over indebtedness. However this method can be very costly and with various limitations.

Unlike under an administration order, 95% of your monthly payment will go to your creditors under a debt counselling plan. A debt counselling plan will manage all your payments to creditors from a central distribution agency on a monthly basis on your behalf.

Under administration, distribution by Lawyers is only done once every three months after all their costs have been deducted (In some cases it can take longer than a year before your creditors' receive any form of payment).

Remember, that once a debt counsellor has accepted your application, they will inform all your creditors that you have applied for debt counselling. You will not be able to access any further credit until your debts have been repaid. You will even have to cut up your credit and store cards such as Edgars, Markhams, etc.

At present, there are no accredited debt counsellors in Namibia. This is a new occupation and training will have to take place to ensure the consumer gets the full benefit of this new law.

Training of Debt Counsellors

The new Act could become law within the next two years. Once enacted, there will have to be a process of training Debt Counsellors to assist consumers.

If we follow the proposed Bill (as it is copied from the Act in RSA) to become a debt counsellor, Namibians have to be over the age of 23 and have a minimum of two years experience in accounting, finance, legal, para-legal or credit fields.  Aspiring debt counsellors will also have to have a clean credit record - have no debt-related judgments against them at the time of applying and not be under administration.

A debt counselling course over five days covers general outcomes such as listening and communication skills, interviewing skills, as well as budgeting and personal financial management know-how.  It also requires specific outcomes regarding the debt counselling process as stipulated in the proposed Bill - from filling in an application for counselling to obtaining a clearance certificate.

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