Thursday, 17 September 2015

Debt counselling can assist indebted consumers

(First appeared in New Era 9 September 2015)

One of the biggest problems is starting a family is that most of the things I want such as furniture, motor vehicle, etc. costs more money than what I earn in a month. The only option for purchasing these high cost items is to either save or to take it on credit. For myself, I have learned the hard way that it is better to save and buy later, rather than purchase on credit and not be able to afford the monthly payments later. Unfortunately, most consumers still prefer to buy on credit and can find themselves lending recklessly and then becoming “over-indebted”.
In many countries of the world, a law has been enacted as a National Credit Act that promotes an effective, fair and accessible credit market and to help protect consumers from "reckless lending" and "over-indebtedness". Unfortunately, Namibia has not yet enacted many such consumer laws yet.
Under such a credit environment, debt counselling is included as a tool to help consumers get out from under debt. These debt counsellors must be trained and certified so that they can assist consumers with debt problems, help to design debt repayment plans and negotiate on behalf of the consumer with creditors to enable the consumer to afford their monthly debt payments. (This process is called Debt Review). The idea behind Debt Counselling is to help clients reduce their overall debt with creditors in the most cost effective way.
At present, with no legal framework in place for debt counselling, the consumer only has two remedies when they cannot pay their debt: administration and sequestration. There are however severe disadvantages to both of these and disempower you as a consumer.
If your debt is lower than N$ 50,000 you may apply to have your debt placed in administration. Under administration order a large part of your disposable income can forcibly be taken to repay your debts and comes with an administration charge of up to 12,5% of each instalment you pay. This would mean that for every N$ 100.00 you pay in debt, N$12.50 would go to cover the cost of the administrator.
Under sequestration you lose all your assets as they are sold to cover as much of your debt as possible and you will need permission from a court-appointed trustee if you want to borrow any money.
This disempowering of the consumer needs to be addressed and this is the core reason for introducing debt counselling under a Credit Act. The biggest attraction is that under a credit law is that the process is regulated and is designed to prevent your creditors from harassing you and prevent the loss of crucial assets. In addition, unlike with an administration order, as much as 95% of your monthly payment will go to pay your debts under a debt counselling plan.
There is a cost to debt counselling – after all the service is being provided by a trained and certified professional. In the regulations of the law, the Credit Regulator will be able to determine fees for an application fee, rejection fee – if you are not found to be indebted, the debt counsellor fee as well as after-care fees.
One of the further benefits is that such a law will enforce more rigidly the “in duplum” rule which under common law limits the interest that a creditor may charge on any debt you incur. (This common law rule holds that the creditor may not charge more interest once the unpaid interest equals the outstanding debt. – See previous column in this regard)
I hope the Ministry of Finance will look urgently into the matter of over-indebtedness – which I believe affects more than 15,000 households in the country.

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