What can you do if you’re overwhelmed by debt?

Reader’s question answered.

CAPE TOWN – In this advice column Mikayla Collins from NFB Private Wealth Management answers a question from a reader who is struggling with debt.

Q: My wife and I together bring home around R12 500 after all deductions.

Our monthly expenses are :

Rent – R4000

Electricity – R600

Our son’s daycare and other costs – R2000

Groceries & cleaner – R3000

Telkom – R400

Medication – R500

Transport – R500

Miscellanous – R500

Total – R11 500

Our problem is that I was retrenched and had no work for a while. We then had to relocate for my new job. During that time I ended up borrowing just to get started and we now have the following accounts :

Mr Price – R3 500 (Instalments R380)

Credit Card – R4 600 (Instalments R400)

Game – R10 000 (Instalments R880)

Edcon – R4 000+ (Instalments R400)

Woolworths – R3 500 (Instalments R400+)

Nedbank – R16 000 (I do not know the instalments because I haven’t been able to pay it)

Old SA Loan – R20 000 (Have not paid it in over a year, and the interest alone is over R900 a month)

As you can see, we need around R2 500 just to make the instalments on the revolving loans. We also don’t have any cash on hand for emergencies, which results in us having to use the credit card.

I try cutting down everywhere I can, but with all this debt and not enough income it is not easy to make it go away.

How would you suggest I budget this R12 500 income to be able to balance or pay off something more efficiently which gives us breathing space, some money on hand and then enable us to start saving for a car etc.?

A: This is a tough situation, and unfortunately one that many people face.

Not taking your debt into account, your income is just sufficient to cover your monthly costs and probably save about 10% of it. That is the position everyone should be in.

However, your debt is making this impossible.

You are aware of the problem. The total capital owing on your accounts is more than R61 600 and you can only afford to pay R1 000 a month in instalments. Looking at the type of debt you have, it is unlikely that this amount will even cover the interest.

Because of this, you will not be in a position to save, invest or buy a car for a long time. This is certainly a tough predicament and one that requires serious action.

For a start, you should not have a credit card as all it does is create further temptation. You should also not purchase any more items on credit until you have been able to bring your debt down to a manageable position.

It is also most likely that you already have a negative notation against your name/s at the credit bureaux. If you have not already had a judgement issued against your name (especially by Nedbank), then it is likely that you will soon. This will severely impact on your ability to be granted credit in future.

I would suggest that it’s important that you obtain your credit record from one of the credit bureaux, such as TransUnion or Experian in order to establish if you have adverse listings against your credit report. The National Credit Act allows you one free credit report per annum. Hopefully you will not have any judgements issued against your name yet as they can only be rescinded by a court of law.

I would then suggest that you write to each of your credit providers in order to explain your financial situation to them to see if they will be willing to negotiate different terms of repayment that may suit your financial position. Whether or not they agree, I would suggest that your family has to try and find a way to reduce expenses further so as to be able to pay off as much per month as possible. The longer you avoid this, the deeper your financial problems will become.

To make this process easier, I would suggest that you visit a debt counsellor who will be better positioned to assess whether or not you are in fact over-indebted. If it is found that you are, they will then help you restructure your debt, approach each of the companies that you have debt with and negotiate terms on your behalf, or make the necessary applications to the Magistrates Court in order to assist you.

A debt counsellor will also be in a position to determine whether any of the credit granted to you was issued recklessly. The National Credit Act requires that credit providers ensure that consumers are able to afford the credit they have applied for before it is granted.

If this is not done, a credit agreement could be considered a “reckless” by a court upon application. Although we don’t have full details, looking at your position it may be that some of your credit was recklessly granted, given that you have not been able to pay your Nedbank and Old SA Loans.

In addition, you mentioned that the interest alone on your Old SA Loan is R900 a month. On a capital balance of R20 000 this works out to 54% per annum, which is above the maximum interest rate allowed by the National Credit Act. This would also be an area on which a debt counsellor could advise.

The most important thing to realise is that paying off your debt is a process that will take a long time, but it will be worth it. The sooner you set a plan and start paying it off, the sooner you will be free of your financial burdens.

Thereafter, please, try and avoid credit wherever possible, unless you are extremely sure that you can afford it. This is unlikely to be the case in the foreseeable future. Rather do without an item that is not needed for survival than have to deal with the terrible stress and implications that come with over-indebtedness.

Mikayla Collins is a private wealth manager with NFB Private Wealth Management.

If you have any questions you would like answered by financial planning experts, please send them to editor@moneyweb.co.za.

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