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Debt counselling is a new field of immense importance to financial planners. It has become essential as a tool to assist clients through difficult or disastrous financial circumstances. Whereas clients could previously count on increasing income and reduced debt between 2003 and 2007 – now known as the “boom years” – that bubble has passed and the likelihood of incomes and asset values returning to what they were at their peak in 2007 has diminished considerably as the credit crunch has impacted the global financial system, writes Stephen Logan.

Financial planners wanting to mitigate against the heightened risk of their clients defaulting on premium payments and policy cancellation, need to be able to justify the premiums to creditors who have no qualms about pressuring their shared clients to find more money to pay their debts by giving up what they see as non-essential financial cover.

Debt counselling has a role in presenting a balanced picture to creditors to show them that clients in financial distress need to continue with their life and medical aid cover and retirement planning.

The term “debt counselling” was introduced into South African law by the National Credit Act (NCA), which makes debt counselling a regulated profession requiring all debt counsellors to first register with the National Credit Regulator (NCR) before being able to claim that they are indeed debt counsellors.

Debt counsellors are required to display their certificate of registration, issued by the NCR, and affix a decal issued by the NCR to the door or window of their office.

It is therefore important for financial planners not to hold themselves out as debt counsellors unless they have been registered as such by the NCR.

While debt counsellors are required to pass an exam on the functions of a debt counsellor in terms of the NCA, they are not required to have financial planning expertise.

Both debt counselling and financial planning deal with clients’ financial decisions and impact on their financial well-being, but the two professions sit alongside each other.

According to the NCR, there are still less than 500 registered debt counsellors, so it is clear that, so far at least, very few financial planners have registered as debt counsellors.

Given that many clients, who could previously afford investments, RAs, life and medical cover, are now battling to make ends meet, there is a real gap in the market for financial planners to either refer clients to debt counsellors or go through the registration process themselves and add debt counselling to their portfolio of services.

It should be noted that not all clients will qualify for debt counselling, as they may have missed the 10-day deadline for the debt to be included in a debt-counselling process. Creditors are only required to give 10 days’ notice before taking legal action, and clients must approach a debt counsellor within that 10-day period if they wish that debt to be included in the debt counselling process.

Does it work?

But how does debt counselling work, and would it be worthwhile for financial planners to register as debt counsellors?

The key starting point in any debt counselling situation is the conduct of a comprehensive debt review.

The debt review is similar to a complete financial review, familiar to all financial planners. The key difference lies in the goal of the exercise, which is to determine whether or not the client is over-indebted.

The client is over-indebted if he/she has insufficient money to pay the required minimum installments on their credit facilities after deducting all their actual expenses from their proven income.

If having conducted a debt review the client is declared to be over-indebted, the debt counsellor may formally place the client under debt counselling. It is at this stage that the debt counsellor must – in addition to having determined that the client is over-indebted – consider whether or not debt counselling will be in the client’s best interests.

Debt counselling aims to make the client’s debts affordable by extending the payment terms and accordingly reducing the monthly payment contribution.

Debt counselling will not be appropriate where the client has far more debt than he/she can pay off within a reasonable period, usually considered a maximum of five years for normal debts (credit cards, personal loans, car finance) or 30 years (mortgage/housing finance).

It would therefore be inappropriate for a debt counsellor to recommend debt counselling where the client has R1 000 to offer per month on debts totaling R500 000 as the interest due far exceeds the amount being offered.

In practice, a good rule of thumb in determining whether to proceed with debt counselling, is to establish whether the amount that could be paid monthly by the client would cover the interest portion of the debt at a very minimum.

While debt counsellors should aim to persuade creditors to reduce the interest payable or write off part of the debt, this request is often not granted and only in rare cases of reckless lending will debt counsellors be able, through the courts, to make out a case for the court to force a creditor to reduce the interest or write of all or part of a debt.

In most cases, creditors will agree to extending the payment period, as they stand to make more interest in the long run.

However, creditors face a catch-22 in that they are not allowed to recklessly extend credit and cannot therefore accept a payment proposal that offers an amount that does not cover the interest due, as the debt will then spiral up and possibly get out of control.

Financial planners

Debt counsellors are not able to solve all financial predicaments. Statistics show that debt counsellors are generally able to assist in no more than 50-70% of the cases that come before them for review.

The remaining 30%-50% are generally cases where the clients have far too much debt given their income and creditors will not (or cannot) accept the low installments being offered, or where the client cannot repay his/her debt within a reasonable period or possibly has no income at all.

Experience shows that debt counselling can be a worthwhile profession, but it should be noted that it is not the most lucrative profession, as the process is time consuming and the maximum fees that can be charged (R3 000 for an individual and R4 000 for a couple) are often insufficient for the amount of work required.

Financial planners who already have extensive office infrastructure and secretarial services are better able to render effective debt-counselling services by putting the required information technology systems in place and training existing staff to assist with debt-counselling clients.

In the current economic climate, with commissions and sales at their lowest and many previously comfortable clients falling on hard times, it is important to consider whether the client should seek the help of a debt counsellor.

In my experience, a knowledgeable debt counsellor can prove invaluable in getting clients to cutback on non-essential expenditure, such as additional cars, holidays, the best private schooling, unnecessary perks and entertainment.

When clients understand the risk of legal action following default in payment (loss of key assets, negative credit record), they generally cut back on their expenses and this debt review process also allows them to re-evaluate and better appreciate that key safeguards, such as life insurance and comprehensive medical aid cover, are not luxuries and can be justified.

I would therefore recommend that financial planners ask their clients if they are facing financial pressures that would possibly result in their having to cut back on their cover, and if so, to either refer such clients to competent debt counsellors, or to register as debt counsellors and provide these clients with a much-needed service, which will hopefully return the client to a sound financial footing and result in greater client loyalty and the retention of key cover.

Stephen Logan was the first consumer attorney and male debt counsellor registered by the NCR. He is the author of “The Credit Guide” and managing director of Logan Attorneys.

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