EVERYTHING YOU NEED TO KNOW ABOUT DEBT COUNSELLING

(00:00) Welcome to the official podcast for MyCreditStatus.co.za. We will be introducing you to credit experts who will be providing valuable insight and advice from your financial health to improving your credit status and score. Your host for the show is Laura Palmieri.

Laura Palmieri (00:20) Hello and welcome to MyCreditStatus podcast. In today's podcast will be discussing debt counselling. We are extremely privileged to have Benay Sager, the Chief Operating Officer at DebtBusters. DebtBusters is South Africa's largest and most trusted multi-award-winning debt management company, and they've already helped over 60,000 consumers manage their debt. Benay, let’s start the podcast with a brief explanation on what is debt review and is it the same as debt counselling, as this seems to be a lot of confusion between the two.

Benay Sager (00:54) Thank you, Laura, for having me, and thanks to all the listeners. It’s indeed a little bit confusing out in the public domain. Debt review is exactly the same as debt counselling. The two phrases are used interchangeably for those of us who are in the industry. It means the same thing. It's a process that was put into the National Credit Bank, which was promulgated in 2007, and it's quite a unique process in the sense that it exists in a handful of countries in the world. It was very progressive thinking of the legislators to put it in the National Credit Act. It provides an avenue for individuals who are struggling with their debt to essentially hit the reset button and ask for help in a legal way that's very much protected under the National Credit Act. It allows consumers who are really struggling with their finances or will be struggling with their finances too, in a controlled environment to try to sort of address the problem. That's what it is.

Laura Palmieri (02:05) Okay, that’s interesting. I think very few people realised that it was put through the National Credit Act in 2007.

Benay Sager (02:14) Yeah, the Credit Act has lots of sections, and as it's typical with legislation, it could get quite daunting for those of us who don't have legal backgrounds to try to understand, but it has been around for about 12 years, very successful. It has put through roughly about a million individuals on debt counselling, and we believe about forty percent, about 400,000 of them, got what we call: clear in certificates at the end. Meaning they were able to clear their debt and get back into the lending world without really having any black eyes, so to speak, without having any black marks on their current credit record. So, we think it's very successful, and it's truly unique in the sense of success. We’ve had people from overseas from China and other places, especially in countries struggling with consumer debt, who have come to check out how the South African debt counselling process and market work. So, it's getting quite a bit of publicity outside of the country as well.

Laura Palmieri (03:20) I didn’t realise that, to that extreme, but it's very interesting. Funny enough, I was living in Bangkok for about two years, and I’ve noticed the change that that country is also highly struggling with debt well, with an increasingly high level of debt that’s occurring in that country. I don’t think there is any avenue at this stage there either, so we’re actually quite in the forefront with everything at the moment.

Benay Sager (03:43) We are. I lived in the US for several years, and even debt was quite a big problem and now much more so for individuals, and people are drowning in debt. They always try to kind of restructure the debt. Still, no one has the thing except for a few countries. No one else has as structured and type of legal process as we do here, which is excellent from a consumer perspective because it provides the legal protection that the consumers need during the restructuring of the debt process. It allows all the role players, including consumers, debt counsellors, credit bureaus, credit providers who are all involved. Everyone knows the process, and everyone respects the process. It allows everyone to play within particular rules, that all the rules are pretty well defined. So, I think we like it from that perspective as well.

Laura Palmieri (04:37) Yeah, that's excellent news. Okay, now before we go into more detail about debt counselling, can you quickly explain what is prescribed debt?

Benay Sager (04:47) Prescribed debt is a technical term for debt that essentially has not been repaid for an extended period of time, and it's been prescribed to essentially, either to be written down or something else. So, a typical example would be, let's say someone owes a retail credit provider of a few thousand Rand, that they opened an account with, and they for whatever reason, either they couldn’t, or they wouldn't repay back, and a few years have elapsed. What would happen is: the lender that's owed the money would try to collect on that debt by trying to get in touch with the consumer if they are unsuccessful for a period of time, meaning either they are unable to get ahold of the consumer. The consumer is not making payments towards the debt prescribes. Depending on the type of debt, there are different timelines that you would need. For example, if you owe money to SABC or SARS, that debt does not prescribe for thirty years, so it's quite a long time. Meaning you would not pay that debt, or you would not get a hold of you for a thirty-year period before they can prescribe, meaning write that debt off and sell it to someone else to collect on your behalf. Prescribed debt doesn't mean that the debt has been extinguished, it doesn't disappear by itself, but it does take place from time to time that credit providers cannot collect on it. So, it's been quite a contentious issue, as you might imagine, over the last few years.

(06:43) The best piece of advice I can give is, to our consumers, if you are going to take out debt, make sure that you take it out with the belief that you are going to pay it back if you end up in the prescribed debt territory, it becomes quite complicated to deal with, even in our environment, and it could hurt someone’s credit status. So, you don't want prescribed debt on your credit record.

Laura Palmieri (07:08) Okay, yeah. Thirty years is a long period of time, I must say.

Benay Sager (07:14) Indeed, it's very long, yeah. You can understand the reason for it because it’s an obligation to the government.

Laura Palmieri (07:22) A hundred percent. And do you find that there are many creditors or debt collectors that are breaking the law using prescribed debt?

Benay Sager (07:32) I wouldn't think so. We don't find that. We also know that those credit providers and debt collectors registered with the appropriate authorities, whether that's the National Credit Regulator or some other entity in the case of debt collectors, it's the Department of Justice that normally handles them through the Debt Collectors Act. We find that the registered players play by the rules. We haven't come across it… of course, you come across individual cases that look a bit strange from time to time. It could be an oversight or mistake made on behalf of someone, but we find that registered entities almost always play by the rules. This is important for consumers to know because they can ask for the registration numbers of credit providers, debt collectors, debt counsellors, or anyone involved in the credit industry, be it regulated by the creditors or FSCA. They should always ask for the registration and license numbers to verify that there are registered entities. Our regulators do, I think, a great job in making sure that everyone is sticking with the rules. We don't always get it right in the industry, there are some bad apples, but the best way to kind of weed them out is to always go with the entities registered with the proper authorities.

Laura Palmieri (08:57) Makes sense. And it's also good advice to request the registration details before applying, for example, signing up to DebtBusters to ensure that the person is registered in that industry.

Benay Sager (09:11) Exactly, exactly.

Laura Palmieri (09:13) This is a bit of a cheeky question, but does DebtBusters ever use this law to their advantage regarding debt counselling?

Benay Sager (09:23) I don't think there are many people out there doing debt counselling who are not registered because the way that debt counselling works are: a debt counsellor is a person, so, I’m a registered debt counsellor in my personal capacity, of course, I work for DebtBusters, but you would definitely need to ask someone if they tell you they are a debt counsellor, you would certainly need to ask them what their NCR DC number is and that shows that you can also go to NCR’s website and check that person is indeed registered, to the extent that the website tells you that certificate is up to date and all of that. I haven't come across any instances where someone would masquerade and say, ‘I'm a debt counsellor but not registered with the NCR. ‘I think it's quite a serious offence that people wouldn't take lightly.

Laura Palmieri (10:19) Well, that's good to know. That’s good to know that's not happening.

Benay Sager (10:23) Yeah, but I think it's essential for consumers to know that they must always speak to registered debt counsellors. And by law, a debt counsellor is registered as a person.

Laura Palmieri (10:37) I see, okay, so that's why you said now that you’ve registered in your personal capacity.

Benay Sager (10:42) That's correct. So, if you go to the NCR's website and look at my name, you will see that I'm a registered debt counsellor.

Laura Palmieri (10:49) Okay, now I understand, thank you. Okay, when should a consumer consider debt counselling and what are the criteria?

Benay Sager (10:57) Yeah, this is one of the misconceptions out there as well. Debt counselling, as we said, it’s a statutory process provided for in the National Credit Act. So, if you look at the Act, it's meant to help individuals who are over-indebted or about to be over indented. That might sound a bit technical. I think, simply put, if you are unable to make ends meet. You’re struggling to pay back your creditors or your insurance payments or your landlord, or whoever it might be, I would always urge people to speak to someone in the debt counselling industry to help them understand why they cannot meet their obligations. So, debt counselling is for people who are described as being over-indebted or about to be over-indebted. That technically means that the money they earn, their income, or if they’re getting money from renting a house or whatever it might be, is less than the money they owe to creditors and their expenses. So, we look at three things: we look at someone's income, look at how much they pay towards the creditors, and look at their expenses. If the expenses and how much they're meant to pay to their creditors, if those two combined are more than what they're earning, in terms of their net income, technically they’re over-indebted, and they would be a candidate for debt counselling. So, that's one scenario.

(12:34) The second scenario is that if someone is going to be over-indebted. One can prove that again, you know that your costs will increase, you going to take your child to school, it hasn't happened today, but it's going to happen in two months’ time. You can demonstrate that you are struggling to make ends meet, and you're going to be technically over-indebted. That’s also possible for someone to apply for debt counselling. We often get the individuals, we get our people who are good paying clients, but they’ve just fallen on hard times, they are unable to make ends meet, and they're technically over-indebted. And what we try to do at DebtBusters is to help them. They find us, the typical client profile, if I can share that, is someone with a middle-level income, somewhere between R18,000 to R25,000 is what they’re earning. Still, they would need to pay back their creditors more than that every month, so technically speaking, even from that, these individuals are unfortunately really struggling, drowning in debt without even factoring in their expenses. And it could be because there was something unexpected that has happened in their lives, there were two breadwinners, and one of them lost their job, which is something we see quite regularly these days with the economy being in a struggling state, or it could be that an unexpected event happened in their lives, there was a funeral, there was a hefty medical bill that they were not insured for, and all of a sudden you have this mountain of expenses that you were not catering for and you find yourself having to take out a personal loan or some other means to pay it back and now you unable to pay back, under the terms. And then interest rates keep ticking and ticking. So, that's kind of like the typical scenario that we often find when consumers are struggling, those are general things.

(14:49) Most of our consumers you asked about the criteria for debt counselling have to be over-indebted, and you have to show that you have a source of income. It doesn't have to be a full-time job. It could be part-time; it could be that you are earning income from renting a house or whatever it might be.

Laura Palmieri (15:07) But just something of income?

Benay Sager (15:09) Yeah, you have to demonstrate that you have the means to pay back your debt. That’s one of the conditions of being admitted to debt counselling. I think this is fantastic because these are consumers who have realised they have a problem in terms of their debt. They’re genuinely trying to change the situation for themselves, to improve their financial situation. That's the typical consumer that we get. They recognise that they are in difficult times, but they don't really know, they think taking out another loan is the only way out, but we can also help them in terms of restructuring their debt. That’s generally the typical profile that we get.

Laura Palmieri (15:48) Sadly, many consumers just had that perception like you were saying about taking out another load and instead of actually taking the avenue which debt counselling provides, which I think is fantastic.

Benay Sager (16:00) Simplistically, you make a good point. Whenever we have training with this stuff, I also ask them this question, suppose that you’re earning a certain amount of income. You want to put aside from that income a certain amount of money, or rather the question is: how do you save R1000? How do you set aside R1000 per month? And almost always, I would say ninety-five percent of the time, peoples first inclination is, ‘okay, for me to save that kind of money, I need to earn more, I need to get more money, I need to get a loan, I need to increase what I’m earning.’ Rarely do people think, ‘Maybe I can also cut back on my costs,’ and in this case, I think it's typical human nature. We think we’re increasingly struggling with our money, so what do we need? More money. So, that's the first thing that they always think about.

(16:56) There’s the other side of the equation, income minus expenses, minus debt repayments that people generally ignore, and they don’t think, and that part of our job is also to help them feel. We speak to them on a monthly basis about 15 to 20,000 consumers. Only a fraction of those consumers end up becoming debt counselling clients. The rest of them are struggling financially and then looking for avenues to help themselves, and we give them free advice and give them free credit reports when they speak to us. But there are many more people we talk to than those who end up coming under debt counselling, who can use the advice, and I think this is not a uniquely South African problem; by the way, I think this is a global problem. Globally, people are drowning in debt, and they don't always have avenues like debt counselling to help them restructure it.

Laura Palmieri (17:54) No, I agree with you on that one. Okay, what are the advantages, or are there any disadvantages of debt counselling?

Benay Sager (18:04) So, suppose I can just explain how this debt counselling process works a little bit. In that case, the advantages are, depending on how you look at it, if you apply to debt counselling, how the process works is that if we determine that you are over-indebted, you will fill out a form. You would apply. If we determine that you are over-indebted, we will apply on your behalf to all the creditors. We would send them a letter saying, ‘this person has applied to that counselling.’ It’s almost in a way to say, ‘stop all lending activity to this individual until such time that we determine whether they are over-indebted or not.’ Once we determine if they are over-indebted or not, which is generally in a matter of days, then we will make the final call, ‘okay, the person is over-indebted, and they will go under debt counselling.’ Onwards, what happens there is that we again notify all the creditors they owe money to, and from that point onwards, they're not allowed to lend more money to those individuals. So, one of the things with debt counselling is if you are in debt counselling, you're not allowed to take their credit. But this could be seen as a positive or negative depending on creditors. I think it’s pretty fair that the creditors or lenders have agreed to restructure your debt. How it works, it usually is, that we will get concessions on your behalf as a consumer from the creditors to extend the amount of time that you have to pay back that debt and further, lenders also take concession about reducing your interest rates, I think it's only fair that you as a consumer in return agree not to take out further credit, as long as you're under the program.

Laura Palmieri (19:55) That’s fair; I agree with you on that one.

Benay Sager (20:01) So, it's a long-term commitment in the sense that it's generally not something that you do in three months and you're finished, but it's generally three to five years. As positive or negative in this sense, you can see that it is difficult for some people to keep to the budget for three to five years. One cannot predict what happens in the next few years, but we do have avenues to help individuals whose situations change during that period. It gives you legal protection from the creditors meaning from that point onwards, once you're on the debt counselling, you deal with your debt counsellor, you make one payment per month through independent payment distribution agencies known as PDAs, which are by the way also licensed and registered by the National Credit Regulator, you make a payment to them, it's one payment per month, you don't have to worry about eight to ten payments that most of our consumers make and that payment gets distributed to all of your creditors based on the new amount that we would negotiate on your behalf and get the agreement from them. And from a consumer perspective, it becomes relatively simple from that point onwards, you can make one payment per month, you can set it up as a debit order, so it goes off your account, you don't pay your creditors directly, you pay the PDA, which we manage in terms of being distributed. And when you’ve paid up all your short-term debts and if you've got a bond that can remain, then you can get a clearance certificate. And once you've finished the process and get your clearance certificate, again, it could be anywhere from a few years to five years or six, depending on how much debt you have, the size and the nature of the debt. The flag on your name is removed, you can get credit again, and what's the best news is that it doesn't appear to creditors that you ever been on the debt counselling or debt review before. So, it's not meant to be a negative penalty for you going forward.

Laura Palmieri (22:13) I can see how it’s been structured. It’s not that bad at all. It just helps you for that period to sort your debt out.

Benay Sager (22:21) Yes, exactly, and most of our consumers find that we get lots of compliments from consumers, often in cases they're going through some difficult financial times, or maybe there's a divorce involved, or some other difficult time one of the breadwinners lost the job. It truly is life-saving for many of our consumers because what happens is debt causes so much stress that even for younger people, we know instances where the debt is too much for them. It becomes so stressful that they just cannot cope with it. So, it becomes a massive relief for consumers; they know how much they need to pay for every single month for the next few years to get out of debt. And again, it becomes a pleasant avenue for them to kind of get back on their financial feet.

Laura Palmieri (23:11) Yeah. And what I find after you expand all this is that the consumers are not alone, even though the process is like three to seven years depending on the debt, there's always someone there for them in the sense of the debt counsellor, that they're not stranded learning trying to sort this out on their own.

Benay Sager (23:28) So at DebtBusters, we take the view that you should be in charge as a consumer, and we have an online portal. Much like many other financial services companies these days, you can log into the portal at any point in time. It’s got live information about how much money is being distributed to all the creditors that you owe money to, how far are you from reaching your clearance certificates, if there any relevant documents for you in terms of that debt review process, they will be uploaded there for you to be able to access. We want to provide full transparency in the process to let consumers know. It's also okay to forget sometimes: how much longer do I have to go? It’s not easy. It’s quite an overwhelming discussion in the beginning because many people don't know about the process, so you've got to learn a lot of things as a consumer. But we try to make it easy by having a portal. Our portal is called SmartCents, (Cents, like Rands and Cents). We try to give consumers as much information as possible to make it transparent, we've got nothing to hide, and at the end of the day, it's the consumers who are making this choice actually to repay their debt, and we're here to assist them, that's how we see our role.

Laura Palmieri (24:48) No, that’s true. Okay, so now, if a consumer is interested in going into debt counselling, what are the fees involved? How do the fees work?

Benay Sager (24:59) Yeah, so debt counselling fees, there are two types of fees. There are the fees that you paid to your debt counsellor and the fees that you paid to your PDA. And the nice thing is, all of these fees are built into the calculation, so when you have a conversation with a debt counsellor, and they tell you, ‘okay, you’re going to the same pay R3000 for the next twenty or fifty months,’ whatever the number is, all the fees are built into that. So, you make one payment, and those fees get distributed to all the relevant payers, role players in the process. If you were to ask me in isolation, like how much of the money the consumer would pay over the debt counselling, how much of that goes to creditors and how much of it goes to fees? I’ve actually done this analysis quite recently and looked at all of our income brackets, all the way from people earning R3000, R2000 and those in excess of R25,000 and depending on the amount of money that you pay back to your creditors on a monthly basis, when you look at the period of debt counselling, of the total amount that you pay, between six to ten percent of that money only would go to paying your PDA and debt counsellor fees. So, in other words, ninety to ninety-four percent of everything that you pay during the process goes straight back to your creditors, which is the way it's meant to be. It’s excellent for creditors because they're getting a large share of the repayment and why creditors love the process because it guarantees the payment. So, the fees are built-in, but if you compare to alternative methods of paying back because we're able to slash a lot of the monthly fees from the accounts, it makes it a lot more attractive for consumers, it's a cheaper way, if I can say it like that, then ending up in a legal process where you have to be chased by external debt collectors or attorneys or whatever, those fees generally become expensive for the consumer if they stop paying. And most of these consumers would be in a situation where they would struggle to pay back all of their debts, so if they choose this avenue, it proactively helps them avoid many of the costs that would come from alternative collection methods.

Laura Palmieri (27:35) Correct. So, it makes the fees, like you mentioned, between six to ten percent, it’s reasonable. Considering what they’re saving in the long run, this is not a bad deal at all.

Benay Sager (27:49) So, our consumers talked a little bit about it earlier in terms of their income levels. So, a typical consumer profile would be that they would come to us, like I said, earning between R18,000 to R25,000, the average is R22,000, gross so, then netting around R18,000 per month, and debt obligations meaning if they were to pay every single creditor, every month, it would be R19,000. So, what I'm saying is in most cases, the net income is not possible to pay all the creditors, but because of the restructuring that we do and negotiation that we do on their behalf, and slashing up out the interest rates, the monthly fees, in most circumstances we’re able to reduce that R19,000 amount that they would have had to pay to a third of what it was before, so let's call it R5000 to R6000. So, that provides them with some immediate relief from a cash flow perspective every month, so all of a sudden, they're still netting R18,000, but they only need to pay R5000 towards the creditors. So, it gives them some breathing space and Laura, what we also know is that most consumers need these two-thirds of their net income for the basic necessities of life, for food, for transport, for housing, for school fees and other expenses. Inflation and petrol prices and all of that hasn't been kind to the South African consumer for the last several years, so we know that consumers need that two-thirds of their net income in terms of being able to survive. So, we try to work off of that. When you factor in all of that, it becomes a very attractive proposition to come to DebtBusters and into debt counselling for consumers to help them.

Laura Palmieri (29:45) No, that is, I agree with you on that one. Okay, so now, once the consumer signed up for debt counselling, what happens next? What is the exact process?

Benay Sager (29:55) So, once they sign up for debt counselling, which would mean technically, we found them to be over-indebted. They applied to us, before that we found them to over-indebted, we send to all of the creditors indicating that, ‘yes, this person is applied and we found them to be over-indebted, onwards they are under debt counselling.’ We would simultaneously do that; we would inform the credit bureaus using an online system that this individual with this particular ID number or passport number has applied for debt counselling to stop further lending processing immediately. It informs all the credit bureaus, so from there onwards, what we do is that we would interact with all the creditors. The first thing to do is for the creditors to get what we call a ‘certificate of balance’. That is information from the creditors that the consumer has the outstanding amount of money that they owe for every single account that the consumer has. Once we have that information, let’s say they have eight to ten creditors, and most consumers would have several. Once we get all that information, we would then essentially look at the individual's income, and we would look at how much money they owe to different creditors. We would work backwards to restructure their debt over an extended period of time. Most of our consumers, we will be able to propose the creditors that they pay back the debt with the exception of on loan, that they pay back their debt between four to five years, I think average is about forty-two months actually, maybe a little bit lower than four years, so we would send the proposal to the creditors asking them whether they accept our restructure proposal. And we would have a back-and-forth negotiation on behalf of the consumer with the creditors. We would try to secure the best deal on behalf of the consumer, based on what they can afford to pay every month rather than trying to force the consumer to overpay. We generally work off the principle that the consumer can pay like a third of their income towards their debt repayments.

(32:16) So, we take over from that point, and we renegotiate in most instances at DebtBusters. We’re able to get all creditors to agree to restructure the proposal, over ninety percent of the cases. Once that's done, we would take those papers where all the creditors have agreed to restructure the payment plan. We would take them either to Magistrate Court or the National Consumer Tribunal to get the legal backing that ‘yes the consumer along with all of the creditors have agreed to this repayment plan.’ So, from there onwards, there's what's known as a ‘court order’ in place. And along the process, what the consumer sees is kind of like the final result. We tried to make it as easy as possible for the consumer, we ask them to do one thing and one thing only on a monthly basis, just pay the amount that was agreed with the debt counsellor, pay it on time, pay it in full, and we will take care of the rest. So, once the court order is in place, the rest is essentially an agreement between the consumer and the creditors to say, ‘Okay, we have X number of months to pay this back.’ When the time comes for the consumer to exit debt review, we proactively contact these creditors to get the balances. If there any paid-up letters and so on, we prepare the documentation into exit debt counselling. We would grant them all the paid-up letters in place, meaning all the accounts on the short term accounts have been paid. Still, except for the bond, we would issue what's known as a clearance certificate, and that would mean there's no more debt review flag on the consumer’s name with any other credit bureaus. Now, the process I described from beginning to end could take several years. In the beginning, it's very intense in the first few months. Intense in the sense that we need to secure from connection, for example, we need to stop debit orders that might be running off clients’ accounts to make sure that they have money to pay for the debt counselling process, that requires quite a bit of in intense interaction, sometimes with the consumer, but after the court order as long as the consumers are paying on time, there’s generally, besides the normal annual update, the consumers would only know that things are on track. And again, they can go to a website, they can go to the consumer portal to check their progress. So, in the beginning there’s quite a bit of involvement from the consumer to make sure that everything is set up right in the first two to three months, I would say in the negotiations process but from there onwards it kind of works in the background.

Laura Palmieri (35:06) Okay, interesting. Then the next question I have ties into what you mentioned earlier, is while consumers are under debt counselling, will this affect their credit score but clearly, I know that you get to flag them, but does it affect their credit score?

Benay Sager (35:23) So, the credit score is a bit of a complex thing in the sense that how credit scores are calculated. There are a significant number of credit bureaus, as you know, in South Africa, 46, and each one has a particular way of calculating your credit score, but each one has a different component. So, a credit score consists of several things; one is your payment record; how good are you with paying back the money you borrow? The second thing is, how long have you been credit active? Have you been in the credit industry and borrowing money, let's say, only for one year versus ten years? Which makes a big difference. The other thing that impacts the credit score is the composition of the debt. What type of debt do you have? Let's say a bond and a vehicle that's financed? Or do you not have either, and you just have a retail account? Maybe if you have a credit card or a personal loan, the composition of that debt is quite important in determining a credit score. The last thing that also impacts the credit score is that if you have a credit card and have store cards, what percent of that credit card are you utilising? As it’s called utilisation. Because there are four or five of these factors, I just mentioned how the credit score moves, whether it goes up or down. It really depends on the interplay between these parameters. Each credit bureau has a different way of scoring.

(37:03) So, to answer your question, what happens to the credit score once someone comes under debt review? Because paying back creditor is an essential part of it, but so is utilisation, those things over the long term, if you're a consumer that pays back on time the amount that's been pre-agreed with the creditors. In terms of the restructured debt, we find that in almost all the cases, consumers who are paying on time and paying the total amount every month, their credit score goes up. Consumers who skip payments or pay partially or anything else that might happen have their credit score going down. So, it's similar to how the behaviour outside of the debt review affects the credit score… it’s no different. So, there is definitely an impact. The credit score movements may not be as big as they would but also remember that because consumers are not taking up new credit, interestingly enough, one of the most significant determinants of your credit score is the fact that if you take out a lot of credit. You use it fully; let’s say you have a credit card with a limit of R50,000. You’re maxing it out every month perversely that improves your credit score, even though that doesn't necessarily mean that you are in a better situation yourself. Still, if you’re using it every month and maxing out the credit card, it signals to the lenders that you are a good prospect to lend to, increasing your credit score. So, I think one is to understand the complex drivers of credit score before you can make judgments whether credit score is going to go up and down, but what I can tell you is based on the information we look at, we provide through a partnership with a company called CUDA, we provide all of our consumers that credit report from what we see, that credit score goes up if consumers are paying and paying regularly.

Laura Palmieri (39:14) Interesting. I understand that now actually makes perfect sense, so it's the same principle whether or not you are in debt counselling. It’s highly servicing your debts and how much credit you have out.

Benay Sager (39:28) Correct. It's very good.

Laura Palmieri (39:30) Can a consumer, I think we've covered this, but can a consumer apply for credit or use their credit cards while under debt counselling to have an existing credit card as an example.

Benay Sager (39:41) Yeah, I think we touched on a little bit, but I cannot articulate. Existing credit card, no. In fact, credit cards or overdrafts cannot be used while they're under debt counselling because an overdraft is also seen as a credit facility. However, you can use bank cards, so if you have a debit card from your bank for groceries or whatever, you can use it as long as you're not using the overdraft portion. The only type of new credit that you can take out while you're under debt review is what's known as a consolidation loan. There haven’t been many requests for this; we haven't had any, and I would advise against, indeed, because you’ve restructured your debts, and consumers need to demonstrate that they are paying back their restructured debt. So, it's possible when you read the act list, that’s the only thing that's technically possible, but I don't know any products out there that would satisfy that.

Laura Palmieri (40:51) Okay. And how long after debt counselling can a consumer occur debt? I recall you mentioning a clearance certificate. So, am I right to say, once they've gone through the debt counselling process, they've got a clearance certificate, can they then go and apply for debt again?

Benay Sager (41:10) Yes, it's immediate. So, as long as the flag on the bureau is removed, which is generally in a matter of days, the consumer can go and apply for new credit.

Laura Palmieri (41:23) And then have you noticed that tends to happen, that the consumer goes back into that cycle?

Benay Sager (41:30) Most of our consumers recognise that the previous way of dealing with money and debt was probably not the best. And what happens is that many of them, when they finish with us and get the clearance certificate, actually want to go and an asset. They either want to get a finance vehicle or, in most instances, actually get a home loan. So, if you ask in term of what percent of the individuals come back to DebtBusters after they've been through the process once, it's tiny. I would say only a handful of people in the six years I've been with this business, not more than three or four. So, most of our consumers and by the way, we are granting about 250 to 300 clear certificates per month, so last year alone, for example, in 2018 I think we had about 3600 people who were given clearance certificates so out of that, maybe one or two would ever come back saying, ‘look, I struggled with my debt again, I want to come back on the debt counselling,’ it's very rare.

Laura Palmieri (42:38) That is very positive information that they don’t fall back again.

Benay Sager (42:42) I think our teams feel very proud of their ability to help the consumers become more educated about finances and debt and manage their own financial situation.

Laura Palmieri (42:56) Yeah, it sounds like that. And then what is the percentage of people that finish the debt counselling process, so we know that they’ve all signed up, so what is the percentage that you’ve seen that finishes it?

Benay Sager (43:11) Yeah. So, in early 2015, the National Credit Regulator changed some other criteria for individuals to exit their debt review. Before that point, a consumer could say at any point in time that they want to exit their debt review, and they could leave without any issues. Since then, the rules have been changed that you can leave debt counselling only once you’ve paid your short-term debt, meaning everything except for home loans because home loans generally have a much longer horizon, twenty-five years. So, suppose you look at the statistics before that. In that case, if you look at the period when consumers could say that they want to leave debt counselling midstream, without seeing through all the benefits of debt counselling, without sticking it out, you're probably looking at like twenty-five to thirty percent that would finish with clearance certificates. Since then, we are looking at upwards of forty percent, so the number is sticking up. Every year, the number improves because consumers are getting better educated about why they should stay on debt counselling for the full period. So, it's nearing the fifty percent mark, meaning almost half of the people see through the benefits and get their clearance certificates. Yeah, so I think the industry is done very well in improving that number. If you look at the statistics over the years, like I said, out of 1,000,000 people, about 400,000 got clearance certificates. Still, suppose you separated into pre-2015 versus post-2015. In that case, it's a lot more promising after the change in the guidelines into early 2015 that we're seeing more and more people get to the clear certificate stage.

Laura Palmieri (45:10) Forty percent is incredible, and to think that that will only improve over time.

Benay Sager (45:17) Yeah. That's what we believe in. Of course, we will have this conversation again in three years, and then we can see the numbers specifically.

Laura Palmieri (45:25) Okay, then our final question. What interesting stats can you share with us regarding the South African population and their financial behaviour?

Benay Sager (45:36) I think a lot of the stats are pretty well publicised. About 25 million consumers are credit active, and roughly about 10 million of them being in arrears. I think what we see with our consumer base at DebtBusters is quite interesting. Many of the consumers who come to us have very few arrears, and what you're doing is they’re constantly borrowing to pay the previous loan, and they end up and almost like a debt spiral. So, from a statistics perspective, what we see is that nearly half of the debt that comes to us with in terms of value is what we call unsecured debt, meaning personal loans, credit cards, overdrafts, things like that, retail accounts, only about half of the debt that they come to us with would be tired to assets such as vehicle finance or a bond. And if you compare that to three or four years ago, the picture was very different, and when you consumers were coming to us, almost seventy percent of their debt would be secured assets, meaning bond or vehicle finance.

(47:02) So, there's definitely been a push in terms of more unsecured borrowing in the country. It’s increased and what we also find is that the levels of debt in terms of how much consumers are paying, what percent of the income they are paying towards debt repayments. We did some research on this a few years ago. It’s a lot higher than I think some of the numbers that the Reserve Bank would publish, in the sense that when you factor in the cost of credit life insurance and monthly fees and all of that, what we find is that the percent of monthly net income that consumers every single consumer in South Africa if you were to spread the debt over them we would all need to pay about thirteen of net income towards debt repayment, now if you took all the debts individuals own and distributed across the entire population, the figures are published by the Reserve Bank, they generally refer to about an eleven percent number, which is quite different than the thirteen percent, it doesn't sound like much. Still, it’s a massive difference in the sense that we think of the actual debt levels. The household debt levels are twenty percent higher than what's being published. And the reason for the difference is that a lot of the non-bank lending is not factored into the statistics, and a lot of the cost of credit such as extras, such as interest repayments and credit life insurance and so on are also not factored in. The other thing to keep in mind is that even with the numbers, we say the household debt to GDP ratio is somewhere around seventy-six to eighty percent. I think many of the pundits would have you believe that number has been coming down, and they would compare to countries like the US, for example, or Australia, where a comparable number would be between 120-140%, and it all looks good on paper.

(49:05) I think the issue is twofold. I just described the real levels of debt that don’t factor in long back lending, the cost of the interest rates and credit life insurance, and so on, which are generally burdens on the consumer. And the second thing is the nature of the debt is very different. In some of those countries that are quoted like Australia or the US, the majority of the debt that households owe is a mortgage, with very low-interest rates. We’re talking three to six percent. Whereas, in South Africa, when we looked at the average interest rate across the board for our consumers, it's twenty-one percent. So, the bulk of the lending is because of unsecured borrowing. And when you think about the difference of the amount of if you say, you pay R1000 back on loan every month, what that means practically is if most of it were to be paid to bond, only a small percentage of that would be interested. Whereas, when you pay an unsecured loan back, almost 100% of what you're paying back goes to interest. So, you never really make a serious debt in terms of capital repayments. So, we think the nature of the debt is a lot more difficult to crack than compared to other countries.

Laura Palmieri (50:23) Interesting, that’s very interesting. Okay, once again, Benay, thanks for joining our podcast, and I think there's a lot of confusion about this topic. Hopefully, we've managed to give our listeners a better understanding of the whole debt counselling process, and I hope you’ll let us invite you back onto our show again.

Benay Sager (50:44) Thank you very much, Laura. If any consumers are struggling with making ends meet or they're going to bed every night thinking about how they’re going to repay that loan, I would seriously advise them to look out for a debt counsellor. They can go to our website: DebtBusters.co.za or call us on 0869990606 and see if we can help them.

Laura Palmieri (51:06) Perfect, thank you very much, and we’ll speak to you soon.

Benay Sager (51:10) Thank you take care, bye.

Laura Palmieri (51:11) Bye.

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