Track your progress and 6 other tips to help you get out of bad debt

Over-indebtedness continues to be a huge concern in South Africa, with research conducted by the World Bank revealing that South Africans are the biggest borrowers in the world.

This, according to Head of Transactional Product at Nedbank, Philippa Weimer, can be attributed to the increase in VAT and inflation which continues to contribute to people’s financial obligations, as well as the general slowdown in economic activity that has led to an increase in unemployment.

However, Debt Counselling South Africa explains that these factors have, unfortunately, not stopped consumers from acquiring more credit – with 70 percent of household earnings being channelled towards the repayment of debt.

Lack of financial literacy, family or cultural obligations and non-modest lifestyle choices are some of the reasons that many of us find ourselves overly indebted, says Gavin Mkhabela, a debt management expert.

However, he stresses the importance of individuals flipping this narrative and looking at the positive spin-offs that can come from financial burdens.

“Yes, black tax continues to set many of us off financially, but empowering ourselves with knowledge of how to find income-generating opportunities can assist in building financial stability.”

Mkhabela explains that budgeting needs to become the cornerstone of our financial life as this will enable us to not spend more than we can afford. He further adds that exploring and equipping ourselves with investment knowledge will, in the long run, also assist in lessening unnecessary financial burdens and lead us to financial freedom.

‘I changed my lifestyle’

Two years ago, 34-year-old Thembi Mabuza found herself in financial distress when she took up a credit card offered by her bank.

“It was great while it lasted, until I was woken up by a crazy debt of close to R25 000 – which I had no idea of how I would pay back,” she explains. “During the same period, I decided to buy a house. To make up for the 10 percent deposit, I took out a home loan – and all this eroded my monthly income.”

Thembi explains that this impacted greatly on her health and social life as she found herself with an additional R4 000 financial strain every month.

“I had to find some sort of rescue, seeking financial assistance from my parents until I eventually spoke to a financial advisor friend who helped me assess my expenditure and cut out costs where possible.”

For Thembi, the two-year clean-up process came as a huge financial blow but helped her accept that she indeed was in trouble and needed to tighten her belt.

“This saw me downgrading and eliminating many of my unnecessary lifestyle wants. But, most importantly, the process assisted me in understanding the importance of financial discipline and paying off debt as soon as I can, to avoid accumulating high interest.”

For entrepreneur Hope Simelane*, being on the verge of filing for bankruptcy, was awake-upcall. Six years ago, Hope and her husband decided to leave the corporate world and venture into business.

“We cashed our savings and pension funds and used the money as capital to start-up our media company and pay off some of our smaller debt,” she explains.

“The first year-and-a-half business was doing well, and we were breaking even. But this didn’t worry us as we understood that the first few years of a small business are tough and breaking even was a good sign.”

She adds that what blew their finances off was not separating business and household expenditures, taking from the little they made to boost their personal lifestyle.

“Our bond, vehicle repayments, daughter’s school fees and other lifestyle wants became expenditure line items in our business’ financial statement. We neglected ploughing back and developing our business proposition and offerings.”

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This, according to Hope, is one of the biggest financial blunders any young entrepreneur could make.

“We were spending more than what we were making and decided to look for additional funding from banks through personal loans, believing that in time we would be able to make up for this, pay it back and continue with realising our business vision.”

But, business dipped, and the couple’s debt escalated, with high repayment interest on their loans as well as suppliers and staff payments being compromised.

“We were drowning in debt and had to find a way out. Filing for bankruptcy seemed to be the only option.”

Hope explains that seeking counsel from a debt management expert and financial advisor assisted them in consolidating their debt and tracking their lifestyle spending – allowing them to start afresh.

“It hasn’t been easy. I’ve had to go back into the corporate world to assist with paying off our debt, while my husband looks after our business, which we have had to downscale. Lessons were learned, and the financial advisory process has empowered us to better understand the importance of living within our means,” she explains.

So, what does ‘filing for bankruptcy’ mean?

Discovery Legal Advisor, Malusi Mkhize, explains that the legal technical term for filing for bankruptcy is “sequestration” for trust, partnerships and estates of individuals that are insolvent.

“This is when someone has become insolvent and is no longer able to deal with their financial affairs freely,” he explains. “It is imposed by the courts for persons who are unable to pay their debt or whose liabilities exceed their assets.”

Mkhize adds that once an individual has filed for insolvency, creditors will not have the power to re-coup all outstanding debt and a portion of the debt will be written-off.

“Once the process is completed, one no longer carries debt and are then able to re-build their estate from scratch – a process that will require counsel from an attorney.”

He explains that insolvency is on the rise in South Africa, however, and says that proper advice must first be gained from a legal expert who is well-versed in insolvency law, once all other avenues to settle the debt have been exhausted.

Simple solutions

Eunice Sibiya, Head of Consumer Education at FNB, explains that, when one finds themselves relying on debt to survive, they need to evaluate their finances in order to get financial stability.

“It may seem hard at the beginning to make changes to your daily routine, but looking at the end goal is encouraging. Therefore, one should carefully re-evaluate their budget and prioritise paying off debt as quickly as possible.”

Weimer adds that another solution one should consider is to look at special arrangements with their bank and agree on a workable and affordable solution that will also ensure no legal action is taken by the creditor.

“If an agreement can be reached, the bank will accept a reduced payment for a specific period, ensuring that consumers still have access to credit in the future,” she says.

Here are measures for individuals battling with debt:

1. Change the behaviour that caused the debt problem – acknowledge the challenge and evaluate your spending patterns, as well as your lifestyle. Once you have done this, cut down on unnecessary expenses and channel the money towards paying off your debt.

2. Check your monthly statements – this will ensure that you are paying for what you have spent on. If there is something you don’t recognise, call your bank immediately.

3. List all your debt – prioritise your debt either by interest rate or the balance of each debt. You can choose to tackle the highest debt first or start with the smallest balance. In addition, decide how much you can afford to pay every month for each debt. Be realistic about what you can afford and stick to your budget to avoid defaulting on any payment.

4. Don’t apply for too many loans or credit cards – this will show up on your credit report. If you have too many debts to service, you are probably only paying the minimum and not paying them off.

5. Set periodic goals – when you have listed all your debts and have a plan on how to pay them off, set a time frame and work towards achieving your goal within the set time.

6. Seek counsel from a debt counsellor. This can be highly effective as it is a closely-managed solution for those with serious debt problems. A formal debt rehabilitation programme has been specifically introduced by the National Credit Act. This allows individuals to enter into a debt repayment plan with their creditors and emerge debt-free after a certain period of time.

7. Track your progress – doing this every three months will allow you to review your payment plan and see if it is working or not. If the progress is positive, you will be encouraged and driven to look at the long-term benefit of being disciplined and committed to a debt free life.

Sibiya further advises that, during this challenging journey, avoiding more debt until all are paid off. “Discipline and commitment will lead you to financial independence,” she adds. It won’t be easy but you too can enjoy a debt-free life!

*Name changed.