It is a well-known fact that South Africa has a very high percentage of over-indebted consumers with impaired credit records. This crisis is a result of multiple factors; a major one being the lack of financial literacy that exists in terms of debt-management. 

In this article, I will briefly discuss some of the most pertinent debt management strategies and the rationale behind each of them. Since this field of financial planning is a broad one, and the course of action appropriate to each individual scenario will be different, we urge you to consult with your financial advisor, or to get in touch with us should you not have one. 

Before the management process can be looked at, you should first be able to identify whether your debt is short-term (resulting from an unexpected emergency) or whether it is a long-term debt that has led to you not being able to meet your financial obligations. 

During the last year for instance, we have found that many of our clients have incurred short-term debt as a result of loss of income, incidental expenses and retrenchment. 

Once you have established the reason(s) for incurring the debt, a proactive management plan can be put into place. 

Although not an exhaustive list, the following strategies can be adopted in order to get your debt under control: 

• Establish the interest rates being paid on loans, overdrafts, store – and credit cards. 
• Make paying off the “most expensive” debt a first priority. Your most expensive debt will be those outstanding accounts with the highest interest rates. 
• In light of the current low interest rate environment, we are presented with an opportunity to pay off more of our principal debt than what was possible pre-lockdown. 
• Make sure to keep up the minimum repayments on the “less expensive” debt while the former takes priority. 
• Once you have settled your debt with the highest interest rates, use your newly freed up cash to settle any outstanding balances. 
• If possible, consolidate the most expensive debt into a larger loan with a lower interest rate. 
• Create a regular monthly budget so that you can decrease unnecessary expenditure in order to free up more of your income, which can then go towards repaying your debt. 

There are situations where the liquidation of investments in order to settle debt may be justified. It is highly recommended that you consult with a qualified financial advisor prior to going this route, as your potential investment return (interest rate) would have to be compared to that of the debt you want to settle. There may also be capital gains tax implications depending on the investment(s) you intend to realise, which further necessitates obtaining expert financial advice. 

In severe situations, you may have to apply for a bank loan to settle your original debt, although this is not an ideal scenario as you would effectively be replacing one type of credit with another, but it does allow for an extended repayment period and smaller instalments. 

Something else to keep in mind is that borrowers are far more reasonable towards consumers that have a plan to repay them, as opposed to those who attempt to avoid their obligations. 

If your debt is completely unmanageable, you may need to consult a debt counsellor to assist in restructuring your debt in a way that results in the satisfaction of creditors, while still allowing you to meet your basic financial needs. This option is preferrable as it is designed to resolve matters in a way that leads to the repayment of debts, and to avoid costly court cases and insolvency. 

Should you find yourself in need of a personalised debt-management strategy or general financial advice, please contact us so that we may assign a qualified representative to you.