A DIY DEBT REPAYMENT PLAN
TOUGH TIMES: COVID PANDEMIC HAS BEEN FINANCIALLY TAXING ON A LOT OF PEOPLE Get up to 20% off outstanding amount by engaging with a collection agency.
Your debt may have taken on a life of its own during the Covid crisis. In this article we are going to give you the tools to put together a clearly formulated debt repayment plan to pay off all your debts in a year.
We’ll illustrate how renegotiating your monthly instalments can help you get rid of your debt and provide an easy-to-follow script to help you renegotiate repayments.
The silver lining
Being handed over could actually make it easier to repay your debts. Remember, unlike debt counselling or consolidation, debt collection agencies are only concerned with collecting the money on the account that’s been handed over.
You have more room to renegotiate your debt repayments than you might think, especially once you get handed over. It’s better for a company to get back all the money and interest over a longer period than getting no money at all because you defaulted.
Most of us never learn how to ask for discounts or extended repayment periods, but you can get as much as 20% off the outstanding amount if you engage with the debt collection agency.
DIY debt repayment plan
This debt repayment plan works with the salary you’re currently earning, but only if you don’t take on any more debt.
If you are reliant on short-term debt like a credit card to get through the month, exclude that account from this calculation.
Once all your other debts have been paid off, you’ll have more disposable income to pay off that
account and make it through the month on your own steam.
Step one: see the full picture
This first task is the most unpleasant, but it’s impossible to defeat the monster unless you know what you’re fighting.
Make a list of all your outstanding debts and write down the minimum amount you need to repay every month. Also write down how many more months of outstanding payments you have.
Don’t add them all together just yet. Take one unpleasant bite at a time.
Step two: determine flexibility
Some creditors are more flexible than others. Many banks introduced payment holidays to help desperate South Africans navigate this crisis.
You can also negotiate repayment terms with smaller institutions like your doctor’s practice or your child’s school.
Accounts that have been handed over to debt collection agencies can be flexible, if you remember to ask. Think of the debt collector as a mediator.
Rate your debt by flexibility on a scale from one to three. Debts with no room for negotiation, like micro loans, would get a rating of one. Debts that you might pay off later or in smaller instalments, like an outstanding amount at the pharmacy, gets a rating of three.
Step three: write down what you can afford
If you’re feeling overwhelmed by your debt, it’s probably because your monthly repayments are higher than you can afford to re
pay in a month.
Write down how much money you can realistically pay towards your debts every month.
Add up your minimum repayments.
Deduct what you can afford from your minimum repayments due.
The answer is your goal in step four.
Step four: Negotiate
Your entry-level goal in this step is to reduce your monthly repayments to get to the amount you can actually afford to repay, as identified in step three. Your stretch goal is to reduce it even more so you can contribute whatever’s extra towards repaying high interest rate accounts.
Remember your flexibility list? It’s time to contact all the threes. In the case of your child’s school or your doctor’s office, you might get an even lower rate by having the conversation face-to-face.
If your minimum repayment amount is for a period less than a year, you might reduce the monthly rate by extending your repayment period to a year.
Once you’ve done all the threes, target the twos. By the time you’re done with those, you should have the confidence for the ones.
If you reduce your monthly payments without speaking to the company you owe money to, you’ll be handed over.
Top tip: If you are negotiating with a debt collection agency, ask them if they can offer a discount on your debt if you agree to pay it off over a year.
Case study
You can also negotiate repayment terms with smaller institutions like your doctor’s practice or your child’s school.
A spreadsheet by VeriCred (available on this link: https://bit.ly/3DL57MI) offers three possible debt repayment scenarios. Scenario number three follows our debt repayment plan.
Palesa earns R15 000 a month. She has set aside R4 500 per month to repay her debts. Before her negotiations, her monthly repayments amount to R5 079.
In Scenario 3, she adds the money she saves by reducing her minimum payments to the least flexible and highest interest-rate accounts. Once an account is paid off, she adds the money that would have gone to that account to the next account.
If she follows this strategy for a year without taking on any new debt, she can repay her debts within 12 months. Every additional cent she puts towards repaying debts will make the time she spends repaying even shorter.
Enduring some discomfort for a few months will speed up the debt repayment process.
For example, Palesa tends to include treats like hot chocolate in her weekly shopping. If she decided to forego this, she would save around R60 per week, or R240 per month. Adding those savings to her debt repayment plan will help her get out of debt faster so she can go back to indulging in her favourite treats.
This article was first published on Just One Lap