Shedding light on debt counselling’s lesser-known predecessor, Forbearance

You’ve probably heard of debt counselling before – it’s that ominous last resort when you simply can’t afford to pay off your debts. Although it can be a saving grace when you’re down on your luck, it’s something we all hope to avoid in our lifetime. The reality, however, is that life is entirely unpredictable and situations or forces beyond our control may conspire to lead us down the winding road to bad debt. You miss one payment, then the next, and before you know it, your hand is forced and debt counselling seems to be your only solution.

But if you find yourself treading the treacherous path to defaulting on your debts, you may be pleasantly surprised to learn that debt counselling isn’t your only lifeline. We sat with Peter Mphahlele, Chief Risk Officer for Debt Counselling and Customer Forbearance, and Raphael Kotler, Manager of Absa Vehicle and Asset Finance (AVAF) Collections Strategy, to discuss debt counselling’s relatively unknown predecessor; Forbearance.

So what exactly is Forbearance and who is it for?

Forbearance or Distressed Customer Solution is essentially a less formal step before debt counselling. It’s a policy put in place by the bank, in line with the regulatory requirements of the National Credit Act (NCA), to advise and assist customers experiencing financial difficulty.

Peter and Raphael are in agreement that Forbearance suffers from a lack of awareness in the public space. It’s a service that can benefit a wide range of distressed customers, but is underutilised due to this relative obscurity. Raphael goes on to describe the two main ways in which customers initiate the Forbearance process:

The proactive approach:

This generally involves a customer identifying their need for assistance – whether they foresee difficult financial times ahead or have already missed a payment and realise that they need to take action – and contacting the bank before their situation becomes untenable. This approach is highly desirable and to be encouraged, as it can prevent the problem from compounding and creating even greater challenges in future. Prevention is better than cure, after all.

The reactive approach:

This is the most common way in which customers become aware of the Forbearance process. When a customer is in arrears and misses a significant number of repayments, the bank’s collection team will contact them to assess the situation and take action. The objective is to determine if there is a willingness by the customer to pay their debts, if there’s an inability to do so due to financial difficulty, the bank can actively help the customer resolve the situation.

“Ultimately the customer should have an understanding of their own financial situation” Peter says, “If you miss a payment and you know it’s a once-off that you can resolve next month, then that’s fine. But if you can see an impending problem and you know you’re going to have difficulty in meeting your payment obligations in the next few months, we encourage you to contact us. We are trying to build this relationship of trust and open, honest communication so that we can help. And if the customer is proactive and contacts us before the problem becomes too serious, all the better.”

In essence, if you think you may be approaching a period in which you’ll struggle to pay your debts, take action and seek help from the bank. The Forbearance process is entirely free for Absa customers and the team will assess your individual situation and subsequent needs to provide a personalised solution for you.

What does Forbearance actually do and how will it help?

Upon assessment of the customer’s debts, personal situation and repayment capability, Raphael describes the main outcome of the Forbearance process as being a temporary or permanent reduction in one’s obligation to the bank.

He illustrates this with two examples:

Example 1:

A seasonal contract worker reaches the end of a contract and will be out of work for the next three months and therefore unable to pay the full amount on their monthly home loan repayments during this period, so they initiate Forbearance. The bank then grants the worker a short-term payment reduction for this period to ensure they don’t default on their debts. After this period the repayment amount reverts back to its original value.

Example 2:

A couple finds that their monthly income is drastically reduced after one of them is retrenched, thus they are unable to afford their monthly vehicle repayment amount of R5 000. Through Forbearance, the bank permanently restructures their loan, extending the term and reducing the repayment amount to R2 500, which the couple can afford.

It may seem that the bank is losing out in an effort to save the indebted customer, but Peter and Raphael argue that this is a highly beneficial situation for both parties. The Forbearance process not only serves to strengthen the relationship between bank and customer by defying the stigma that banks are only there in the good times, but by relaxing the loan, rather than allowing it to default, the bank also decreases the ugliness of subsequent legal action.

But why should I choose Forbearance over Debt Counselling? 

Debt counselling is often inevitable, particularly for customers who accrue debts at more than one bank, and it can be a highly beneficial and entirely necessary process for a customer deep in debt. However, if you have the option of initiating Forbearance before or instead of debt counselling, there are a number of benefits.

Whereas debt counselling involves a number of external parties, such as the debt counsellor themselves, legal and National Credit Regulator representatives, and others, Forbearance is kept between the customer and the bank. Additionally, debt counselling is a premium service and comes with costs that you may wish to avoid, considering your currently indebted situation. But the biggest difference is that during debt counselling your credit record is flagged at the National Credit Bureau, meaning that you are ineligible for further lending during this time. This flagging doesn’t take place during Forbearance and your record remains untainted.

Don’t wait until it’s too late

In closing, Peter and Raphael stressed that customers shouldn’t hide their financial situation from their bank. The bank isn’t just interested in taking your money when you’re thriving, but instead wishes to open a line of communication and co-operation to help you to proactively manage your finances and avoid unpleasant situations when times are tough.

Build a relationship of trust and honesty with your bank and you may just find that they become your lifeline when you need it most.

If you have any additional queries about your credit record, forbearance or debt counselling, you can phone us on 086 122 2272 or go to www.absa.co.za