The debt mediation process as introduced by the National Debt Mediation Association involves five steps. At the end of each step, your counsellor will assess your level of indebtedness and, if necessary, you will move to the next step.
Note that after you have completed the process and your debts have become manageable, there may be a price to pay over the long term: you may find yourself paying more interest over a longer period.
Step 1: No more luxuries
If you request debt mediation, you will have to agree to stringent measures such as liquidating your non-essential assets and restructuring your expenses to meet your essential needs only. This could involve selling your holiday home, jet ski, second car, boat, caravan or motorcycle; selling or cancelling timeshare, gym and other such memberships; moving your children from private to public schools; downsizing from a large home to a smaller one; replacing your luxury vehicle with an economical one; and suspending payment of your church tithes. You will also have to relinquish your credit and store cards, which will be cut up by the debt counsellor in your presence.
Once you have agreed to these lifestyle changes, which the debt counsellor oversees, the counsellor will, with the agreement of your creditors, start working through the following steps.
Step 2: Loan restructuring
Your debt counsellor will look at increasing the terms of your leases, mortgages and other credit agreements:
- Mortgages - can be extended by as much as 20 years (but the total loan term must not be more than 30 years);
- Vehicle financing - the lesser of 84 months (seven years) or 1.5 times the original term;
- Short-term loans of less than 12 months - three times the contractual term, including the expired term; and
- All other debts - five years.
Step 3: Lower interest rates
Starting with the debt with the highest interest rate, your debt counsellor will reduce, by a quarter of a percent at a time to the minimum of the repo rate (currently 7.5 percent), the interest rates on your debts until your repayments reach a level you can afford.
Step 4: Mortgage payment holiday
If you have a mortgage, your debt counsellor will apply on your behalf for a payment holiday of up to 12 months, while the terms of your other debts are fixed as per steps two and three. During the payment holiday, you must use the money you would have paid towards your mortgage to pay your other debts.
During this time, the interest on your mortgage will be capitalised to your bond at the repo rate.
Step 5: Further reduction of interest
With the measures adopted in steps two, three and four still in place, your debt counsellor will further reduce the interest rates on your debts (excluding your mortgage and car finance) to a minimum of zero percent for up to 12 months.
Debt counsellors have to go through steps one to five in order and cannot simply skip a step.
Five years after starting the mediation process, you should no longer be over-indebted, and you should be able to manage your remaining debt.