Question:
I have a bank overdraft, credit card and personal loan. I had to close my account due to high bank charges.

What is the best way to make arrangements to settle with the bank on a monthly basis?

I am trying to get my finances in order, because my expenses exceed my income. I do not overspend or live lavishly, yet my basic expenditure is more than I earn.

The bank wants me to sign an Acknowledgement of Debt (AOD).

I need some advice as I do not want to commit myself to something I will not be able to pay back. I am not refusing to pay, but will like to pay the minimum.

Answer:
You need to talk to the bank and agree on a repayment schedule that will be acceptable for you both. However, when you signed up for the credit card and the overdraft with the bank you agreed to the terms and conditions of the loans — they therefore have the upper hand.

If the debt is unsecured (you do not own or hold any assets) and you default it will be difficult to recover any money. This is why they asked you to sign an AOD as it lays out the conditions of the new agreement.

It will state that in the event of default you will be liable jointly and severally for all legal costs incurred in the collection process. These costs include yours and theirs. It will also state that you must pay commission on capital, interest and costs as well as interest at an agreed rate. This interest will be calculated and capitalised on the same day of each month, in arrears, on the outstanding balance until the total amount due has been paid.

The problem with this is that not only will you have to pay the loan plus interest, but also a fee (it could be as much as R500 per payment) for the collection process.

If at all possible try to avoid this and come to an agreement whereby you pay off the capital over a set time period. Of late I have seen many people who are paying off debt under AOD agreements and when you look at the schedule of charges it becomes apparent that they will really battle to pay off the loan.

If your expenses exceed your debt you may want to look at the possibility of going for debt review. A debt counsellor will be able to renegotiate the terms of the loan on your behalf to ensure that you can afford the payments.

If you manage to renegotiate with the bank, but your expenses still exceed income you will slowly fall behind again. You have to get your cash flow to the point where you can pay off some of the debt. Scrutinise your budget to see where you can cut.