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MONEY CLINIC | I have received a R70 000 retrenchment payout. How should I manage my debt?

A Fin24 reader, having recently been retrenched, received a payout of R70 000. Seeking the advice of an expert on how to manage his debt, he writes: 

I am 28 and have been laid off at work. My take home package is R70 000.

I have an outstanding student loan of R19 000, two credit cards: one has a balance of R4 000 and the other a balance of R5 000. I also have a car and pay R3 000 per month, excluding insurance.

I do plan to seek employment and work on my personal business, but until then I need advice.

Should I pay the loan and credit cards to avoid overhead costs and use the remainder of the money to pay for the car until I find something? Or should I send the creditors my layoff letter and save some money?

I currently live with my parents and don’t pay rent as my family is supportive.

Neil Roets, founder and CEO of Debt Rescue, responds:

This is very good question, and there are definitely various factors to take into account when making this decision.

If you were to settle the unsecured debt, it would be a good idea to request a possible settlement discount on the student loan. On a rough calculation, if the unsecured debt of around R28 000 were settled immediately (loan and credit cards), it would leave enough funds to afford the vehicle instalments for around 12 months, while searching for employment or an income.

This would be the best recommendation, based on the information at hand, to reduce high interest that typically is charged on the unsecured debt.

Some consumers have accounts that have credit life insurance, which often contains cover for retrenchment. If you have such insurance, you can contact the creditors to establish if a claim can be lodged. The retrenchment cover should then cover the instalments for a certain period of time, and based on certain requirements. They will require supporting documentation (such as the retrenchment letter).

If there is no retrenchment cover, but the creditors grant a grace period (no payments being made to the account), interest will continue to be charged during the period of non-payment. If you consider this option, it is however important to continue paying at least the required instalments until you receive feedback and confirmation that it has been approved.

*Questions may be edited for brevity and clarity.

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