Debt counselling may not shield you from your creditors if they send you a letter of demand before you have applied for debt counselling.
The Supreme Court of Appeal (SCA) ruled this week that a creditor that issues you with a letter of demand – in legal terms, a section 129 notice – before you have applied to have your debts reviewed is allowed to take legal action against you to recover an outstanding debt.
If you then apply for debt counselling, the process will exclude any debt for which you have received a letter of demand.
The case that came before the SCA dates back to 2008, when the National Credit Regulator (NCR) asked the North Gauteng High Court to clarify several aspects of the debt counselling process, Peter Setou, the senior manager of education and strategy at the NCR, says.
The country’s four major banking groups – Absa, First Rand, Nedbank and Standard Bank – took some of the findings of the High Court on appeal to the SCA.
If you become over-indebted, you can ask a debt counsellor to restructure your repayments, Setou says.
Normally, all your credit agreements will be included in the debt restructuring process, he says. As a result, your creditors cannot enforce the credit agreements and take you to court (issue a summons) or attach your assets to settle any outstanding debts, Setou says.
But there is an exception in terms of the National Credit Act (NCA): if a credit provider takes steps to enforce a credit agreement before you apply to have your debt restructured, the relevant credit agreement is excluded from the debt review process.
“In practical terms, this means that the credit provider can take further legal action against the consumer to enforce the agreement even though they are under debt review, because that particular agreement is excluded,” Setou says.
There was some confusion over when a credit provider is regarded as having begun to enforce a credit agreement and therefore at what stage the agreement is excluded from the debt review process.
The NCA states that before a credit provider can enforce a credit agreement, it must issue a consumer with a section 129 notice that warns that legal action may be taken against the consumer unless he or she takes action to reach an agreement with the creditor about repaying the outstanding debt. Such action would be for the consumer to approach a debt counsellor, an alternative dispute resolution agent or a mediator, a consumer court, the National Consumer Tribunal or an ombudsman.
The section 129 notice must also state that if you have defaulted on your debt for at least 20 business days, the creditor will pursue legal action against you after a further 10 business days have lapsed.
The NCR argued that the notice to a consumer is only a notification and not a step to enforce the credit agreement, because, if you were even one month in default, your credit provider could issue you with a section 129 notice and you would not be able to apply for debt restructuring to help you pay back your debts, Setou says.
The banks argued that a creditor starts to enforce a credit agreement once it issues a section 129 notice, and therefore the relevant credit agreement is excluded from the debt review process.
The SCA agreed with the banks’ interpretation of the NCA, saying that as soon as you receive a section 129 notice in respect of a credit agreement, that agreement is excluded from the debt review process. However, you can still apply for debt review in respect of the other credit agreements, Setou says.
How interest can be charged on outstanding debt
A Supreme Court of Appeal (SCA) ruling this week means that as long as your credit agreement covered by the National Credit Act (NCA) is in default, your interest and the other costs on the contract can never exceed the capital amount you owe.
The ruling has major implications for the banks, particularly with regard to long-term contracts such as home loans, vehicle finance, overdrafts and credit card facilities, and the Banking Association says the ruling could result in banks enforcing agreements on which you default more strictly.
The SCA’s ruling dealt with how the common law in duplum rule applies to agreements regulated by the NCA.
The common law in duplum rule states that the amount of interest you are charged on a credit agreement may not exceed the outstanding capital amount you owe. Once the interest is equal to the unpaid capital, further interest may not be charged.
However, once you make a repayment on your debt (as you would if you were under debt review), your payments are first set off against the interest and will therefore reduce the interest. You may then be charged more interest until the interest again equals the outstanding capital amount.
The country’s four major banks contended that the common law in duplum rule should be applied to over-indebted consumers who are under debt review.
But the SCA ruled that the relevant section in the NCA differs from the common law in duplum rule in that, with agreements under the NCA, the interest, as well as the costs of the agreement – such as the initiation fee, service fee, credit insurance, default administration charges and collection costs – may not exceed the outstanding capital amount.
The SCA’s ruling interprets the NCA to read that when the total charges (the interest and fees and costs) equal the amount of the unpaid principal debt, no further interest may be levied until the amount in default is paid off, even if you make payments in the interim.
“The court said this section of the law helped to prevent unreasonable over-indebtedness of the consumer,” Peter Setou, the National Credit Regulator’s senior manager of education and strategy, says.
Nicky Lala-Mohan, a general manager at the Banking Association South Africa, says the ruling may compel credit providers to enforce agreements vigorously where consumers default and fail fully to pay the default, however small.
For example, whereas previously a credit provider may have waited three months before it sent you a section 129 notice, it may now decide to send you one as soon as you default, Lala-Mohan says.
As a result of the ruling, he says, credit providers may change their credit assessment criteria and the terms of credit extension to avoid additional costs and risks should a consumer default. These changes may detrimentally affect your ability to access credit, the terms and conditions under which you are granted credit, and the cost of credit, Lala-Mohan says.