The case of a single mother whose debt has ballooned rather than decreased while in debt counselling highlights many of the problems with debt counselling.
Carol is a nurse in her early 50s. She has two dependent children and an ex-husband who doesn’t pay maintenance. About 11 years ago, Carol bought a house and obtained a bond for R380 000. About five years later, she started having financial difficulties: her mother got terminally ill and it fell to Carol to take care of her, which meant she took a knock in her earnings.
She then got sick, yet was able to take an additional bond on her property which had appreciated in value. Consequently, her home loan debt more than doubled to R850 000. The extra money was used to fund living expenses for a year and pay off medical bills and other debts.
By the time she went into debt counselling, almost five years ago, she had more than R300 000 in unsecured debt – 12 credit cards and two personal loans – plus her home loan and a car loan.
On signing her up, Carol’s debt counsellor ought to have done a reckless lending assessment. But he did not do one and Carol didn’t know he had to. Had he done so, some of her debt would have been found to be reckless. Had the bank that gave her the second home loan done a proper affordability assessment, it’s unlikely that she would have qualified for that bond, because she needed to borrow money to fund living expenses, which indicates that she was already over-indebted.
She says she acquired the credit cards after being granted the second home loan.
Then about two years into debt counselling, Carol was notified by her debt counsellor that two of her creditors – the banks that granted her a personal loan and a bond – were taking her to court to extract these debts from debt review. They claimed that, in terms of the court-approved debt restructuring plan, they would never be paid all that was owing to them.
On the advice of her debt counsellor, Carol defended the matter at a cost to her of R2 000. The lawyer representing Carol told the court that the debts in question could be reckless.
With that, the creditors withdrew their application and she went back to paying them according to the original arrangement. The magistrate didn’t declare the credit agreements reckless and her debt counsellor apparently made no effort to have these credit agreements set aside.
Perverse incentives are probably the reason her debt counsellor failed to have her debt declared reckless: the more Carol pays to her creditors, the higher his “after-care” fee: five percent a month of her total instalment.
What makes her case all the more tragic, is that almost five years into debt counselling, Carol’s home loan now stands at R1.2 million. It has escalated because she has been paying such a small portion of her instalment (R3 800); which is not even covering the interest of R8 000 a month.
Carol’s debt counsellor told her that all of her debt except for her home loan would be paid off in five years, but she can see that they won’t and she’s petrified of losing her house. “It’s all I have; it’s my pension,” she says.
Carol may not be totally blameless, but her creditors, her debt counsellor and the courts have failed her. She got into debt because of unforeseen circumstances and made bad decisions along the way. But she should not be paying for reckless lending.