This article was first published in the third-quarter 2013 edition of Personal Finance magazine.
Debt counselling was introduced by the National Credit Act (NCA) in 2007. Since then, about 402 000 consumers have applied for debt counselling, over R10 billion has been paid to credit providers by consumers in debt counselling, and every month about R255 million is collected from consumers in counselling and paid over to their creditors. It is estimated that 110 000 consumers are in debt counselling.
Statutory debt counselling is designed to provide over-indebted consumers with an alternative to the traditional remedies for defaulting on your debt: administration and sequestration.
There are disadvantages to both administration and sequestration. For example, you may apply to have your debt placed under administration only if your total debt is less than R50 000, and the administration charges are high at 12.5 percent of every instalment paid. And when you go into sequestration, you lose your assets and have to obtain permission from the court-appointed trustee if you want to borrow money. Credit Ombud Manie van Schalkwyk says this is disempowering for the consumer.
Rehabilitation – and, to some extent, empowerment – of the over-indebted consumer is at the heart of debt counselling. One of its big attractions is that the process is regulated and designed to protect you from harassment from your creditors and the loss of crucial assets. Unlike sequestration whereby you must apply to a high court for a rehabilitation order, you can be rehabilitated as soon as the debt counselling process is terminated – with no negative listing remaining on your credit record.
But due to the poor drafting of the NCA and key court rulings in favour of credit providers, consumers in debt counselling can still find themselves cornered by their creditors and may feel let down by the process as a result.
Before you go the debt counselling route, you need to understand precisely what you are in for, including your responsibilities and the rights accorded to you by the NCA.
1. You may not qualify for debt counselling
Anyone can apply for debt counselling, but not everyone will qualify.
To qualify for debt counselling, you need to be over-indebted as defined by the NCA – that is, you are unable to meet all your financial obligations in a timely manner. This is determined by a debt counsellor and basically means that you can’t repay your minimum monthly instalments.
If a debt counsellor finds that you are not over-indebted, you cannot be placed in debt counselling. In that case, you must be issued with a letter of rejection, spelling out the reasons for the debt counsellor’s finding. This will leave you with no option but to negotiate with your creditors to have your debts “rearranged” – in other words, your creditors permit you to pay reduced monthly instalments over an extended period.
If you are not over-indebted but clearly in danger of becoming over-indebted, a debt counsellor may not place you under debt counselling but may ask your creditors to agree to rearrange your debts “on a voluntary basis”. This means that your creditors reserve the right to take legal action against you to enforce the credit agreement/s.
Kedilatile Malakalaka, debt counselling manager at the National Credit Regulator (NCR), says that if a debt counsellor concludes that you are not over-indebted and rejects your application, but you believe you are over-indebted, you may apply directly to a magistrate’s court for an order.
“A magistrate can order a debt counsellor to put a consumer under debt counselling,” Malakalaka says.
Paul Slot, president of the Debt Counsellors’ Association of South Africa (DCASA), says if you have no income, or if you will not be able to repay your debts in a reasonable time, debt counselling is probably not for you.
2. It’s going to cost you
The bad news for the over-indebted consumer is that debt counselling is not free. The good news is that the fees are regulated in terms of guidelines set by the NCR. This means that, according to the conditions of their registration, debt counsellors agree to charge no more than the fees stipulated in the guidelines and disclose to you upfront all debt counselling fees and provide them to you in writing.
The fees are as follows:
* An application fee. A fee of R50 is payable by anyone who applies to a debt counsellor for a debt review – this is an assessment of your finances to determine whether or not you are over-indebted and eligible for debt counselling.
* A rejection fee. If a debt counsellor determines that you are not over-indebted (in other words, not eligible for debt counselling), you are liable for a rejection fee of R300 (excluding VAT).
The application and rejection fees are the only fees that you must pay directly to a debt counsellor. All the other fees are worked into your restructured repayment, which is a single amount paid monthly to a payment distribution agency (PDA). A PDA is an entity accredited by the NCR to collect repayments from over-indebted consumers and to distribute them to credit providers (see point 5, below).
* The debt counsellor’s fee – also known as a restructuring fee – is a maximum of R6 000 (excluding VAT), or the first instalment of your restructured repayment, whichever is the lesser. This means that if your instalment is less than R6 000, your debt counsellor may charge you no more than the instalment.
* After-care fees. In addition to the debt counsellor’s fee, you will be required to pay a monthly after-care fee, which is paid to your debt counsellor. This is five percent of your monthly instalment to a maximum of R400 a month (excluding VAT) for 24 months. Thereafter, it decreases to three percent of the monthly instalment to a maximum of R400 a month, until you’ve paid off all your debt.
Slot says the fees listed above are the maximum fees and in practice the debt counsellor’s fees paid by consumers are usually much lower. “The average fee ranges between R1 500 and R2 800,” he says.
It is also important to know that, if you withdraw from debt counselling after the debt counsellor has finalised the negotiations with your creditors to restructure your debt repayments, you will be liable for a fee equal to 75 percent of the restructuring fee.
And if your debt counsellor fails to submit proposals to your creditors or refer your matter to the National Consumer Tribunal or a magistrate’s court within 60 days from the date of your application, you are entitled to a full refund from the debt counsellor.
3. You may be in for some legal fees
Any legal fees for which you are liable must be disclosed to you upfront and in writing by your debt counsellor.
A consent order, for example, will cost you R750. (A consent order is an agreement between you and your creditors on a debt rearrangement plan.) This fee may be deducted only in the second month of debt counselling. If your affairs cannot be resolved through a consent order and there are additional costs for further legal proceedings, these costs must be negotiated with you separately. Your debt counsellor should be able to produce pro forma invoices issued by his or her lawyers for legal services.
It’s important to find a debt counsellor who works with an attorney who is proficient in the complexities of debt counselling matters and who can bring your matter to court within the 60 days permitted for your debt to be restructured.
4. Some of your debts can be excluded
If, before you applied for debt counselling, you were in default and a credit provider began legal proceedings against you, that debt can be excluded from debt review. This underlines the importance of applying for debt counselling before it is too late.
If terms of the NCA, before a credit provider can launch default proceedings, the provider must notify you in writing of your right to refer the credit agreement to a debt counsellor, an alternative dispute resolution agent, the Credit Ombud or a consumer court in an attempt to resolve any dispute or agree on a plan to settle your debt. This notification from the credit provider is known as a section 129 notice, and it gives you 10 days in which to respond.
Malakalaka says that, although the NCR believes a section 129 notice is a notice of impending legal action in the spirit of the Act, according to recent case law, the interpretation is that the credit provider has already started “enforcing” the debt. In other words, the section 129 notice constitutes legal action and means that the credit agreement is excluded from the protection of debt counselling.
“Consumers need to make sure that they don’t get that letter by staying on top of their debts,” she says.
Slot says this interpretation is “grossly unjust to consumers” in that it denies you a remedy (debt counselling) offered to you in the notice.
“It could never have been the intention of the Act. Where legal enforcement has commenced, the consumer is also required to pay the legal cost of obtaining judgment, which is usually a High Court application,” Slot says.
The important thing to remember about a section 129 notice is that it must be delivered to you, and a credit provider must be able to prove that it was delivered. This is according to a Constitutional Court ruling (in the matter of Sebola versus Standard Bank).
In the past, it was sufficient for a credit provider to show that it had sent a section 129 notice to your address; it didn’t matter whether or not you had received it. Now, if you didn’t receive the notice and the credit provider cannot prove that it was delivered to you, you can contest proceedings on the basis that you did not receive it and were therefore unaware of your rights.
5. You’re not entirely safe from creditors
Although debt counselling is supposed to protect you from litigious creditors, your creditors can withdraw from the debt counselling process after 60 business days of the date on which you applied for debt counselling. This withdrawal is called termination, and it occurs when a credit provider issues you with a section 86(10) notice. In effect, it means that the credit provider pulls its credit agreement/s out of debt counselling, and can proceed with legal action against you. This notice must be given to you, the consumer in debt counselling, to your debt counsellor and to the NCR.
Section 86(10) of the NCA says that “if a consumer is in default under a credit agreement that is being reviewed in terms of this section, the credit provider … may give notice to terminate the review in the prescribed manner … at any time at least 60 days after the date on which the consumer applied for the debt review”.
In addition to default, the common reasons for termination include:
* The credit provider’s non-acceptance of the debt restructuring proposal put forward by the debt counsellor. If no court order has been obtained, the credit provider can withdraw from the process.
* Short payments, no matter how small the amount. If you agreed to pay your creditor, say, R500 a month and you pay even R10 less, you are in breach of the court order.
Slot says that, every month, credit providers terminate about 3 500 credit agreements and withdraw from the debt review process.
“You can be issued with a section 86(10) even if the matter [your application for a consent order] is pending before a court. Nowhere in the world can a notice by a credit provider terminate a court application. Many credit providers are terminating debt review after 60 days,” he says.
Malakalaka says interpretation of section 86(10) by case law has proved to be one of the biggest loopholes in the Act.
“We believe this is not in the spirit of the Act.
“It is a challenge in some magisterial districts for debt counsellors to get matters heard within the 60 business days. But if an order is granted within the 60 days and the consumer is making payments, then the credit provider has no legal right to do this. [However,] if there is a court order, it is binding on all parties. If the 60 business days lapse before the matter gets to court, then the credit provider has the right to terminate,” Malakalaka says.
6. You’re protected from further indebtedness
When you fall behind on your repayments, you become liable not only for the principal debt, but also for interest and collection costs. Collection costs refer to the amounts that a credit provider may charge to enforce the credit agreement. Enter the in duplum rule, which has been described as “the best-kept secret” in debt counselling.
In duplum, in our common law, limits the interest that a creditor may charge on an account in arrears. The common law rule holds that interest stops accumulating once the unpaid interest equals the outstanding debt. The NCA provides an extension of the in duplum rule by limiting the interest and “all” other costs that a creditor may charge on an account that is in arrears.
According to The Credit Guide by attorneys Nicky Campbell and Stephen Logan: “The NCA … broadens the previous protection to include collection costs that were previously excluded. The maximum amount that can be collected is double the capital amount outstanding at the time the consumer defaulted, including any interest or collection costs. The limit on interest and costs that may be charged therefore protects debtors from exploitation by creditors.”
For example, if you borrow R10 000, and end up owing interest and costs of another R11 000, and repay only R3 000 of the capital, the maximum amount that can be recovered from you is the unpaid capital of R7 000, plus interest and costs up to another R7 000. If, however, the interest and costs amount to only R4 000, the most that can be claimed from you would be R7 000 plus R4 000.
In other words, Campbell and Logan say, the following amounts, when added together, may not exceed the unpaid balance of the principal debt under a credit agreement as at the time that the default occurs:
* Initiation fee;
* Service fee;
* Cost of credit insurance;
* Default administration charges; and
* Collection costs.
Malakalaka says in duplum is a “good weapon” in the hands of a debt counsellor, because all charges stop when they reach [an amount equal to] the outstanding debt.
Slot agrees, but says it is “not implemented or applied by most credit providers”. The credit industry is waiting on the regulator to issue a non-binding opinion on its interpretation of the Act in respect of in duplum, he says.
7. You will not have access to more credit
In terms of the NCA, credit providers are prohibited from lending to consumers while they are in debt counselling, unless the loan is a consolidation loan and does not result in greater indebtedness.
When you enter into debt counselling, this is noted in your credit records (held with the various credit bureaus) and remains there for as long as you are in debt counselling.
The effect is that you are not eligible for more credit until you are issued with a clearance certificate by your debt counsellor. The repercussions of this are far-reaching, especially if you have a home loan, which usually has a 20-year term. Assuming you were granted a home loan last year and you enter into debt counselling this year, you will be issued with a clearance certificate only once all your debts – which includes your home loan – are paid. So, for you, that could be 19 years from now.
Logan says this ought not to be the case. “The idea is to terminate debt counselling as soon as the consumer is financially stable and able to resume normal monthly repayments. In most cases, consumers are able to resume their normal monthly repayments within five years.”
Given the cost of extended credit terms (the cost of paying over a longer period, such as a home loan extended from 20 years to 30 years), Logan says consumers should remain in debt counselling only in cases where credit providers have agreed to substantially lower interest rates.
“Debt counsellors have a perverse incentive to keep clients in debt counselling for as long as possible because of the annuity income that they derive (as a percentage of your repayments),” he says.
8. Not all debt counsellors are alike
The competency and skills of debt counsellors differ significantly, according to an assessment of debt counselling in South Africa by the University of Pretoria Law Clinic last year. Some debt counsellors are highly skilled and professional, whereas others provide substandard services to clients.
Finding a debt counsellor is easy, but finding a good one is anything but. Word of mouth is often a good gauge, but since people are generally ashamed of being in debt, not many will admit to being in debt counselling, let alone volunteer a recommendation.
Van Schalkwyk says it is “very difficult for a consumer to ascertain” whether a debt counsellor is any good. “Before engaging the services of a debt counsellors, it’s imperative to check the regulator’s website to ensure that the debt counsellor is registered.”
Logan suggests that clients do a site visit and check whether the debt counsellor’s offices appear neat and well organised. Malakalaka says you should also look out for the registration certificate bearing the NCR’s logo, as well as the window decal, which should be prominently displayed where the debt counsellor practises.
The number of years the debt counsellor has been in business and other qualifications, such as the counsellor also being an attorney, are good indicators of competence, he says.
Call the NCR on 0860 627 627 for a list of registered debt counsellors or go to www.ncr.org.za and click on “Register of registrants” at the bottom of the home page.
Only people who are qualified and who are registered with the NCR may offer debt counselling services. “Also find out if the they belong to an industry association, which is usually a good sign,” Van Schalkwyk says.
When a credit provider gives you credit without checking your credit record, or fails to determine that you understand the risks and costs of the credit agreement, the provider is guilty of what is known as reckless lending. The NCA makes provision for relief for consumers who have been granted credit that they could not afford.
9. Reckless lending: you have recourse
When assessing whether or not you are over-indebted, a debt counsellor will check for credit agreements that may have been entered into recklessly. If a debt counsellor believes that your creditors extended credit to you recklessly, he or she is obliged to issue a proposal to a magistrate’s court recommending reckless lending. (Note that this applies only to credit agreements entered into after 2007.)
Even if the debt counsellor finds that you are not over-indebted, you may still be the victim of reckless lending. If this is the debt counsellor’s finding, he or she must give you written advice of your right to approach the court within 20 business days (from the date of issue of the rejection letter) to have the credit agreement/s declared reckless and to apply for an order to have your debts rearranged.
Only a court can declare that a credit agreement is reckless. If a court does so, the credit agreement may be fully or partially unenforceable and the credit provider may lose all or part of the money advanced to you. This means that any money owed by you is no longer owed, and any money already paid is either refunded to you or forfeited. The court decides what is appropriate in the circumstances.
Note that you can’t claim that you are a victim of reckless lending if you were not fully truthful when the credit provider did an affordability assessment on you. If the court or National Consumer Tribunal finds that you failed to provide truthful answers and that this significantly affected the credit provider’s ability to make a proper assessment, you lose your right to have the agreement declared reckless.
10. You can’t wash your hands of your debts
Being in debt counselling is not a “get-out-of-jail-free” card as many consumers mistakenly believe. Your debt is still your responsibility. Van Schalkwyk is emphatic about this: “Debt counselling is not your saviour. The consumer in debt counselling needs to take responsibility and to be involved in every step of the debt counselling process. This means making sure that your debt counsellor is doing what they are supposed to be doing. You cannot abdicate responsibility in this process.”
Logan advises you to check that your payments to the PDA are being paid over to your creditors, and make sure that these payments are reflected in your monthly statements from your creditors.
Van Schalkwyk says that debt counselling often falls down at the proposal stage: “The proposal will go to the credit provider, who will, in turn, make a counter proposal. You need to know what that proposal is and if you can afford it. You need to find out what the process is and keep up to speed with your debt counsellor.
“It’s onerous, I agree. But the risks of not being informed every step of the way are way too high: you stand to lose your home or your car.
“We find that a lot of problems with debt counselling stem from the lack of communication between consumers and debt counsellors, who are their agents, appointed and paid for. Consumers are only too happy to hand over their problems to their debt counsellors, in the misguided belief that all their problems are solved. That is a very dangerous attitude to adopt. Your problems have not gone away, and they are still your problems,” Van Schalkwyk says.
Slot says debt counselling does not provide you with a “payment holiday”.
You must make debt payments every month from the first month that you apply for debt counselling, and while you are in debt counselling, you must make sure that you never miss a repayment, because this will automatically nullify the process and your credit providers will be entitled to take legal action against you.
What is debt counselling?
Debt counselling is a regulated process whereby a debt counsellor negotiates, on your behalf, with all your creditors, to have the term of each credit agreement extended and the instalments reduced. Your debt counsellor may also appeal to your creditors to reduce the interest rate/s on your credit agreements so that you can afford to pay off all your debt as soon as possible.
What is a debt counsellor?
A debt counsellor helps over-indebted consumers to become debt-free and credit-healthy by way of the regulated debt counselling process. A debt counsellor must be a natural person – in other words, a company cannot be a debt counsellor – qualified by and registered with the National Credit Regulator. In terms of the National Credit Act, a debt counsellor may not work for a credit provider, debt collection agency or credit bureau. A debt counsellor is not a financial adviser and hence is limited to dealing with over-indebtedness and the restructuring of your debts.
NOT ALL CREDIT IS ‘EQUAL’
Not all accounts on which you are charged interest are classified as “credit agreements” in terms of the National Credit Act (NCA). Municipal accounts, cellphone accounts, legal bills, school fees, and doctors’ and hospital accounts are examples of “incidental credit agreements”. With these types of accounts, the interest falls due only if you fail to pay for the goods or services on time, usually within 30 days.
In effect, these accounts are treated as if they were a credit agreement only if you default on the payment and are charged interest.
If you are over-indebted, your debt counsellor should be able to include incidental credit agreements in debt counselling. However, some creditors – mobile communications companies, in particular – argue that incidental credit agreements ought not to be included in debt counselling.
Kedilatile Malakalaka, manager of debt counselling at the National Credit Regulator (NCR), says in terms of section 86(2) of the Act, credit agreements (including incidental) where legal steps have not been taken should be included in a debt review. “Non-compliance by credit providers in this regard should be reported [to the NCR],” she says.
The Act caps the interest rate that can be levied in terms of an incidental credit agreement. It is currently two percent a month.
The Act defines an incidental credit agreement as an agreement in terms of which an account was tendered for goods or services that have been provided to a consumer, or for goods and services that are to be provided to a consumer over a long period of time, and where either or both of the following conditions apply:
* A fee, charge or interest became payable when payment of an amount charged in terms of that account was not made on or before a determined period or date; and/or
* Two prices were quoted for settlement of the account, the lower price being applicable if the account is paid on or before a determined date, and the higher price being applicable due to the account not having been paid by that date.