Government moots debt forgiveness for consumers

Government moots debt forgiveness for consumers

The Department of Trade and Industry has suggested to Parliament that the National Credit Act should be changed to allow the Minister of Trade and Industry to announce debt relief measures for those who cannot afford to pay their debt .

Parliament’s Portfolio Committee on Trade an Industry first mooted the idea of debt forgiveness in March this year, when the National Credit Regulator presented its report on the local credit market.

According to Fin24.co.za, a discussion document was then presented to Parliament on 16th May by MacDonald Netshitenzhe, of the consumer and corporate division of the DTI, the National Credit Act currently makes no provision for the minister of trade and industry to provide any debt relief in specific circumstances. The discussion document recommended the development of criteria under which retrenched consumers among others may qualify for debt relief.

It could be a matter of months before any details emerge on what these debt relief measures should be, how the debt relief measures should be put into place and who they should apply to. It may only be for retrenched consumers, victims of unlawful deductions or those who fall prey to reckless lending. This sounds palatable.

However, the very idea of creditors being forced by law to simply write off debt, because consumers’ circumstances have changed, raises alarm bells. Banks will effectively be forced to start forecasting the likelihood of a person losing their job, which is impractical to say the least.

Banks and lenders may be tempted to reign in the granting of credit. However, Section 60 gives every consumer the right to apply for credit and the exclusion of particular groups from accessing credit, simply on the basis of income received would be a contravention of this right. The exclusion would only be justifiable if the person cannot in fact afford the credit, at the time of assessment. A speculative projection of how the applicant’s circumstances may change, could be challenged.

Creditors may then be forced to raise the threshold of what they deem affordable, as “affordability testing” as prescribed by the NCA, will not be enough to mitigate against the risk that the government may force the lender to write off the debt if the consumer’s circumstances change. Thus, the creditors must pay for something they have no control over.

Further, if an irresponsible consumer borrows, he or she may not have an intention to honour the debt and think they can simply rely on the debt relief measures to get away with non-payment. Those who do conduct their finances responsibly, may also have a case that they are being discriminated against for being responsible.

Discussions will continue, as various stakeholders have aired their views that there is no need for a debt relief mechanism. The Banking Association of South Africa for instance, told the Portfolio Committee on Trade and Industry that it does not support a debt forgiveness program. Head of the Banking Association, Cas Coovadia said it would undermine the banking system’s foundational principles of efficiently and legally lending money to borrowers and to collect the repayments for these loans. Non-adherence to this principle, “will increase the risk carried by depositors and savers, will impose a cost on society and will limit credit providers’ ability to extend credit,” said Coovadia.

Over-indebted consumers have access to debt counselling and consumers have access to regulatory structures that can offer relief in instances where reckless lending has taken place, or a consumer may be subjected to unfair credit practices. Coovadia told MP’s that a distinction must be made between debt forgiveness and debt relief.

The National Credit Act provides for debt relief through debt review, which allows consumers to continue making repayments at lower instalments in order to cope with their debt without being subjected to legal action by creditors.

It is arguable that debt review has not worked for many and so perhaps it might be conceivable that making debt counselling more effective, and even have the mechanism adjusted in a manner that it can more effectively cater for lower-income earners, would be sufficient.

Further regulation itself may also need to become more effective. Long delays and a lack of efficiencies to deal with consumer complaints, has resulted in a loss of credibility for some regulatory institutions.

Our law also provides for alternative debt relief measures, for example the Insolvency Act of 1936, allows one to apply for voluntary surrender of one’s estate. Sequestration provides quick relief and enables the consumer to “get their house in order”, while they remain listed on the credit bureaux as being insolvent. After four years, the consumer is most likely to have improved financially and will have learned to cope largely without credit at their disposal. He or she can then apply to court for rehabilitation and start afresh.

Sequestration may not be suitable if the consumer does not want to lose his or her house or car, but they can then opt for debt settlement negotiation, or for reduced instalments outside of the debt review mechanism.

Debt review always results in the consumer spending many more years to repay their debt, than would have been the case if they paid normally. This is often a gripe for most who undergo debt review. However, debt review can also be cancelled, once the consumer is back on his or feet and financial circumstances have improved.

Debt and the defence of prescription clarified

Debt and the defence of prescription clarified

The collection of prescribed debt has been is now prohibited. No person may sell a debt under a credit agreement that has been extinguished by prescription under the Prescription Act 68 of 1969. Further, no person may continue the collection of, or re-activate a debt under a credit agreement where the debt has been extinguished by prescription or where the consumer could have raised the defence of prescription had the consumer been aware of such a defence.

The above prohibitions were incorporated into the National Credit Act 34 of 2005 by the National Credit Amendment Act 19 of 2014 and are now entrenched in section 126B. The National Credit Amendment Act 19 of 2014 was assented to on the 16th of May 2014 and came into effect on the 13th of March 2015.

Albeit that the sale, collection and re-activation of prescription is now prohibited, many debt collectors continue to buy debt books that include prescribed accounts and some debt collectors continue to harass consumers for prescribed accounts and in some instances, judgments are even granted in respect of prescribed accounts as the defence of prescription and/or issue of prescription was not placed before the Court at the time the judgment was granted.

There is even evidence of companies listed on the JSE, who part-take in these unlawful practices. One such company is on record as saying that it does not collect on prescribed debt, although it admits that mistakes can happen. The number of such incidents need to be examined to test the mettle of this explanation.
Thus, where demands for payment are made to consumers, consumers must be prudent enough to determine the lawfulness of the creditors’ demands for payment. Threatening letters of legal action being taken against the consumer are par for the course. The tone and letter of these letters smack of intimidation and consumers, being unaware of their rights, cave in under the pressure. When challenged, some debt collectors will go as far as saying the prescription was broken when the consumer made payment toward the account. Remember, this is not correct. To “break” or interrupt prescription is essentially unlawful in terms of Section 126B of the National Credit Act 34 of 2005.

The In Duplum Rule – How much do you owe?

In Duplum – How much do you owe?

Section 103(5) of the National Credit Act limits the amount that a creditor may recover for a credit agreement, by limiting the collection costs that may be charged if a consumer was to default on a credit agreement.

The maximum amount that can be collected is double the capital amount outstanding at the time a consumer defaulted, including any interest or collection costs. This provision is essentially an extension of the in duplum rule that is found in our common law and basically limits the interest and all other costs that a creditor may charge on an account that is in arrears. The limit on interest and costs that may be charged therefore protects debtors from exploitation by creditors.

For example, should the consumer borrow R10 000, end up owing interest and costs of another R11 000 and repay only R3 000 of the capital, the maximum amount that could be recovered would be the unpaid capital of R7 000 together with interest and costs up to a maximum of a further R7 000. If however, the interest and costs only add up to R4 000 then the maximum that could be claimed would be R7 000 plus R4 000.

Put differently, 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
• interest
• cost of credit insurance
• default administration charges
• collection costs

This is a departure from the past when collection attorneys and debt collectors could collect far more than was fair, by continuously adding fees and interest to an account. Often the fees and interest added could far exceed the initial amount borrowed.