Debt review is not a cure all solution

Gareth Stokes, FAnews Online Editor

A headline on iol.co.za caught my attention recently. It read: Fight to save house after R260 short-payment… The article which first appeared in The Mercury newspaper details how a Reservoir Hills family was forced to turn to the Durban High Court to obta

The article raised a number of points to debate. First among these is the on-going heavy-handed treatment meted out by South African banks to their customers. Now don’t get me wrong. I firmly believe in a no-nonsense approach to debt defaulters; but a blanket “without further notice” attitude to repossess someone’s home cannot be condoned. In this case a simple telephone call could have resolved the issue, which stemmed from an apparently genuine mistake – the homeowner having transferred R3600 instead of R3858.

The second consideration is whether the debt review process put in place by the National Credit Act is producing the desired results. It is all fine and well to place an individual on debt review, notify the creditors, and agree a single monthly repayment; but a total waste of time if the individual cannot service this amount.

Is it time to rethink debt review?

This fact is not lost on the National Debt Mediation Association (NDMA), a National Credit Regulator-approved not-for-profit organisation established by the credit industry to provide debt mediation. Magauta Mphahlele, CEO of the NDMA believes that a single rational process for over-indebted consumers is desperately needed. Her view is informed by the 4000-plus complaints and 4800-plus enquiries dealt with by the organisation over the past two years. It appears that consumers bear the brunt of inefficiencies in the various remedies of debt rehabilitation contained in existing credit legislation.

“Blockages in the system mean that over-indebted consumers have to shoulder the consequences in the form of time delays, abusive market practices and exorbitant legal costs before their debt problems are resolved”, says Mphahlele. Not surprisingly issues with the termination from debt review process pop up frequently. Since January 2010 the NDMA has dealt with more than 755 complaints relating to this practice. The right of the credit provider to terminate debt review even when a matter is enrolled in court means that a consumer, after having paid the legal fees to have their debt review matter heard, may have to incur further legal costs to defend the matter outside of the debt review process.

Quoting an article in De Rebus, a publication for the legal fraternity, the NDMA observes that debt counselling applications are time consuming, costly and complicated. It states that the applications differ from court to court, take up to two years to grant and cost an average of R8000 in debt counselling and legal fees. The following example illustrates the difficulty consumers have in settling their debts through the debt review process: A client who could afford monthly debt repayments of some R2131 incurred debt counselling fees of R2317 and legal fees of R7901. It would take months of repayments before the credit provider received a cent!

Struggling consumers face complex recovery

There are other problems with the current system. The NDMA notes that credit agreements where section 129 notices have been properly issued are excluded from debt review, with the result consumers have to apply different remedies. While some credit providers voluntarily agree to include section 129 arrangements in debt review, this is not standard practice across the board. The quantum of this challenge is illustrated in the Debt Counsellor Association newsletter which reports that of the 330000 debt review applications received since 2007, credit providers have issued between 100000 and 110000 section 86(10) terminations.

“While credit providers have the right to issue section 129s and terminate defaulting consumers we have found a win-win agreement can be reached through mediation,” says Mphahlele. “The dilemma that over-indebted consumers face is that they may apply for debt counselling for some of their debts – such as their home loan – but then have to fend off legal action from other creditors. The result is that they then agree to unsustainable arrangements and battle to maintain them”.

Debt review and IFAs

Why should independent financial advisers (IFAs) care about over-indebtedness? The answer is simply that your clients – consumers of risk and savings solutions – are part of the wider domestic consumer landscape. Their indebtedness has a direct impact on your business because higher debt servicing costs mean less money for discretionary investments. And the statistics are frightening.

At 31 December 2011 there were 19.34 million credit active consumers in South Africa having entered into approximately 67.53 million credit agreements. Of these consumers 8.83 million (47.2 %) had impaired credit records (three or more months in arrears, under administrative order or had court judgments granted against them). A further 14.7 % were in arrears with payments for one or two months, leaving just 39.1 % in the current category. In other words – six in 10 of your potential clients have difficulties managing their personal financial affairs – whether due to affordability or ill-discipline.

Editor’s thoughts: A recent report by the University of Pretoria Law Clinic concludes there are only three processes that over-indebted South African consumers can turn to for assistance. Have you had any experience with debt counselling as set out in the National Credit Act? And do you believe the regulations provide adequate protection for clients who have run into financial difficulties? Please add your comment below, or send it to gareth@fanews.co.za