Debt counsellors go belly up

2011-04-16 13:11

The debt-counselling industry has had a major shake-up following the closure of over a thousand financially stricken debt counsellors.

Out of the 1 700 debt counsellors who registered when the National Credit Act (NCA) came into effect four years ago, only 400 remain operational, leaving millions of highly indebted consumers stranded.

The introduction of the NCA ushered in the debt-counselling ­industry, but exorbitant legal costs and poor profitability have led to the consolidation of the market despite an increase in the number of highly indebted South Africans.

Consumers affected by the closure of large numbers of debt counsellors will have to start the process from scratch because the existing files will be transferred to the surviving debt counsellors.

Organisations helping over-indebted consumers say debt relief measures are now moving at a slow pace. Paul Slot, chairman of the Debt Association of South Africa, said flaws in the legal system created confusion for some debt counsellors, forcing them to close down their offices and leaving consumers stranded in the process.

The different interpretations of the NCA proved to be complicated for many debt counsellors, he said.

“The legal process was moving at a slow pace and our courts of law remain a challenge.

“More than nine million consumers are over-indebted and need to be helped. Stakeholders need to work together to make the process work,” said Slot.

Slot said the NCA initially recommended that consumers undergo debt counselling on receipt of the Section 129.1 notice or the letter of demand from credit providers advising a defaulter of imminent legal action should they fail to make immediate payment.

However, the courts later declared that consumers needed to undergo debt counselling as soon as they started to experience difficulties in honouring credit agreements. Slot singles out this confusion over interpretation of the NCA as one example that resulted in many debt review applications being dismissed by courts.

The end result of this confusion was the de-registration of many debt counsellors, who had also discovered that they were not making much profit because they had incurred huge legal costs.

Slot said the implementation of the NCA had not been an easy journey for debt counsellors. He said the task team the National Credit Regulator (NCR) formed a few years ago to look into challenges faced by debt counsellors delivered positive results last year.

The debt-counselling process was compromised in some instances because of administration flaws, which resulted in credit providers claiming not to be receiving loan repayments from consumers.

To deal with the problem, the NCR accredited payment distribution agencies to collect repayments from consumers and distribute the funds to creditors.

More consumers are repaying their loans as a result of the introduction of this collection method.

The Credit Ombuds, Manie Van Schalkwyk, said this week that significant strides had also been made in resolving complaints from consumers and businesses negatively affected by credit bureau ­information.

Last year alone, the office investigated 3 870 disputes and 3 550 of these were settled.

About 69% of the rulings were in favour of consumers.

The Credit Information Ombudsman changed its name to Credit Ombuds last year and ­together with the Pension Funds Adjudicator, the Financial Services Board (FSB) and the NCR launched a centralised helpline to minimise consumer confusion regarding which organisation to contact in the event of a dispute.

Van Schalkwyk said the role of the Credit Ombuds was important in making a difference in the lives of indebted consumers.

“The Credit Ombuds has an important role to play in spheres of debt counselling,” he said.

Magauta Mphahlele, chief executive officer of the National Debt Mediation Association, reiterated that the NCA had made a difference in the lives of many consumers, but she expressed concern about some consumers who seemed to have lost trust in the debt-counselling process.

Her office resolves complaints from over-indebted consumers who complain about unfair service from debt counsellors and service providers. She said her office received on average 400 complaints a month from disgruntled consumers undergoing debt review.

Some of the problems resulted from the consumer’s failure to ­understand the debt-counselling process.

She advised over-indebted consumers to act as soon as they started experiencing repayment problems: “The NCA is still young and we are doing well, but consumers do not seem to understand the short relief that debt-counselling offers,” said Mphahlele.

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