Analysis: All you need to know about debt review

Debt review is not a one size fits all solution and the debt counsellor must apply his mind to the individual solution required for each consumer.

Debt review is a process that should be addressed by a duly registered debt counsellor (DC).

Debt review is not a means to finance a consumer's lifestyle, but to assist in repaying the consumer's debt in full to his creditors. It is also not a means for creditors to enrich themselves and charge additional interest on the extended term as that is not providing relief.

Creditors are entitled to the contractual outstanding balance or settlement value under debt review. The National Credit Act (NCA) makes provision for three separate scenarios when a consumer is experiencing difficulties in repaying their debt.  

Please note that credit providers are not required to reduce interest on outstanding debt. Misleading advertising in the media has caused many nasty surprises to consumers. It is a consumer who requires the debt review intervention. In general, credit providers can thus not be punished by demanding from them to write off interest or to reduce it.  

The process starts for all three scenarios in the same way.

The consumer fills out a Form 16 as prescribed in the NCA, which gives the DC certain limited powers. These include obtaining the consumer's personal credit check (ITC report); notifying creditors and credit bureaus in the prescribed way; determining the consumers' state of over-indebtedness; investigating reckless credit; investigating unlawful interest; and recommending a re-arrangement plan that has to be referred to court for an order.

The NCA does not allow a DC to engage creditors on behalf of a consumer except if the consumer mandates the DC to do so, but it is not a requirement by law.
The information on the Form 16 must include the consumer’s income and statutory deductions (for instance, PAYE, UIF, Medical Aid) as well as the consumer's essential living expenses (housing, food, school fees, insurance, transport, banking costs).

It must also contain a list of the consumer's Total Balances Outstanding (including arrears if applicable) and the monthly instalments required. The DC then uses this information to determine the consumer's possible over-indebtedness.

Hereafter there are 3 possible scenarios:

Scenario 1

When doing the assessment, the DC finds that the consumer appears to be able to afford his debt and is not over-indebted.

A good DC can assist the consumer in this case to reorganise his budget as that is sometimes all that is required.

The DC must in this case reject the application and the consumer can, if still insisting that he is over-indebted, approach the court himself. This will be done by utilising the Form 18 in the NCA. The consumer can either approach the court himself or appoint a lawyer. This is not done by DCs.

Scenario 2

The DC finds that the consumer is not yet over-indebted but finding it difficult to pay his debt.

This is usually a short-term solution and caused by something like divorce, medical problems and vehicle maintenance, which results in a temporary cash flow problem. The debts of a consumer who is not yet over-indebted should not be rearranged over five years. If that is required, scenario 3 is applicable.

In scenario 2 the DC will find that the consumer is not yet over-indebted and assist the consumer to himself make arrangements, or if the DC has a mandate specifically permitting the interaction and negotiation with creditors, to make arrangements on behalf of the consumer. These arrangements with creditors will typically be for one or more of the consumer's credit agreements.
In this case the arrangements must be reduced to wiring and all parties must sign the document. This is then referred to court or via the NCR to the Tribunal to be made into a consent order. The consumer is not declared to be over-indebted and the credit bureau is not notified as such.  

This is a temporary solution and will not necessitate a long-term rearrangement of all the consumer's debt obligations. If all debt must be rearranged, Scenario 3 applies.

Scenario 3

The DC finds the consumer to be over-indebted.

The DC then proposes a rearrangement plan as to how the credit agreements instalments are to be reduced and the term extended. It is important to note that it is not recalculated, as neither the DC nor the Magistrate nor the lawyer representing the consumer are mandated by the NCA to do so.

The amount the consumer has available should be distributed responsibly and fairly between all the creditors. This amount is the cash the consumer has available after statutory deductions and essential living expenses have been paid.

It is not disposable income but discretionary income. In short, one creditor may not receive preferential treatment. As the consumer is over-indebted with only a specific amount available for distribution between creditors, negotiations are not required. If negotiations are possible, Scenario 2 is applicable.

A consumer with a fixed salary and deductions cannot pay more when a creditor demands it as there are no funds available to negotiate with.
Consumers are required to repay the total balance outstanding or contractual settlement value at the time the determination is made and that will include the contractual costs, fees, charges and interest.

If the creditors agree to reduce the interest, it will be a reduction of the contractual interest and must be reduced to writing and signed by all parties as this is a contractual alteration.
When a consumer is over-indebted, the matter must be referred to the Magistrates Court as only the court is mandated to declare the consumer to be over-indebted and then grants the order. In this case the credit bureau lists the consumer as being over-indebted.
The NCA makes provision for one or more of the consumer's credit agreements to be rearranged under debt review. Not every credit agreement needs to be included. The downside on this is that the consumer may not use any of the revolving credit facilities or apply for new credit as he may not incur any further debt whilst paying off the current debt.

If the user or consumer in this case was able to pay the bond in full, that should have been excluded from debt review.

Settlement value

The settlement value under debt review must not be confused with early settlement, which is something different. If debt review is done correctly everyone will be treated fairly and the consumer will pay his contractual obligations, the creditor will receive every cent owed but just wait for the money a bit longer.

The downside to this is that early settlement might not be possible as the act requires a consumer to have paid all debt in full as per the order or agreement before the clearance certificate may be issued.
To exit debt review before a court order is granted, the consumer must prove to the debt counsellor that he is up to date with his debt repayments as per the agreements with his credit providers.

The debt counsellor then files an additional affidavit to the court, or the consumer can do it himself to prove to the court that an order for debt review is no longer required. The court then makes an order finding the consumer is not over-indebted, all parties are notified, and the consumer exits debt review. Credit bureaux must remove the debt review flag from their systems when a court makes an order.

If the consumer pays all debt as per the debt review order, he applies to a debt counsellor for a clearance certificate. The DC notifies all relevant parties thereof. Upon receipt of the Form 19 clearance certificate, the credit bureau must expunge from their records all relevance to debt review within 7 days.

The same goes for a Tribunal Consent Order - except the NCA is vague as to what status a consumer has who is part of Scenario 2.  

The last option is available if a debt review order had material defects, was granted incorrectly or by mistake the consumer can approach a lawyer to have the matter addressed in the appropriate court. Magistrate Court orders can be reviewed and set aside in the Magistrates Court, but National Consumer Tribunal Orders must be reviewed and set aside in the High Court.

Lastly, the debt counsellor does not enjoy any powers to make a finding of what the consumer's state of over-indebtedness is, whether reckless credit applies and the rearrangement of debt. Only the court, in terms of the Constitution, has that right.

A debt counsellor accepts an application from a consumer and determines the consumer's state of over-indebtedness, notifies relevant parties, verifies information and recommends a repayment plan. This is only finalised when the court makes the order.

When the consumer is ready to exit debt review, the debt counsellor issues a clearance certificate.

* Renée Marais, an independent debt counsellor in Pretoria.

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