Facing the debt crisis

Many South African consumers are in serious financial trouble, with more than eight million people having impaired credit records, which means they are three months or more behind in their payments.

Over the last three years, 184 000 consumers have applied for debt counselling, with 7 500 new applications received a month. These people have on average nine credit agreements with different credit providers, with some people having up to 30 different credit agreements that they cannot maintain.

According to the banks, although still high, the number of new bad debts is falling, but what is of real concern is the number of outstanding debts, which remain stubbornly high.

The National Credit Regulator, Gabriel Davel, believes that the economic fall-out rather than irresponsible lending is responsible for most of this debt stress.

With 232 000 jobs lost this year alone, bringing the total number of jobs lost due to the recession to more than one million, many people simply cannot afford to repay their debts.

Davel says people dependant on commissions, or those that work shift hours, have seen a drop in income of between 20% to 30%. “It is inevitable that we will have a debt crisis, the question is how we manage it,” he says.

Managing the problem to allow people not to lose their homes and to bring them back into the mainstream economy is exactly what the new National Debt Review Committee is hoping to achieve.

The introduction of debt counsellors through the National Credit Act was not a resounding success.

The debt-counselling process faced many challenges. On the one side you had the banks taking a very militant stance and refusing to sign off on debt-counselling repayment agreements, forcing the matter to be heard at our already overburdened magistrate’s courts. The backlog reached tens of thousands, taking up to 18 months to receive a court order to approve the repayment plan. In the meantime the banks would cancel the debt review and attach the assets.

On the other side you had a surge in the number of debt counsellors from seven to 1 800—some saw it as a get-rich-quick system and others were just incompetent. Clients were encouraged to apply for debt counselling just to get out of paying for goods, and in other cases unrealistic payment plans were handed to the banks.

There were also serious issues with the payment distribution agencies. As part of the debt review, the amount needed to settle all the accounts is deducted monthly as a lump sum from a bank account. This payment is then meant to be distributed to the various creditors. In some cases these funds were not being paid over to creditors, and even though people were paying, their goods were being attached.

In the middle of all this sits the indebted client whose needs were not being met.

The banks, debt counsellors, payment distribution agencies and regulators have now sat down and hammered out a code of conduct and rules on how debt counselling will work. These rules will hopefully put some trust back into the system and the courts will no longer be required.

According to the team, some of the changes have already been put in place and the code of conduct and debt-counselling rules will be signed off within the next three months.

Rael Zimmerman of Taitz & Skikne attorneys, who specialise in debt counselling, remains sceptical. “If it works and banks sign off on the rules that they all agree to, it will work. But if some banks don’t and carry on litigating as they have been, it will fall apart.”

Zimmerman is concerned that certain banks and credit providers seem to be taking advantage before the new rules are in place to litigate against consumers who can’t afford to pay their debt, let alone pay lawyers. “There is carnage out there right now.”

What will change over the next three months:
A National Debt Review Committee will be established to create rules around the debt-review process and monitor the industry on an ongoing basis.

Codes of conduct will be established by the banks, the debt counsellors (through the Debt Counselling Association of South Africa) and the payment distribution agencies. These will set guidelines on the process of how debt review takes place. A set of eligibility, affordability and reckless lending assessment guidelines for debt counsellors will be issued by the committee. This will prevent people from applying for debt counselling who are simply trying to get out of paying their debts, as well as help counsellors to identify reckless lending instances.

Repayment plans: As part of these agreements it is expected that those under debt counselling would have 86 months to repay car debt, 30 years to repay home loans and about 60 months to repay short-term debt. If a debt-repayment plan falls within these time frames, then credit providers will not be able to contest the debt review. Paul Slot of debt counselling company Octogen is hoping that a change to the interest rates will also be included for those clients who cannot repay the debt within these timeframes. By reducing or even cancelling the interest, it will assist the client to pay off the debt quicker.

System improvement: Debt counsellors will have to implement a minimum standard in terms of systems required to run a debt-counselling business. This should shake out some of the less scrupulous operators.

The payment distribution mechanism will be improved and collection methods also enhanced. Currently there is a R5 000 limit on the early debit order system (this allows a credit provider to debit the account the minute the salary is paid); this is to be increased to allow for the full collection of the agreed payment plan to be deducted before other debit orders. This will improve the recovery rates.

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