/ 7 December 2010

Code of conduct on debt

A code of conduct released this week between credit providers and debt counsellors is expected to significantly improve the debt counselling process and possibly puts South Africa at the forefront globally in dealing with over-indebtedness.

An estimated 8-million South Africans are indebted with 110 000 people under debt review making debt repayments of R214-million a month with total outstanding debt at R40-billion of which 75% is made up of mortgages.

Every month a further 7 000 people apply for debt counselling. There are 92 000 people whose home loans are now delinquent and face repossession.

The codes of conduct seek to streamline the debt counselling process by standardising the content of debt proposals and payment plans; establishing an ombudsman scheme to resolve disputes; and providing clear guidelines for debt counsellors to determine whether consumers are able to afford to take on more debt.

As part of this code of conduct, realistic timeframes have been set for the repayment of debt and in order to meet those timeframes and ensure that the consumer is able to be fully rehabilitated within a reasonable period, the credit providers have agreed to lower or even cancel their interest on the loan.

A lengthy process
Until recently the debt counselling process was far from the success envisaged by the National Credit Act.

In many cases banks had taken a very militant stance, refusing to sign off on debt counselling repayment agreements forcing the matter to be heard at our already overburdened magistrates’ courts.

So far an estimated 20 000 cases have been resolved through the courts; with a further 26 000 cases still on the roll.

It takes 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.

Then on the other side of the table we saw a surge in the number of debt councillors 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. For example, in one case a debt counsellor put forward a 100 year repayment plan to a bank.

Payment distribution agencies
As most over-indebted consumers have on average nine different credit agreements, creditors were fighting to get paid first and if a consumer came in good faith to discuss their financial difficulties, they were encouraged to sign documents on terms that were even more aggressive than their existing agreements.

There were also serious issues with the payment distribution agencies (PDA). As part of the debt review, the amount needed each month to settle all the accounts is deducted as a lump sum from their bank account each month. This payment is meant to then 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 sat the indebted client whose needs were not being met.

This is possibly why of the 220 000 people who have applied for debt counselling, only 90 000 remain in the system.

This new agreement hopes to deal with these challenges through a programme that calculates the repayment based on a set of rules.

Debt counsellors will input the clients’ information into a programme including the debt information and their affordability.

The programme creates a recommended repayment programme that allows the consumer to pay off the debts within a set framework and which treats all creditors fairly especially in terms of “sacrifice of yield” where creditors waive or charge lower interest on the outstanding loan.

If a suitable repayment plan cannot be found due to affordability then the person would not be able to undergo debt counselling and would have to be declared insolvent.

The banks have agreed that this repayment plan, based on the agreed rules, will be accepted and they will not take the matter to court. However the consumer has to adhere to this payment plan otherwise all protection will fall away, including the lower interest agreement.

The banks have borne the cost of the development of this programme and the repayment rules were agreed between the debt counselling association, the National Credit Regulator and the Debt Counselling Association of South Africa.

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 around 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.

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