/ 10 December 2010

Swimming in a sea of debt

A code of conduct between credit providers and debt counsellors, released this week, is expected to improve the debt-counselling process significantly 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 a 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 code of conduct seeks 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, realistic timeframes have been set for the repayment of debt and, 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 took a militant stance, refusing to sign off on debt-counselling repayment agreements, forcing the matter to be heard at the already overburdened magistrate’s 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. Meanwhile the banks would cancel the debt review and attach the assets.

On the other hand there was 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 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
As most over-indebted consumers have on average nine different credit agreements, creditors were fighting to get paid first and, if consumers 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. As part of the debt review, the amount needed each month to settle all the accounts is deducted as a lump sum from the debtor’s bank account. Then this payment is meant to be distributed to the creditors.

But in some cases these funds were not being paid to the 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 what the clients can afford. The programme creates a recommended repayment programme that allows consumers to pay off the debts within a set framework and treats all creditors fairly, especially in terms of “sacrifice of yield” where creditors waive interest or charge a lower rate on the outstanding loan.

If a suitable repayment plan cannot be found because of affordability then the person will not be able to undergo debt counselling and will 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. But the consumer has to adhere to this payment plan or all protection will fall away, including the lower interest agreement.

The banks have borne the cost of the development of the programme and the repayment rules were agreed to by 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 will have 86 months to repay car debt, 30 years for home loans and about 60 months for short-term debt. If a debt repayment plan falls within these timeframes, then credit providers will not be able to contest the debt review.