Debt Review – How it works
Debt Review and Debt Counselling
What is debt review? What is debt counselling ?
Would you like to know more about the debt review process that has helped hundreds of thousands of South Africans get out of debt? Here’s a brief explanation:
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The National Credit Act
In 2007 a new Act was made into law called the National Credit Act (the NCA). The purpose of the Act was to regulate how credit is granted, who can give and get credit and what can be done if people have problems paying for their debt. In the NCA there is a particular section (Section 86) which deals with what to do if a consumer has too many debts, too many obligations and not enough money to pay for everything. This section specifically mentions something called debt counselling also known as debt review. Debt Counselling would be advice about your debt from a qualified debt counsellor. A Debt Counsellor would be registered with the National Credit Regulator or NCR (who is an industry watch dog – of sorts.) Over time, the National Credit Act has been updated or amended (by the National Credit Amendment Act 2014) which helped make debt review even more effective. Worldwide there has been a move to provide consumers with counselling in regard to the use of credit and in dealing with their debt.
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The National Credit Regulator was created by the National Credit Act. The NCR register Credit Providers who offer credit and Debt Counsellors who offer debt review services. They also register other parties to the credit industry like credit bureaus and Payment Distribution Agents.
The NCR operates from offices in Midrand, Gauteng. The NCR’s job is not to make the industry work (they regulate, not control) but rather to try to stop naughty creditors (and in the past some Debt Counselors or PDAs or credit bureaus who do not play by the rules) from being too naughty. You will have seen news items about how they do investigations into businesses who are not sticking to the rules as set out in the National Credit Act. They even have the power to then send matters to the National Consumer Tribunal and ask that companies be fined or even shut down. This can result in big court cases about the Act and possible fines.
The NCR has in the past held workshops around the country with Debt Counsellors and credit providers as well as online webinars with registrants. They send a lot of sternly worded letters, visit registered parties or email them asking for info and of course, keep stats about the industry. The NCR are also able to issue non binding opinions about different aspects of the NCA and industry. These are seen by many as guides on how registrants should do business.
A professional NCR registered Debt Counsellor will, normally, meet, in person, with a troubled consumer and go through their financials with them. They like to get you to fill in a form, called a Form 16, which sums up your debt situation. Most Debt Counsellors prefer to have you do this in advance of the meeting or could even ask a staff member to assist you in adding information into this form. Some Debt Counsellors will have this form on their website or will email it to you. It enables the Debt Counsellor to quickly see what your situation is and how things can be changed to improve your situation.
(in some cases the consumer may not be able to go to the Debt Counsellor so they might work with one another via the internet, email or over the phone.)
Here is an example of a Form 16 (without the signing pages) that you can download and look at (with permission from Debt Counselling South Africa): Click Here To Download Example
Meeting with a Debt Counsellor
The professional NCR registered Debt Counsellor will want to get as much info from the consumer as possible about what debts they have etc. (so take your statements with you). Most Debt Counsellors will help give you advice for free (though by law they can charge you R50 for coming to visit them). They should (under the Consumer Protection Act) ask you to sign a contract which explains what they will and won’t do if you want to enter debt review. If they don’t, feel free to ask for one. This is something different from the Form 16 but some clever Debt Counsellors are combining the two documents to try to save time. When visiting the Debt Counsellor, look out for their NCR stick on their door or window and their NCR Registration Certificate on the wall. If you don’t see these then you should definitely ask to see them. This will help you see they are a legitimate debt counselling firm.
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A New Budget:
If you have been under debt pressure you will no doubt have tried to adjust your spending on monthly items. You may even have cut out essential things such as paying your insurance or saving to change your car tyres. It is good to reduce your monthly living costs but what to cut and what to keep? The Debt Counsellor will definitely help to set a totally new budget for household expenses and things people should be saving towards each month since this is often totally overlooked by cash strapped consumers.
It is very important that consumers then stick closely to this suggested monthly budget amount if they want their debt review to succeed.
The Debt Review Proposals
The Debt Counsellor will then use computer programs and phone calls, Faxes and emails to the various Creditors to try make a deal with them that they are willing to accept. Creditors don’t have to like the debt review proposals but if they do that’s good.
If they like it they will send letters (emails) to the Debt Counsellor saying they are happy with the plan and most will already load the changes onto their computers.
If not they will send letters (emails) saying they would rather have…something else. This is called a counter-proposal. It may be a small thing like the percentage used for the interest calculations or for payments to be made for a different amount of time. The Debt Counsellor will talk to you about these and see if you can adjust things to match what the credit provider is asking for.
The Debt Restructuring Application to Court
Either way (and let’s be honest it is going to be hard to make everyone happy) the matter gets turned into a court application. This is done under Rule 55 of the Magistrates Court Act (since the NCA doesn’t cover the court application in detail or how is should be done). The application, which is made by the Debt Counsellor is then heard in the Magistrates Court near where the consumer lives or works.
When the Creditors are not Happy
It is good to note that after 60 days of the review the Creditors can approach another court to try to get a judgement against the consumer for the debt if the matter is not set down at a court. This means that consumers should check with their Debt Counsellor that the matter has been sent to court and a date for the court case set. If creditors ever do try to get out of the debt review and start new legal action then the consumer is able to defend that new legal action and ask that the matter go to the court where the debt review is already happening (and that the creditor pay costs for trying this new unnecessary legal action).
One reason why a Creditor might try this (other than greed or being nasty) is if they genuinely feel that the debt review will not work or if the consumer is already not sticking to the debt review proposals (if they are not paying the right amount or not paying each and every month). Many Creditors have tried to take action against consumers who have assets to try get permission to sell these assets on auction rather than let the consumer pay over time. This normally only happens if the creditor is unhappy with the amount that has been proposed and the debt review is not at court yet.
This is a short sighted and short term solution that some banks sometimes feel is worth it (since they can then claim insurance against the loss and even if there is a shortfall on what the consumer owes the judgement lasts for 30 years so they can take their time in trying to get the balance of the bond or vehicle finance back from the consumer over time). It is not something that happens often and is a bit of a pain if it does as it means more paperwork and sometimes more legal fees.
If the consumer does not fight against this new legal action, though, they will probably lose their assets even though they are under debt review. One factor in this is making sure that Creditors have your latest address so they can send any legal documents to the right address. This then allows the consumer to defend the matter. Consumers can either go to court by themselves (cheaper but nerve wracking) or they can get legal representation (an attorney or advocate) which is more costly. Be wise. Defend your rights!
When the Creditors are Happy
The Magistrates Court then will rule on the proposal as made by the debt counsellor. The creditors are also welcome to come to court and object or ask for more money etc (normally they just delay matters or ask for more money but can’t say where the money should come from.) This will delay the court ruling. The Courts are very busy these days so this can sometimes be a long procedure. Insanely some matters have taken up to 3 years in the past. The good news is that these matters are now going faster and faster as the courts become more familiar with the applications. If the Magistrate understands and likes the proposal they will make it an Order of the court. In some court this is when the consumer needs to be present to say they understand how serious the matter is and to commit to the process and sign the Order. Most courts do not insist on the consumer being present.
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The Debt Restructuring Court Order:
A Debt Counsellor does not restructure a consumers debt. The only body that can do that is a court. This is done by means of a debt restructuring Court Order. Once a Court Order is granted as per the proposal then this is sent to all the creditors and the consumer must make payments as per the Order each month with no deviations. This is very important. Any deviation could invalidate all the work that has come before.
Then, as time goes by, the consumer should get monthly reports of how their accounts are doing. Many Creditors are still struggling to supply accurate statements even after so many years of the process being around. Their computer systems struggle to acknowledge that payments are now different and that a different plan has been agreed on. Even if creditors do agree to the proposal and change the figures when the court order comes they may hesitate to send out monthly statements because these might be used against them later when fighting over money. If your creditors are not giving you statements or if their statements are not showing your regular debt review repayments then complain to the National Credit Regulator (after asking the creditor themselves to first help). A form 29 complaint form can be downloaded from the NCR’s website.
The Payment Distribution Agencies (PDA’s)
The Payment Distribution Agencies (PDAs) are companies that distribute a consumers funds to their various creditors according to the plan of the Debt Counsellor. Though not originally mentioned in the NCA, the National Credit Regulator thought it would be a good idea to have a reliable company handle consumers money rather than each Debt Counsellor or even just the consumer themselves in some cases. They have encouraged Debt Counsellors to use the services of one of these few companies. They also encourage consumers to do the same. These companies have now been included in the National Credit Act (since amendments were made). They are an integral part of the process as the right amount of money needs to reach each creditor each month at the right time for the plan to work.
The PDA’s normally collect one debt review payment from the consumer (who maybe has set up a debit order for this) each month and split the payments up to each of his creditors. They get instructions from the Debt Counsellor on how to split the money up but they don’t let the Debt Counsellor or anyone else touch the money. They then make the payments to the creditors. They send proof of the payments to the creditors. It is important to note that many creditors still cant seem to track when money comes in for some reason. Many of the biggest banks struggle with this simple procedure. So be warned the creditors may call you about payment even if they have received funds. Many Debt Counsellors spend much of each day trying to help the PDA’s prove to the creditors that payments were made.
Any interest that is earned on money in the bank at the PDA’s is in theory paid over to the National Credit Regulator rather than to the consumers or creditor’s accounts. The Payment Distribution Agencies are then required by the NCR to send consumers a statement of the payments. If you are not getting a regular statement monthly from your Payment Distribution Agency then you can complain to the NCR or the Banking Ombud. The statements from the PDA reflect where approximately your debts should stand with each creditor giving you a feel for how long you have to go according to the court order. There may be some minor differences between these figures and those used by creditors and sometimes this means you may have to pay for slightly longer than shown on the PDA statement (maybe an extra month or so).
Consumers are not forced to use a PDA and they can try to manage all of the payments to all the different creditors according to the plan each month but it is very tricky. There are currently 4 NCR recognized PDAs in South Africa: DC Partner PDA, Hyphen PDA, iPDA (formerly NPDA) and CollectNet.
Paying up your debts:
Once one account is paid off, the amount you pay toward all your debts each month will not change (reduce). It stays the same but the amount each creditor that is still left gets increases a little bit. This happens each time a debt is paid up and soon all or most of your debts will be gone. Most plans for debt review are around 3 – 5 years long. Now 3, 4 or 5 years might seem like a long time but most creditors collect smaller debt over 2 years anyway and the amount you pay over 3 years (or however long your plan will be) will be manageable if you stick to your budget each month.
‘If you are able to increase the amount you can pay each month this will greatly reduce the length of the debt review’
If you are able to increase the amount you can pay each month this will greatly reduce the length of the debt review. This is why Debt Counsellors will contact the consumer at least once each year to do a review of their situation. If you have more funds available talk to your Debt Counsellor about using them each month to speed things up. The faster you pay the better.
Remember you don’t have to repay your entire bond while under debt review but you do have to pay off all your smaller debts. You cannot leave the process until those debts are settled. It is like a person starting a diet with a weight goal and then deciding after a few days to quit and go back to eating poorly. Debt review is designed to help you push through and finish off all your smaller debts.
You can leave debt review once all your smaller debts are paid up. Your Debt Counsellor will make sure that a reasonable arrangement is in place for your bond when you do finally leave the process.
Debt Review Clearance Certificate
Once all your debts are gone (or once all your smaller debts are paid up and you only have a bond left) the Debt Counsellor will issue a document called a Clearance Certificate. This is sent to the credit bureaus and they will then clear your record of the debt and the debt review itself. There are still some teething issues with these but the idea is this is a piece of paper that says your debt is paid up.
Beware that many Creditors with their fancy computer systems sadly can’t even track regular monthly payments so don’t be surprised if they give you a hard time as to whether your debt with them is paid up. If they do, then unless your Debt Counsellor gets them to behave, it is off the NCR or even NCT with you and complain once more. It is also a good idea to draw a credit bureau report a short while after you finish your debt review to see that the debt review status has been removed. If not, you can query this with the credit bureau using their complaints form and your clearance certificate and they will sort it out within 20 work days.
That’s a rough idea of what debt review is all about. Each debt review is as unique as each consumer’s situation is unique but this is the normal process. Debt Review or Debt Counselling has helped hundreds of thousands of South Africans to deal with their debt and get back on their feet. If you are experiencing debt stress don’t ignore it. Take positive action and talk to a Debt Counsellor who can tell you more about debt review.
‘Each debt review is as unique as each consumer’s situation is unique’
Some videos about the Debt Review Process: