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CPs Got To Have Their Cake and Eat It

For many years, credit providers have argued that debt review does not cancel the original contract obligations of a consumer’s debt.

This responsibility still exists, and if the consumer defaults on the debt restructuring court order for debt review, the consumer will have to go back to servicing the original contract (with its old fees and rates).

However, credit providers have also said that the (debt review) court order sorts out any default that the consumer had on the original contract. 

The effect being that (they said) the debt review “cures” or gets rid of any default used to calculate the limit of money they can collect as per the National Credit Act Section 103(5).

A new court order has shown that both can’t be true simultaneously, and that debt review court orders do not cure or reset the 103(5) In Duplum limit.

What is In Duplum?

In latin “in duplum” means double.

In Roman-Dutch law the In Duplum rule was designed to protect borrowers from endless interest charges, if you miss payments.

Basically, the rule said once you stop paying, then the credit provider can only add interest till the amount you owe has doubled.

What is Super In Duplum?

When the National Credit Act was written it included an updated version of the old In Duplum rules in Section 103(5). 

This provided even more clarity on what could and could not be charged, and how In Duplum was to be calculated.

This is sometimes known as Super In Duplum since it is so much better for consumers.

What’s the Difference?

While they may seem very similar, there is a big difference, and we will use two buckets to help explain why Section 103(5) is an even better protection for consumers.

Let’s say you take on debt of R10 000 and consider how old In Duplum differs from Super In duplum if you start to miss payments.

If you start to miss payments, you go into Default. 

Now a limit is set on how much the credit providers can collect from you.

Terms Explained:

Default means missing a payment you were supposed to make. It means you’ve fallen behind or paid less than what you agreed to.

The credit provider can collect double what you owe at the time of default (so in this case it would add up to R 20 000).

The difference between old In Duplum and new Section 103(5) Super In Duplum is that Section 103(5) puts a lid on how much is now owed, while old In Duplum works differently.

 So if you pay off some of the debt, let’s say R5000 the amount you owe drops to R 15 000.

If you now start to miss payments the difference becomes very obvious. As fees and charges start to drip in, the lid on the Section 103(5) bucket stops the amount from increasing again.

In the old In Duplum bucket the amount can slowly fill all the way back up to R20 000 again (double what was owed at the time of default)

The lid (or limit set by Section 103(5) means the reduced balance stays at R15 000 and no more fees or charges get added even if you are not paying.

If you start paying again, the old In Duplum bucket takes much longer to pay off and if, for some reason, you miss payments again it can start to fill up again with interest on the debt.

Whatever you now pay out of the new Super In Duplum bucket will keep lowering the water and no more fees or bills can drip in and increase the amount.

Chantelle Scott V the National Credit Regulator and Others

Recently, the Gauteng High Court was asked to help clarify if going into debt review resets or gets rid of the consumers default on their original contract with a credit provider.

This is something credit providers have felt is true, but Debt Counsellors were not as convinced.

The court heard both sides of the story and got input from various parties including the NCR, Banking Association of South Africa and the Debt Counsellors Association of South Africa.

The various judges on the case looked at the specific wording of the National Credit Act as well as the purpose of the Act.

A key part of the ruling was that words used in law must be given their usual grammatical meaning (unless it turns the law into something silly by mistake).

The National Credit Act is very clear on what charges a credit provider is allowed to charge in Section 101.

Section 95 also says: ‘The provision of credit as a result of a change to an existing credit agreement, is not to be treated as creating a new credit agreement for the purposes of this Act…’

The wording of Section 71, 86 (about debt review) 88 and Section 103(5) were also closely considered.

Debt Review Is Not A Whole New Credit Agreement

The court ruled that debt review is a type of debt relief mechanism where the debt contained in the original credit agreement is gradually written off (paid off) over a period.

It is not a whole new credit agreement.

It is also not an addendum to the original credit agreement.

It is a way to pay the original contract agreement, which consumers are allowed to make use of because they are (or will be) in default.

The debt review is used in order to avoid the full collections method (of nasty summonses and court orders and auctions etc). The debt review exonerates the consumer from being sued, as long as they pay towards come of the arrears amount owed.

This is why if the consumer falls out of the debt review agreement, then the matter goes back to the terms set out in the original contract.

Super In Duplum Still Applies

While in debt review, the consumer remains in default under the original credit agreement until they pay the credit provider all overdue amounts (and interest, charges and costs).

Because of this, a consumer under debt review is still in default of the original contract and so, logically, the original limit set by NCA Section 103(5) remains in place.

 

The Ruling

‘An application for debt review and or a debt review order does not purge and or cure the default of the original credit agreement for the purposes contemplated in section 103(5) of the National Credit Act 34 of 2005.’

Sorry, No Cake and Eating It

This means that when a person enters debt review, all parties, Debt Counsellors and credit providers must be sure that any repayment plans keep in mind the Section 103(5) limit.

They must all be careful not to accidentally make the consumer pay more than this very important legal limit, of double the original debts.

There will no doubt be some checks and balances included in the software that Debt Counsellors use when they draw up plans to repay debt.

This also means that credit providers must be sure to disclose the default dates and amounts so these limits can be closely adhered to, so no one breaks the law.

Overall, it provides some clarity about the nature of debt review (that it is not a new agreement but a way to sort out the original contract without it ending up in the full legal collections process).

It also helps protect consumers by putting the lid firmly on the bucket and preventing them from paying more than they should.