Analysis: All you need to know about debt review

Source: Fin 24, 04/07/2019

Creditors are entitled to the contractual outstanding balance or
settlement value under debt review. The National Credit Act (NCA)
makes provision for three separate scenarios when a consumer is
experiencing difficulties in repaying their debt.
Please note that credit providers are not required to reduce
interest on outstanding debt. Misleading advertising in the media
has caused many nasty surprises to consumers. It is a consumer who
requires the debt review intervention. In general, credit
providers can thus not be punished by demanding from them to write
off interest or to reduce it.
The process starts for all three scenarios in the same way.
The consumer fills out a Form 16 as prescribed in the NCA, which
gives the DC certain limited powers. These include obtaining the
consumer`s personal credit check (ITC report); notifying creditors
and credit bureaus in the prescribed way; determining the
consumers` state of over-indebtedness; investigating reckless
credit; investigating unlawful interest; and recommending a re-
arrangement plan that has to be referred to court for an order.
The NCA does not allow a DC to engage creditors on behalf of a
consumer except if the consumer mandates the DC to do so, but it
is not a requirement by law.

The information on the Form 16 must include the consumer’s income
and statutory deductions (for instance, PAYE, UIF, Medical Aid) as
well as the consumer`s essential living expenses (housing, food,
school fees, insurance, transport, banking costs).
It must also contain a list of the consumer`s Total Balances
Outstanding (including arrears if applicable) and the monthly
instalments required. The DC then uses this information to
determine the consumer`s possible over-indebtedness.
Hereafter there are 3 possible scenarios:
Scenario 1
When doing the assessment, the DC finds that the consumer appears
to be able to afford his debt and is not over-indebted.
A good DC can assist the consumer in this case to reorganise his
budget as that is sometimes all that is required.
The DC must in this case reject the application and the consumer
can, if still insisting that he is over-indebted, approach the
court himself. This will be done by utilising the Form 18 in the
NCA. The consumer can either approach the court himself or appoint
a lawyer. This is not done by DCs.
Scenario 2
The DC finds that the consumer is not yet over-indebted but
finding it difficult to pay his debt.
This is usually a short-term solution and caused by something like
divorce, medical problems and vehicle maintenance, which results
in a temporary cash flow problem. The debts of a consumer who is
not yet over-indebted should not be rearranged over five years. If
that is required, scenario 3 is applicable.
In scenario 2 the DC will find that the consumer is not yet over-
indebted and assist the consumer to himself make arrangements, or
if the DC has a mandate specifically permitting the interaction
and negotiation with creditors, to make arrangements on behalf of
the consumer. These arrangements with creditors will typically be
for one or more of the consumer`s credit agreements.

In this case the arrangements must be reduced to wiring and all
parties must sign the document. This is then referred to court or
via the NCR to the Tribunal to be made into a consent order. The
consumer is not declared to be over-indebted and the credit bureau
is not notified as such.
This is a temporary solution and will not necessitate a long-term
rearrangement of all the consumer`s debt obligations. If all debt
must be rearranged, Scenario 3 applies.
Scenario 3
The DC finds the consumer to be over-indebted.
The DC then proposes a rearrangement plan as to how the credit
agreements instalments are to be reduced and the term extended. It
is important to note that it is not recalculated, as neither the
DC nor the Magistrate nor the lawyer representing the consumer are
mandated by the NCA to do so.
The amount the consumer has available should be distributed
responsibly and fairly between all the creditors. This amount is
the cash the consumer has available after statutory deductions and
essential living expenses have been paid.
It is not disposable income but discretionary income. In short,
one creditor may not receive preferential treatment. As the
consumer is over-indebted with only a specific amount available
for distribution between creditors, negotiations are not required.
If negotiations are possible, Scenario 2 is applicable.
A consumer with a fixed salary and deductions cannot pay more when
a creditor demands it as there are no funds available to negotiate
with.
Consumers are required to repay the total balance outstanding or
contractual settlement value at the time the determination is made
and that will include the contractual costs, fees, charges and
interest.
If the creditors agree to reduce the interest, it will be a
reduction of the contractual interest and must be reduced to
writing and signed by all parties as this is a contractual
alteration.

When a consumer is over-indebted, the matter must be referred to
the Magistrates Court as only the court is mandated to declare the
consumer to be over-indebted and then grants the order. In this
case the credit bureau lists the consumer as being over-indebted.

The NCA makes provision for one or more of the consumer`s credit
agreements to be rearranged under debt review. Not every credit
agreement needs to be included. The downside on this is that the
consumer may not use any of the revolving credit facilities or
apply for new credit as he may not incur any further debt whilst
paying off the current debt.
If the user or consumer in this case was able to pay the bond in
full, that should have been excluded from debt review.
Settlement value
The settlement value under debt review must not be confused with
early settlement, which is something different. If debt review is
done correctly everyone will be treated fairly and the consumer
will pay his contractual obligations, the creditor will receive
every cent owed but just wait for the money a bit longer.
The downside to this is that early settlement might not be
possible as the act requires a consumer to have paid all debt in
full as per the order or agreement before the clearance
certificate may be issued.

To exit debt review before a court order is granted, the consumer
must prove to the debt counsellor that he is up to date with his
debt repayments as per the agreements with his credit providers.
The debt counsellor then files an additional affidavit to the
court, or the consumer can do it himself to prove to the court
that an order for debt review is no longer required. The court
then makes an order finding the consumer is not over-indebted, all
parties are notified, and the consumer exits debt review. Credit
bureaux must remove the debt review flag from their systems when a
court makes an order.
If the consumer pays all debt as per the debt review order, he
applies to a debt counsellor for a clearance certificate. The DC
notifies all relevant parties thereof. Upon receipt of the Form 19
clearance certificate, the credit bureau must expunge from their
records all relevance to debt review within 7 days.
The same goes for a Tribunal Consent Order - except the NCA is
vague as to what status a consumer has who is part of Scenario 2.
The last option is available if a debt review order had material
defects, was granted incorrectly or by mistake the consumer can
approach a lawyer to have the matter addressed in the appropriate
court. Magistrate Court orders can be reviewed and set aside in
the Magistrates Court, but National Consumer Tribunal Orders must
be reviewed and set aside in the High Court.
Lastly, the debt counsellor does not enjoy any powers to make a
finding of what the consumer`s state of over-indebtedness is,
whether reckless credit applies and the rearrangement of debt.
Only the court, in terms of the Constitution, has that right.
A debt counsellor accepts an application from a consumer and
determines the consumer`s state of over-indebtedness, notifies
relevant parties, verifies information and recommends a repayment
plan. This is only finalised when the court makes the order.
When the consumer is ready to exit debt review, the debt
counsellor issues a clearance certificate.