Ruan Jooste’s Rants and Cents: Till debt do us part - debt review is not the silver bullet the industry proclaimed it to be

The risk remained that the number of over-indebted consumers might increase given the rising inflation and interest rates. PHOTO:

The risk remained that the number of over-indebted consumers might increase given the rising inflation and interest rates. PHOTO:

Published Jul 2, 2023


Parliament’s portfolio committee on trade, industry and competition met recently to engage with the Department of Trade, Industry and Competition (Dtic), the National Credit Regulator (NCR) and the National Credit Tribunal on the debt review system and its challenges.

During the public hearings on the bill that became the National Credit Amendment Act, several concerns had been raised about the functioning and shortcomings of the debt review system.The intention of the committee was to establish the status of the implementation of the system, as well as consider the challenges facing the system and any steps that the department was looking at to resolve them. The risk remained that the number of over-indebted consumers might increase, given the rising inflation and interest rates.

Simply put, debt review is a process of handing over one’s obligations to a debt counsellor who will consolidate outstanding loans with income, work out a payment plan on your instalments and interest options with creditors; and then negotiate on one’s behalf with all your creditors.

While debt review is an option out of a tight financial situation, consumers should be warned that the process, duration and costs involved can be daunting.

The basic cost of a debt review can range from R1 500 for a basic case to R10 000 or more for advanced cases.

Debt counselling is a formal process, which is governed by the National Credit Act (NCA). Your monthly debt repayment amount is specific to your situation and how much you owe on your debt in total. Debt counsellors are permitted by the NCR to charge certain fees which include:

  • A one-off restructuring fee of 100% of your debt rehabilitation amount up to a maximum as per the NCR’s guidelines.
  • A one-off application fee.
  • A one-off administration fee for your application.
  • A sundry fee equivalent to your monthly debt rehabilitation amount for your legal application to the National Consumer Tribunal or magistrate court.
  • A reckless lending fee that covers the cost of a reckless lending investigation done on the client's account, as regulated by the NCR.
  • A monthly after-care fee for your monthly debt rehabilitation amount for every month that you are under debt counselling.
  • A monthly transactional payment distribution fee.

Debt councillors are also within their rights, as per the NCR’s guidelines to charge for other services like credit checks as well. They may also charge a withdrawal fee equal to 75% of the restructuring fee, should a consumer choose to end the debt review process.

The review process also requires adherence to a strict monthly budget, requiring consumers to drastically cut down on their spending habits. By law, the debt review statuses can be removed from the credit bureau database only once a clearance certificate is issued.

It’s become a lucrative business, and the numbers show it. There were 1 554 registered debt counsellors as of March 2023, which handled an average of 13 319 applications a month and issued 41 645 clearance certificates in that period. There had been close to two million applications since the inception of the process and just over 213 000 clearance certificates had been issued in that time.

People are struggling too, so the industry’s clientele is rising, with just below 50% of South Africa’s credit-active consumers in dire straits. According to statistics released by the NCR, the number of consumers with impaired records had increased by 71 000, from 9.69 million to 9.76 million, during the previous quarter.

But several serious challenges had arisen in respect of debt counsellors the recent parliamentary meeting revealed.

Consumers often did not fully understand the implications of going under debt review and then wanted to get out of debt review.

Members of the portfolio committee also asked if the debt counsellor could also be an owner, partner or director in a payment distribution agency and, if a counsellor could be, was that not a clear case of conflict of interest? If all cases of debt relief were transferred to the National Consumer Tribunal, as suggested, would the tribunal be able to handle the case load? Why did debtors find themselves on the blacklist, particularly of two credit reporting agencies, for small store debts? How could the issues of small debt that ended up on blacklists be resolved? Why, since 2006, had the department not drafted an mmendment to the National Credit Act? What interactions had the regulator had with debt counsellors to discuss the challenges faced in trying to assist consumers? Had there been any symposiums or discussions with debt counsellors? What were the obligations of lenders under the act? Could the entities not tell some of their good stories?

Education and awareness programmes were a major concern for some members of the committee. A member asked the department who was assigned the responsibility of ensuring when a person was cleared of debt, that such a person was taken off the system within the stipulated three days. What was sent to the consumer to prove that he had been taken off the system? Why were so many amendments necessary to improve the functionality of the regulator and the tribunal?

With many questions remaining unanswered, the meeting was concluded with a single recommendation: “The committee recommends that the House request that the minister of trade industry and competition should publish an annual report on the progress made in terms of levels of beneficiation in the economy.”

Perhaps a bit wide in its expectation it remains a valid point, especially with the expectation of household debt-to-income ratio in South Africa to reach 75% this year, according to Trading Economics. That means that average South African spends 75% of their income to pay off debt.

In the meantime, consumers need to think twice before taking on more debt, or opting for debt review to get out of it.