Five critical facts you must know about debt counselling
Once you're in, you can't just exit - there are only two ways out of debt counselling
Consumers enter into debt counselling without understanding the full implications of doing so. Debt counselling – also known as debt review – can be a lifeline or a noose around your neck if you sign up with a bad debt counsellor. And even if you have the best debt counsellor in the world, debt counselling is a legal process and being in it has consequences.
1. A company can’t give you debt counselling
Debt counselling is prescribed in terms of the National Credit Act (NCA), which says that only a natural person may be a debt counsellor.
Some big debt counselling firms solicit business by cold calling consumers and offering to slash instalments to creditors by up to 60%. Applications are handled by call centre agents who are usually not registered debt counsellors.
The National Credit Regulator (NCR) has cancelled the registration of debt counsellors who have delegated their work to call centre agents or people who are not registered debt counsellors.
Two years ago, the regulator said in a circular it was “considering the legalities of the call centre business model used by debt counsellors”.
Clients of big debt counselling companies have complained that they have never spoken to nor met the debt counsellor whose name is on their court papers, and that every time they called the company, they dealt with someone different.
No two consumers are identical. A debt counsellor should consider your unique financial obligations and your relationship should be personal and based on trust.
2. Applying has consequences
When you apply to a debt counsellor to be declared over-indebted, he/she immediately sends a notice to your creditors and all credit bureaus, informing them that you’ve applied for debt review. This is a legal procedure and your application is then noted on your credit report.
The effect of this is that you can’t take on any more credit other than a consolidation loan until the debt counsellor has rejected your application or a magistrate has found that you’re not over-indebted.
“When you apply for debt review, you sign a declaration, acknowledging that you understand your credit report will reflect you’ve applied and that you can’t take on more credit. This is for your protection and that of your creditors, who run the risk of lending to someone who is over-indebted,” says debt counsellor Michelle Barnardt.
In a recent case heard by the full bench of the Gauteng Division of the High Court, the Law Society of SA argued that to list a consumer who has merely applied to be declared over-indebted is premature. Should their circumstances change, it’s difficult for them to clear their credit reports.
3. You need a court order
Once a debt counsellor finds that you’re over-indebted and makes a proposal to your creditors for the re-arrangement of your debts, your matter must be referred to a magistrate’s court for judicial oversight to confirm the finding that you are over-indebted and restructure your debt based on the debt counsellor’s proposal.
A debt counsellor has a “statutory obligation” to refer his or her recommendation to a magistrate’s court, according to a declaratory judgment by Judge Barend du Plessis issued a decade ago. And magistrates have a duty to interrogate proposals made by debt counsellors and not merely rubber stamp them, according to recent case law.
The court order confirms that your instalments have been reduced and the repayment term has been extended. It is to protect both you and the credit providers and ensures transparency in what you owe, how it is to be paid back and when debt review ends.
4. Watch out for consent orders
Some debt counsellors send their proposals to the National Consumer Tribunal (NCT) to be issued as consent orders.
The Act says that if a debt counsellor finds that you’re “not” over-indebted, but are experiencing or likely to experience financial difficulty, they may recommend that you come to an arrangement with your creditors, and the NCT can confirm the agreement as a consent order without hearing evidence.
But if there is not consent between you and all your creditors, your matter must be referred to a Magistrate’s Court. Note that this applies to consumers who are not over-indebted.
Some consumers have successfully applied for the rescission of consent orders issued by the NCT on the basis that their debt counsellor found them to be “not over-indebted” when they were.
5. You can’t just exit
Consumers don’t realise that you can’t slip in and out of debt counselling on a whim. The NCA doesn’t allow it. There are only two ways out of debt counselling: either pay off all your debts in full or pay off all your short-term debts plus catch up on the arrears on your home loan or any other long-term loans and revert to paying the original instalments.
Only then can a debt counsellor issue you with a clearance certificate, which effectively releases you from debt review. Once a clearance certificate has been issued, credit bureaus must remove your debt-review status.
It doesn’t matter if you get to a point where you can revert to paying the original instalment. Your debts have been rearranged and you’ve benefited from this – at the expense of your creditors. You can’t merely pull out.