01 Feb How Debt Counselling Protects You from Creditors
If you’re considering debt counselling, you might have wondered how debt review protects you. If you’re over-indebted, you’ve likely experienced harassment from creditors or debt collectors, late fees, or even a letter of demand (Section 129 letter).
A letter of demand sets out that your account is in arrears and the steps you can take to rectify it, including debt review, repaying your debts in full, the consequences of not paying your creditors back, and the payment deadline. For most over-indebted South Africans, paying back creditors is not an option, so they turn to debt review, often a last resort in the fight against debt.
Most South Africans are unaware of the many benefits debt review offers, including reduced interest rates and repayments and protection from asset seizure. These protect you from the nasty actions creditors can take, including docking your wages, declaring you bankrupt, and auctioning your assets at a loss.
Let’s discuss how debt review protects you from creditors: what the law says, how it can be interpreted, actions that break debt review’s protection, and how you can gain protection.
Ready?
How Debt Review Protects You from the Legal Consequences of Defaulting
The National Credit Act (NCA) sets out that once your creditors have been notified of your intention to restructure your debt (Form 17.2 [b]), they can’t take legal action against you.
The Consequences of Defaulting
If you miss a payment, your creditor may send you a Section 129 (letter of demand) at least 30 days after you default. The letter outlines steps you can take to avoid legal action, including making payment in full, voluntary sequestration, an administration order, or debt review. If you don’t respond to the letter, you’ll receive a summons to court.
Should you fail to defend yourself or don’t show up to court, you’ll be issued with a default judgment. The court will issue a warrant an execution, which will allow creditors to auction off assets like your car to recover their debts. If you don’t have a car to auction or its value is too low, a judge will review your income and expenses, and then make a ruling on how you’re to pay your creditors (called an administration order).
If you don’t make payments as ordered, the court can order your salary to be docked before it reaches your bank account to make payments (called a garnishee order). If you quit your job to escape the garnishee order, your home may be repossessed.
If your creditor doesn’t choose this option, they may apply to the court to have you declared to have you involuntarily sequestered (declared bankrupt), where your assets will also be auctioned (so long as it covers at least 20% of your debt).
What the Act Says
The act says, “Subject to section 86(9) and (I0), a credit provider who receives notice of court
proceedings contemplated in section 83 or 85, or notice in terms of section 86(4)(b)(i),
may not exercise or enforce by litigation or other judicial process any right or security
under that credit agreement…”
Context
Notice that this part of the act mentions sections 86 (9) and (4), as well as sections 83, 85, and 86 (4) (b) (i).
Section 86 (9) describes how consumers can apply directly to the Magistrate’s court for debt review. Section 86 (4) says that all creditors must do their very best to relieve you of over-indebtedness (when reasonable). Section 83 describes reckless credit and section 85 describes the process for declaring someone over-indebted. Lastly, section 86 (4) (b) (i) says your debt counsellor must inform all creditors listed in your application of your intentions to undergo debt review.
Outcome
Essentially, this section states that once a creditor is aware of your intentions to undergo debt review (when a debt counsellor requests information), they can’t sue you or take legal action.
Exceptions
If you’ve already defaulted under a credit agreement (received a letter of demand from a particular creditor), the debt won’t be included in debt review 60 business days after your application. The Act writes, “If a consumer is in default under a credit agreement that is being reviewed in terms of this section, the credit provider in respect of that credit agreement may give
notice to terminate the review…at any time at least 60 business days after the date on which the consumer applied for the debt review.”
Additionally, if you enter into a new credit agreement (except a consolidation loan) under debt review, you will no longer be protected and can be sued. The NCA says this in section 88 (1); “A consumer who has filed an application in terms of section 86(l), or who has alleged in court that the consumer is over-indebted, must not incur any further charges under a credit facility or enter into any further credit agreement, other than a consolidation agreement.” This applies unless your debt review application is rejected or you pay your debts in full.
How Debt Review Protects You from High Interest
High interest rates can be the bane of South Africans’ existence. Creditors apply them when you have a low credit score, high credit utilisation, or debt-to-income ratio. The National Credit Act aims to combat over-indebtedness by laying out that creditors must comply with your debt counsellor’s negotiation efforts to lower them, and sometimes, the total debt amount. This also applies to extending your repayment term, which lowers your monthly repayment amount.
High interest rates can contribute to your inability to pay debts, particularly when your debt amount is already high from predatory loans, such as payday loans.
What the Act Says
Section 86 (5) (A) says that creditors must comply with negotiation efforts to relieve a consumer (you) from over-indebtedness, so long as their proposal is reasonable.
It reads, “(5) A consumer who applies to a debt counsellor, and each credit provider contemplated in subsection (4)(b), must:
(a) comply with any reasonable requests by the debt counsellor to facilitate the evaluation of the consumer’s state of indebtedness and the prospects for responsible debt re-arrangement; and…
(b) participate in good faith in the review and in any negotiations designed to result in responsible debt re-arrangement.”
Context
The section mentions subsection of section 86. Subsection 4 (b) says your debt counsellor must provide you with a receipt of your debt counselling application and notify creditors with Form 17.2 (b).
So, the text after the number five says that all creditors who were notified of your debt review application must follow laws (a) and (b).
Outcome
Section (a) says creditors must comply with reasonable requests, (meaning common debt counselling rearrangement convention) to evaluate your debts (verify the information you laid out in your application form) and the prospects of responsible debt re-arrangement. In this case, “responsible” means lowering interest rates and negotiating loan amounts, as this will combat your over-indebtedness.
Section (b) says creditors must participate in “good faith”, which means they must negotiate amicably. When the Act mentions debt re-arrangement, it means negotiating interest rates and debt amounts.
The key point of section 86 (5) is that it stipulates creditors must work with your debt counsellor to relieve you of over-indebtedness because it’s the responsible thing to do.
Summary
Debt review protects you from legal action when your creditors are notified of your debt review application (unless they’ve already sued you) and from high interest rates using legislation from the National Credit Act.
Under debt review, you’ll also enjoy an extended repayment term and a personalised repayment plan and budget.
If you would like legal protection from creditors and a lower monthly repayment, contact Limdebt. We would love to help you become financially free.