(Source: Personal Finance)
Only a small number of debt counsellors have registered with the National Credit Regulator so far and it remains to be seen if the negotiation process they use will keep those with too much debt out of the courts.
By Laura du Preez
The National Credit Act (NCA), which became fully effective in June this year, provides for a debt counselling process for people who are over-indebted and unable to keep up with their repayments.
The intention behind setting up this process was to provide a service that could be of more assistance to people who have debt problems than the debt administration process, and to avoid the problems that have arisen due to the abuse of debt administration orders.
But issues concerning how much people who provide counselling can charge for their services are preventing more counsellors from setting up office.
Before the NCA became fully effective, Mpho Thekiso, the project manager for debt counselling at the National Credit Regulator (NCR), said the NCR aimed to train 500 debt counsellors nationwide. But to date only 141 counsellors have registered with the NCR, she says.
Besides the issues concerning what debt counsellors may charge, the efficacy of the counselling process has yet to be proved.
Tony Richards, the interim chairman of the Debt Counsellors' Association of South Africa, says debt counselling is very new, and there are no court cases that set any precedents for counsellors and creditors to follow.
Richards says debt counselling is supposed to provide a quick and easy way for people to address their debt problems, but he expects that initially 65 to 75 percent of debt counselling cases will end up in court because the credit providers won't agree with or respond to the debt counsellors' proposed repayment plans.
Thekiso says the first case in which creditors have not agreed to a debt counsellor's proposed plan is going to court next week. She believes after the courts have endorsed a few of the counsellors' repayment plans, creditors will start to agree more readily to them.
Somerset West lawyer Eduan Matthee, who has represented many debtors in court and runs a debt administration company, says he does not believe debt counselling will work, especially in the low-income market, because the amount of debt concerned does not justify involving a suitably qualified person - possibly even a lawyer to take the matter to court - to determine issues such as whether the debt was granted recklessly.
The NCR has set up a fund to pay the debt counselling fees of people from families who earn less than R3 500 a month, but does not envisage paying lawyers from this fund, Thekiso says.
Matthee says if the creditors do not agree to a repayment plan and the debt counselling process lands up in court, legal costs will be incurred to the detriment of the debtor.
The debt counselling process is supposed to remove the court as a third party and leaves the issue of the debt repayment plan to negotiations between a debt counsellor and the creditor, and the potential exists for these parties to abuse the debtor, he says. Debt administration is not a bad thing - it is just badly enforced, Matthee says.
Richards says uncertainty about what debt counsellors are allowed to charge is preventing more people from becoming or practising as debt counsellors.
The NCA provides that debt counsellors can only charge you R50 for an application to undergo debt counselling, Richards says. Beyond this the legislation does not prescribe what debt counsellors can charge. The NCR, the Department of Trade and Industry and debt counsellors are apparently discussing prescribed fees for debt counselling but these have not yet been determined, Thekiso says.
Richards says R50 doesn't even cover the paperwork involved in processing an application. He does not believe the additional fees that debt counsellors should be entitled to charge should be regulated.
Richards says the clients who have applied to his company, General Union Corporation, for debt counselling have on average 12 creditors. Debt counsellors need to record the details of each debt, and processing such an application takes about three hours, he says.
Richards says in addition to the R50 application fee, his company charges a one-off fee for the debt review that is equal to the monthly amount you have available to repay your debt. General Union Corporation caps this fee at R3 000 plus VAT.
Richards says his company also charges a monthly fee of five percent of the amount you are paying towards your debts each month as an aftercare fee for the ongoing review of your situation. This fee is capped at R150 plus VAT.
Thekiso says the NCR has proposed paying set fees for the different tasks performed by debt counsellors for people from families with incomes of less than R3 500 a month. For example, R500 for proposing a repayment plan, and a further R150 if the creditors do not agree to the plan and the debt counsellor needs to prepare for a court case.
How an administration order will affect you
If you are unable to keep up your debt repayments, you have debts totalling less than R50 000 and you have no other significant assets that you can sell to pay off your debts, you can, through an attorney, apply to a magistrate's court for a debt administration order.
Usually, these applications are done through a debt administration company, which examines your finances and determines how much you can afford to repay each month.
An attorney will then present an application to the court and your creditors that outlines a plan in terms of which you will pay off your debt.
The court will grant an administration order, appoint a debt administrator (which may or may not be the attorney's company) and institute a monthly garnishee order against your salary.
In terms of the garnishee order, your employer will have to pay part of your salary - often a large proportion of it - to the debt administrator. Every three months, the debt administrator is supposed to pay the amounts collected from you to your creditors.
The interest on your debt will continue to accrue, but is repaid only after you have repaid the debt you had when you were placed under administration. This measure is designed to prevent the creditor that charges the highest interest rate getting repaid first.
The debt administrator will apply to the magistrate's court to have the administration order rescinded when you have repaid all your debts.
An administration order remains on your credit record for 10 years or for five years after the order is rescinded, whichever comes sooner.
You won't be able to apply for any new credit agreements without stating that you are under a debt administration order.
Debt administrators often advertise their services with offers to help people who are in dire financial straits and face having their homes, cars and/or household goods attached.
They may lure you into accepting their services by offering to help you keep your possessions and repay only a manageable amount each month. If you can, try to negotiate a repayment plan with your creditors yourself and avoid paying the fees associated with debt administration.
If you agree to be placed under debt administration, try to find an administrator that is prepared to be open and transparent about its repayment schedules.
Make sure you know what the administrator will charge and how much of what you pay each month will go towards reducing your debt, and therefore how long it will take to repay your debt in full. Make sure the administrator sends you statements every three months.
If your administrator is overcharging
If your debt administrator is charging more than the legal limit, you should try to get the administration order rescinded or find an administrator that will charge lower fees.
To get the order rescinded, find out from your creditors what you owe, work out what you can afford to repay and ask your creditors if they will accept this, the National Credit Regulator's Mpho Thekiso says. Ask your creditors for a letter of consent and then get a lawyer to take the matter to court or ask a legal aid clinic to help you, Thekiso says.
You will have to go to court if you want to replace your administrator, and this will involve legal fees.
Justice Department spokesperson Zolile Nqayi says if your debt administrator is a lawyer and is overcharging you, you should lodge a complaint with the relevant law society. The law societies will not help you if the debt administrator is not a legal practitioner, he says.
The National Credit Regulator (NCR) can refer you to a registered debt counsellor. The regulator can also deal with complaints related to the National Credit Act. The NCR acts as a mediator in disputes between consumers and credit providers or credit bureaus. The NCR's contact at details are:
Call centre - 0860 627 627
Fax - 011 554 2871
Email - firstname.lastname@example.org or email@example.com
Post - PO Box 209, Halfway House, 1865.