This article is aimed at shedding light on the debt review process and what precisely it entails from a consumer perspective. In our day-to-day operations, we assist many consumers in removing the dreaded debt review flag on the Credit Bureaus. This flag, in layman’s terms is the inscription on the Credit Bureau indicating that a person has applied for debt review and that creditors should not grant any credit to such consumer. Naturally, the flag is a major hurdle to those who are burdened with it. Not only can they not apply for any form of credit but is sometimes prevents them from being offered employment opportunities.
What are the steps in debt review?
FORM 16 APPLICATION
Once a consumer approaches a debt counsellor for advice or with the intention of entering into the debt review process, a form 16 must be completed by the consumer with the debt counsellor’s guidance. This form contains the personal details of the consumer and the consumer’s financial circumstances. The consumer providers the following financial information for the debt counsellor to determine whether he or she is over-indebted:
- Income earned,
- Regular monthly expenses (budget) such as food and fuel;
- Credit agreement repayment amounts and details.
The debt counsellor does an exercise of simple mathematics to ascertain whether the consumer’s expenses exceed his or her income. If so, the consumer is over-indebted.
Once this exercise has been done, the debt counsellor assists the consumer in reworking his or her budget to the extent that excess and unnecessary items are removed. The debt counsellor then determines what amount is available monthly to the credit providers in repayment of the consumer’s debts. This is done by subtracting the reworked regular expenses from the consumer’s income. The remaining amount is what is available for distribution.
If there is an amount available that is roughly 50% of the full instalments, this means that each credit provider will receive monthly payments of that percentage. Each credit provider is paid pro-rata the amount of debt held.
This notice is sent to all credit providers advising them that the consumer has applied for debt review and requesting that certificates of balance be provided to the debt counsellor in order to facilitate the process.
This notice informs all affected credit providers that the consumer’s debt review application has been accepted and that the consumer is now under debt review.
Notice to credit bureaus
Once the consumer has been found over-indebted and the forms 17.2 sent to credit providers, the debt counsellor is obliged to inform the credit bureau of such successful application. The credit bureaus update their records to reflect that the consumer is under debt review. This flag serves to safeguard the rights of credit providers in preventing additional credit from being obtained by the consumer. It also serves to protect the consumer from continuing with obtaining credit which he or she cannot afford to repay.
The debt counsellor now prepares a proposal of repayments to be sent to credit providers. This document sets out the amounts that each credit provider shall receive monthly during the debt review, as noted proportionate to what is available to distribute. The debt counsellor may during this process also propose reduced interest rates on certain agreements, however, it is important that certain credit providers cannot benefit to the detriment of others. One credit provider cannot for example receive 70% of the original instalment and others only 15%.
A common misconception among consumers is that all credit providers are obliged to accept the debt counsellor’s proposal- they are not. In fact, no credit provider can be forced to form part of the debt review process. Should a credit provider find that the proposed reduced instalment is unacceptable for any reason and decide not to participate in the process, it can TERMINATE the debt review by delivery of a notice in terms of Section 86(10) of the National Credit Act, 34 of 2004 (the NCA). This means that this credit provider is not part of the process and may proceed with a summons if it so deems fit.
Another misconception is that the credit providers are in some way obliged to accept reduced interest rates, or to at least negotiate in this regard. There is no obligation on credit providers to reduce interest rates and if they do so, it is of their own volition due to negotiation.
Referral to the Magistrate’s Court
Once the proposal has been so distributed and negotiated as described above, the debt counsellor must refer it to Court in terms of Section 87(6)(c) of the NCA, to be made an order of Court. This application to Court is done by the debt counsellor and the consumer usually is not required to be present at Court. In some instances, a Magistrate has however requested that a consumer should be at Court in order to give evidence on certain aspects contained in the affidavit.
Once a Court order is in place, no credit provider included in same may terminate the debt review and credit providers, therefore, may not commence legal action against consumers. The so-called protection granted by debt review, really only comes to effect on this Court order being granted as credit providers may terminate the debt review at any time prior to same.
What are the effects of Debt Review?
- PRIOR TO COURT ORDER
Once a consumer has applied for debt review and the application has been accepted by the debt counsellor, the process cannot be terminated by the consumer at will and the credit bureau inscription will remain in place. This means that, even if you terminate the debt counsellor’s mandate, the credit bureaus will not remove the debt review flag and it cannot be removed by the debt counsellor on request.The consumer has only one manner in which to remove this flag, and that is to refer the matter to the Magistrate’s Court in terms of Section 87(1)(a) of the NCA. This section allows the Court to REJECT the debt counsellor’s finding of over-indebtedness. This article sets out this application in greater detail [Debt Review Help • I am flagged as being under debt review (vermeulenlaw.co.za)]It must be understood that, once you have applied for debt review and it is accepted by the debt counsellor, this will be evident from your credit bureau profile until you approach the Court with the above application.
- AFTER COURT ORDER
The consumer cannot remove the debt review flag after the Court order has been granted, but for under only very specific circumstances. These are as follows:
- The consumer has repaid every credit agreement, or
- The consumer has repaid all credit agreements BUT FOR the bond or long term agreements, thereafter
He or she is then entitled to a clearance certificate.
The issuing of a clearance certificate has the necessary implication that the debt review flag is removed.
It is impossible to remove this credit bureau flag if either of the above scenarios are not applicable once a Court Order has been granted.
This will mean that, if the consumer has applied for debt review and the proposal envisions the repayments to be extended over the coming 15 years, that the consumer will essentially be ‘trapped’ in debt review for 15 years. This may seem far-fetched, but if one looks at the average vehicle lease agreement, which usually spans over five years, the term will be stretched to double that, if the consumer has a proportional amount available for distribution of 50%.
One must therefore arm yourself with the necessary knowledge BEFORE approaching a debt counsellor, as this information may not be a part of the sales pitch.
The cold hard truth
- Debt review does not lessen the burden of current financial loads, it distributes it over a longer period of time to make the load more manageable.
- Debt review does not guarantee no legal action or summonses.
- Debt review does not guarantee lower interest rates or consolidation of debt.
- Debt review is not a process that one can easily cancel and remove all traces thereof on your credit record.
- Debt review prevents consumers from obtaining further credit, this may include even transactions items such as cell phone accounts.
- Debt review is a long-term encumberment, it always extends the period of repayment.