The report has found that creative solutions and positive collaboration by stakeholders in the credit industry have streamlined the debt review process, but too few debt-stressed consumers are making use of debt counselling in its current form.
"The study shows that the NDMA, as the agency responsible for implementing the NCR Task Team recommendations on behalf of the credit and debt counselling industry, has made a positive contribution to the process," says CEO of the National Debt Mediation Association (NDMA), Magauta Mphahlele. "However the report noted that even with many creative solutions introduced, a small percentage of consumers that would qualify for debt restructuring are applying for this remedy."
The report states that debt counselling or debt review procedures introduced by the National Credit Act (NCA) is one of only three debt relief measures available to over-indebted consumers in South Africa. Because the administration order procedure (under section 74 of the Magistrate's Court Act) has a R50 000 maximum debt ceiling and insolvency procedures (under the Insolvency Act) have requirement that favours concurrent creditors, they are extremely limited in application, making debt counselling the primary debt relief remedy for over-indebted consumers.
At the end of December 2011, there were 19.34 million credit active consumers in South Africa having entered into 67.53 million credit agreements. Of these consumers 8.83 million (47.2%) had so-called impaired credit records (ie were three or more months in arrears, under administrative order or had court judgments granted against them). A further 14.7% were in arrears with payments for one or two months, leaving a mere 39.1% in the current category.
The study showed that the position is even worse if one takes into account that not all debt emanates from credit agreements; not all credit providers contribute to the statistics held by credit bureaus; and that debts such as arrear maintenance payments and defaults on municipal accounts are not included in the credit bureau records. The number of consumers with impaired records increased by 170 000 in the 2nd quarter of 2012, bringing the total number of consumers with impaired records to 9.2 million. Those that are three+ months behind account for 19.5% being 3.8 million.
The researchers say the total number of applications for debt counselling between March 2008 and February 2012 was estimated at just 296 544.
Closer analysis also revealed that a large percentage of consumers approaching debt counsellors for debt counselling also seemed to leave the process (after either termination or withdrawal). In February 2012, it was estimated that there were 105,413 consumers active under debt counselling, meaning that close to 40% leave the process though being terminated, voluntarily withdrawing or not being accepted. About 50 000 are reported to still be in the process of assessment and negotiation.
The authors of the report say the legislative environment is problematic, with industry players still uncertain about sections in the NCA and regulations.
Overall, the study found the NCA and regulations were perceived to be ambiguous, difficult to interpret and lead to contradictory judgments. Many aspects were clarified through the judicial interpretation of specific problematic areas in the NCA, but these judgments have not all been favourable to either the debt counsellor or consumer.
A number of judgments relating to section 129 and 86 (10) of the NCA had brought an end to the uncertainty created by previous, often conflicting, judgments on the interpretation and implementation on specific sections of the NCA. But the researchers said it was now up to the legislature to decide whether these interpretations of the NCA do indeed reflect its intentions. 85% of respondents indicated that these rulings had a negative impact on the process, especially with regards to the exclusion of certain agreements from entering the debt review process.
Another obstacle consistently noted by interviewees in the study from debt counsellor, credit provider and stakeholder organisations in the debt counselling process was problems experienced in the magistrates' courts.
According to a Statistical Summary of Debt Counselling for the period ending February 2012, approximately 39 306 court orders have been issued with approximately 38 800 consumers awaiting court orders. Of the 296 544 consumers applying for debt counselling, 113 716 were rejected or withdrew from the process.
The study showed that problems experienced by and as a result of the mandatory intervention of the magistrates' court were consistently noted, specifically, jurisdiction and availability of courts for a hearing.
The termination of the debt review process also created further delays in the process, the study found. The authors point out that the only way a debt counsellor can legally avoid terminations of debt review is to obtain a court order for debt restructuring within sixty business days after the consumer has applied for debt counselling.
However, it is not always possible to obtain a court order within sixty days as the court rolls may be full or matters may be postponed. Where a matter is postponed past the 60 business day period, it may be terminated where the consumer is in default. This termination is subject to participation in good faith by credit providers but does not require any judicial oversight. The authors also show that wrongful terminations, for example, where a consumer is making payment and the payment is not received contributed to delays in the process.
Indications are from both the reports of the NCR as well as that of the credit providers that stricter termination policies exist where a secured asset is involved, whilst a more lenient approach is adopted where the agreement is unsecured.
The study said that it was clear that the competency and skills of practicing debt counsellors differed notably, with some debt counsellors being truly competent and professional, while others provided substandard services to clients. This was due to a lack of understanding or knowledge about the process and credit as a whole.
Consumers bear the brunt
The report noted that the consumer had to incur the costs of appointing a debt counsellor as well as an attorney either resulting in an interruption of payment, if any, to creditors and resultant further default or reduced payment.
The expenses incurred because of terminations, consequential enforcement and defending matters often exacerbated these legal costs.
Over the past five years, a number of industry initiatives such as the NCR Task Team guidelines, National Debt Mediation Association (NDMA) Joint Debt Review Forum and DRAC have been introduced to improve the process. Debt counselling was introduced as a debt relief remedy, industry agreements were negotiated in order to address shortcomings in the NCA and problems with implementation of statutory provisions and the judiciary has changed the debt review landscape repeatedly in a short time.
However, the report says many players were firmly set in their ways prior to the introduction of the NCA. In the premises, not all the difficulties have been addressed some have partly been addressed and new aspects requiring attention has come to the light. Mphahlele says that this confirms that there are positive shifts in the industry and this should be given time to mature and be embedded in every business practice.
The main concern of the research team is, however, the exclusion of certain consumers from debt review and the reliance on informal agreements between members of the industry. The NDMA shares this concern, hence the call for alternative debt rehabilitation options as well as legislative changes in the long term.
"The NDMA welcomes the report as it confirms the concerns that have been raised by the NDMA regarding the failure of current debt remedies to rehabilitate a sufficient number of the over-indebted population in South Africa. We believe the NDMA can continue to play a positive role in addressing some of these shortcomings by assisting over-indebted consumers and advocating for the introduction of other alternative remedies whiles the process to review the various laws are underway," concludes Mphahlele.
