Category: <span>News</span>

Best deals on Debt Review fees and monthly payments?

This article about Debt Counselling fees was posted on www.businesslive.co.za :
https://www.businesslive.co.za/bt/business-and-economy/2017-06-24-reckless-loan-relief-a-benefit-of-debt-reviewtext-it0-bd0-mode1-/
In our opinion, however, it requires some additional clarification.
As regards the Debt Counsellor’s Restructuring fee:
(a) The National Credit Regulator (NCR) Guideline is that the Restructuring fee equals the first month’s payment. This amount is CAPPED at R6 000 (i.e. even if the client’s monthly Debt Review payment is more than R6 000, the maximum Restructuring Fee paid to the Debt Counsellor shouldn’t exceed R6 000). If the client’s monthly Debt Review payment is less than R6 000, the Restructuring Fee should also equal this lower amount.
(b) The Debt Counsellor’s Restructuring Fee is NOT an additional payment that the client has to make to the Debt Counsellor. Once a client’s debts have been restructured to a monthly amount which they can afford, the client should only be required to pay that amount monthly. The Debt Counsellor’s Restructuring Fee AND the Legal Fees for the Debt Restructuring Court Application are distributed from those monthly payments.

This also relates to another practice of which we recently became aware. When we work with a client to assess the amount which they can afford to pay monthly towards their debt, part of our duty is to ensure that this amount is sufficient for “reasonable” proposals to be sent to creditors. “Reasonable” means that:
* Outstanding debts shouldn’t take unrealistically long to pay off ;
* Provision is made for appropriate interest, linked insurances and fees, where required ;
* Creditors are treated fairly and impartially (i.e. one is not preferred over others).
This means that there will be instances where the Debt Counsellor may advise the client that an initial assessment shows that the amount that they have available for debt repayment is insufficient, and their Budget therefore needs to be revised.

It’s come to light, however, that some Debt Counsellors will complete an application and sign up a client even if the amount available is NOT sufficient for reasonable proposals. The risk of this is that creditors could reject the Restructuring Proposals and consequently oppose the Debt Restructuring Court Application. This could result in the Magistrate who is hearing the Application refusing to grant it, and thus deciding to “reject the recommendation or application” [National Credit Act Section 87(1)(a)].
To try and avoid this rejection, some Debt Counsellors resort to unscrupulous tactics such as:
* Building an annual escalation (i.e. an increase in the client’s Debt Review payment amount) into the Proposals, sometimes without even telling the client or consulting them to verify that they will be able to afford such escalation. This means that, if the client doesn’t increase their payment amount after a year (e.g. because they weren’t aware that they were supposed to), they’re in breach of the agreements made with their creditors, and at risk of creditors proceeding with legal action or other means of collection. It also means that, although the Proposals may show that a client will be debt-free in a reasonable period, the reality is that it will take significantly longer.
* Getting back to the client AFTER they’ve made their first payment (i.e. the Debt Counsellor has received their Restructuring Fees), and advising them that either:
(a) They need to increase the amount that they’re paying to Debt Review, or
(b) The Debt Counsellor will need to remove certain accounts from Debt Review (i.e. the client still pays the same monthly amount, but it doesn’t provide for ALL of their debts, only those that the Debt Counsellor chooses to retain).

Our reason for saying that these tactics are unscrupulous is that we feel that they are not true to the aims of the National Credit Act which (as stated in Section 3(g)) are: “addressing and preventing over-indebtedness of consumers, and providing mechanisms for resolving over-indebtedness based on the principle of satisfaction by the consumer of all responsible financial obligations”. Rather than providing relief, the main aim of these tactics appears to be ensuring that the Debt Counsellor signs as many clients and earns as many Restructure fees as possible. Yes, all Debt Counsellors need to have a sustainable practice, but it should still be done by following the correct procedures.

Efficient debt repayment

If you have a number of debts that you’re repaying by way of instalments and one of them is an Access Home Loan/Mortgage Bond, you may be in a position to do your own “Debt Consolidation”. The interest rate on the Home Loan/Mortgage Bond would usually be lower than the interest rates on the other debts. It thus makes sense (if you have access to sufficient funds in the Bond) to draw those funds and settle the other debts. If you then pay the instalments that you would have paid to those other accounts into the Bond, you will get the benefit of the lower interest being charged on your Bond, which means that in the long term you will have settled your outstanding debts in a shorter period.
Alternatively, if you’ve been feeling the squeeze financially, you could free up some disposable income by only paying into the Bond a percentage (for example 75%) of the instalment that you would have paid to the other debts. This would free up the other 25% as disposable income.

Let’s look at an example : X has the following accounts:

  • Home Loan (interest rate = 11%): Outstanding balance = R750 000, & has access to an additional R250 000;
  • Credit Card(s): Average interest rate = 21%, Total outstanding balances = R100 000
  • Clothing account(s): Average interest rate = 26%, Total outstanding balances = R20 000
  • Furniture account(s): Average interest rate = 24%, Total outstanding balances = R60 000

X’s repayments are as follows:

  • Home Loan: R10 350 monthly (to settle it in 10 years);
  • Credit card(s): R3 100 monthly (to pay them over 48 months);
  • Clothing account(s): R1 100 monthly (to pay them over 24 months);
  • Furniture account(s): R2 400 monthly (to pay them over 36 months);

X takes R180 000 from his/her Access Bond and settles all of the other outstanding debts. The outstanding balance of the Bond is now R930 000.
SCENARIO 1: X adds the FULL instalments that he/she was paying to the other debts to the Bond repayment. This means that the Bond repayment increases from R10 350 to R16 950. The Bond will now be paid in full in six-and-a-half years (assuming the interest rate remains at 11%). Just reflect on that – X is completely debt-free THREE-AND-A-HALF YEARS earlier than expected!
SCENARIO 2: X decides that some extra cash would come in very handy every month, and is happy to pay off the Bond over 10 years. This would require only increasing the Bond instalment to R12 850 monthly. This means that X’s TOTAL monthly instalments have decreased by R4 100 monthly.

BE WARNED, though: BOTH scenarios assume that X DOESN’T incur additional debt after consolidating the original credit card, clothing and furniture accounts. Creating NEW debt obligations will change these scenarios.

(The idea for this article germinated from a question asked by a Fin24 reader and answered by Craig Torr of Crue Invest: http://www.fin24.com/Money/Money-Clinic/Debt/torn-between-credit-card-and-bond-repayments-20170526).
Thanks also to Mark Ansley for his valued input.
DISCLAIMER: Credit Balancing Services staff are registered Debt Counsellors, NOT Financial Advisors, and therefore make no claim to providing qualified Financial Services or advice.

Withdrawing from Debt Review

We occasionally receive enquiries from people who had previously applied for Debt Review, but for one reason or another want to withdraw. In March 2015, the National Credit Regulator issued guidelines in this regard (available to view here : http://www.ncr.org.za/documents/Withdrawal_guidelines/Withdrawal%20from%20debt%20review%20guidelines.pdf ).
These guidelines brought together the stipulations of the National Credit Act and Case Law/Legal precedent to clarify the procedure for withdrawing from Debt Review.

Without “re-inventing the wheel”, we thought it might be helpful to simply list some of the main points of these guidelines.

  • Clients who have applied for Debt Review can no longer just withdraw voluntarily at any time. Voluntary withdrawal is only permitted BEFORE the Debt Counsellor has issued a Form 17.2. This form confirms that the client is indeed over-indebted. The Debt Counsellor has to make this finding within 30 business days of the client’s application. Once this finding has been made and the client confirmed as being over-indebted, they can no longer decide that they don’t want to be under Debt Review.
  • For clients who have a Home Loan under Debt Review, these guidelines have now confirmed that they don’t necessarily have to remain under Debt Review until the Home Loan is paid in full (which could take 20-30 years or, in extreme cases, even longer). As soon as all other debts are settled and the Home Loan is no longer in arrears, these clients can exit Debt Review. But hang on, you may be asking yourself ; If my Home Loan has been under Debt Review and receiving a lower instalment, surely it’s just been going further and further into arrears? What are the chances of it ever NOT being in arrears? A good question, but there’s one factor you’re not considering. Most Debt Review clients have other accounts (besides their Home Loan). Accounts with lower outstanding balances could be paid off and settled relatively early in the process. Therefore, the instalments which were being paid to these creditors can be re-allocated to the remaining accounts, which thus reduces their outstanding balances more quickly (known as the “cascading payments” effect). As more accounts are settled, more funds are re-allocated to the Home Loan account. It’s therefore entirely feasible that the Debt Review instalment being paid to the Home Loan account could eventually be MORE THAN the contractual instalment. When this happens, each payment reduces the arrear amount, until the Home Loan is no longer in arrears.
  • Clients who are no longer eligible to withdraw from Debt Review but stop making their Debt Review payments could be placing themselves in a difficult position, even if they eventually settle their outstanding accounts directly with the creditors. The reason for this is that the PDA normally allocates a percentage of a client’s payment (initially 5%, dropping to 3% after two years’ worth of payments i.e. 24 monthly payments or 104 weekly payments) to be paid to the Debt Counsellor as an “Aftercare” fee. This fee is intended as payment for the work that the Debt Counsellor does on the client’s accounts until they are all settled and a Clearance Certificate issued. If the Debt Counsellor is not receiving this fee, either through the PDA or directly from the client, they are entitled to suspend their services. The Debt Counsellor may therefore not reconcile the account to confirm that it is settled, and may also not be prepared to issue the Clearance Certificate, even if all accounts have been settled in full. The consequence is that the Credit Bureaus will continue to record the client as being under Debt Review, thereby blocking their access to any additional credit.

Debt Review is often very beneficial to over-indebted consumers, but there are people who have regretted applying because they hadn’t considered all of the effects and implications – definitely a time when it pays to “look before you leap”. As always, anyone who has questions or would like more information is welcome to contact us – simply click on the “Contact” section of our website for the relevant information.

Debt Review Repayment Period

We were recently asked : Can a Debt Review Court Order specify the exact period for which a client must remain under Debt Review? Or, in other words, if a Debt Restructuring Order states that the client should pay their Debt Review instalment for 60 months, can the client automatically stop paying once he/she has made 60 monthly payments?

Herewith our answer :
When a Debt Review application is placed before the Magistrates Court, the Court may only make an Order which it is empowered by law to make. We therefore describe the Magistrate as a “creature of Statute”. The decisions which a Magistrates Court is empowered to make as regards a Debt Review Application are conferred upon it by the National Credit Act, specifically (in this case) Section 86(7)(c)(ii). This section ONLY allows the Court to :

  • reduce monthly instalments and extend the period over which the balance is repaid and/or
  • postpone the dates on which payments are due ;

This implies that the Court does NOT have the power to :

  • Stipulate the BALANCE which is to be repaid, or
  • Stipulate the exact PERIOD over which the balance is to be repaid.

Strictly speaking, the Court doesn’t even have the power to change the interest rate at which the outstanding debt is repaid. This has resulted in some contention, as many creditors are prepared to consent to reduced interest rates when accounts are placed under Debt Review. Usually the Courts confirm this as a “Consented Arrangement” within a Debt Review Order, but some Magistrates have been known to refuse to grant Orders with reduced interest rates, stating that the Act does not empower them to do this.
Most Debt Review orders (including those drawn up by our Attorneys, Liddle & Associates) will state that the instalments are required to be paid until the outstanding balance is settled in full. This implies that, although the Debt Restructuring proposal will include an estimate over which each debt/account is to be repaid, the significant stipulation is the TOTAL to be repaid, NOT the repayment period.
It would also not be fair to creditors for the Court to stipulate the exact period over which a debt is to be repaid. Some reasons for this are :

  • Debt Restructuring and Repayment Proposals are based on a cascading schedule (i.e. as one account is settled, that instalment “cascades” to the other creditors, so their instalments increase to settle their balances more quickly) ; However, there will always be unavoidable variations in the cascade, which make it impossible to predict the exact repayment term ;
  • Interest rates may not be fixed i.e. could be linked to the Prime Lending Rate (which is linked to the Repo Rate) If the Repo Rate changes after the Debt Counsellor has drafted the Debt Restructuring Proposal, this could affect the Interest Rates, which in turn affect the Repayment period ;
  • The Restructuring Proposal assumes an ideal world where the Debt Review client always pays on time ; In practice, this is seldom the case – a payment which is even one day late affects the interest calculations, which can affect the Repayment Term.

As Debt Counsellors, it is therefore part of our duties to confirm with creditors that the full outstanding balance of an account has been paid in full before stopping the distributions to that account. The proposed period is therefore a guideline (which should be reasonably accurate (i.e. to within a month or two), but the key proviso is normally that the outstanding balance of any account under Debt Review is to be paid in full.

Zeekoevlei Senior Secondary School

On the 23rd of March, we were afforded the opportunity to give a short talk on debt counselling at Zeekoevlei High School.

The school is situated in a severely poverty-stricken area, in which a large percentage of the residents are unemployed. The school serves seven informal settlements and accommodates most of the learners from the Philippi farms.  It is surrounded by two informal settlements, one of which was previously illegal. They are so closely situated that if you could extend your arm through the 2.4m high fence you’d be able to touch the dwellings. The fence is tough, made of special material which is near impossible to cut through.

The principal, Mr Prinsloo, is a tall imposing figure and is about as tough as that fence. He has a policy whereby he does not turn away any applicant seeking to attend, and does not discriminate based on prior academic performance at all. Voted best Principal in the Western Cape in 2009, he guides and directs with a steely resolve. He is determined that no learner will be lost in the system. Together with his staff, they impress upon their learners not to focus on where they’re from, but on what they can achieve. And achieve they do, beating all other schools in the district, including Norman Henshilwood, Wynberg and South Peninsula at year-end results as well as athletics.

Zeekoevlei boasted a 98.33% pass rate at the end of 2016.

Spending time with Mr Prinsloo and listening to him can only be described as an uplifting experience. More than a few times he punched the air with his fist, to emphasise one of his (and the school’s) favourite new sayings: “We beat them”. The respect he commands in his school as well as in the wider community is admirable and seems impossible to achieve in an age where authority does not matter much. This is a man who has even negotiated with gangs in the area that the school is its own turf. Learners and staff can feel safe in the knowledge that no gang warfare will be fought beyond that fence. He also promotes an urgent sense of pride and belonging where learners ascribe to the motto that “ONCE a Zeekoevleinian ALWAYS a Zeekoevleinian”

It was our aim to educate and inform on matters of debt counselling and consumer rights under the National Credit Act, but we both felt that we had received an education in return. Seeing what the staff and students are achieving through hard work, sacrifice and belief, in the midst of cirumstances which are far from ideal, is both humbling and a beacon of inspiration.

When is a Judgment not a Judgment?

We recently had a client who came to us because he’d received a Section 129 letter regarding his Home Loan [please look at our previous post (on our News page) regarding Section 129 letters]. We placed him under Debt Review and informed the bank of this (by means of a Form 17.1). From this point, this story becomes a bit of a “good news/bad news” comedy show.

BAD NEWS : The bank responded with correspondence stating that the account could not be placed under Debt Review because they (the bank) had already obtained JUDGMENT in their favour against the client. This was bad news for us and the client because the law is very clear that, if judgment HAS been granted on an account, that account cannot be placed under Debt Review. However, IF there was already a Judgment in place, it surely wasn’t necessary for the bank to instruct Attorneys to send a Section 129 letter? As is our standard practice, we requested evidence of the judgment from the bank. We also contacted (telephonically) the Attorneys who had issued the Section 129 letter, and…
GOOD NEWS : The Attorney tells us that no Judgment has been granted as yet, but…
BAD NEWS : The Bank replies via e-mail to say that Judgment has been granted in 2012!
MORE BAD NEWS : The client calls to say that he has now also received a Summons from the Bank’s Attorneys. We ask the client to drop the Summons at our office, which he does. The Summons is dated AFTER the date of our Form 17.1, which is…
GOOD NEWS, because the law is also clear that a creditor cannot proceed with legal action on an account after that account has placed under Debt Review. However, there is still…
BAD NEWS, because there are conflicting stories regarding the legal status of this account. To try and clarify the situation, we called the Bank’s legal department. The Bank’s legal representative confirmed that the Attorneys who had issued the Summons had advised them of the client’s Debt Review application, and that they were reviewing the matter.
GOOD NEWS : The following day, we received a Certificate of Balance from the Bank confirming that the account was now included under Debt Review.
MORE GOOD NEWS : We e-mailed the Attorneys, requesting confirmation that the Summons would be withdrawn ; They confirmed by reply e-mail that the Bank had instructed them to withdraw and close the file.

We have encountered similar situations before, so this is not even an isolated incident. For clients, it makes it very hard to know who to trust, especially when the mighty Bank is telling you one story and the lowly Debt Counsellor is telling you something else. Forgive us if we appear smug, but hopefully this will show that sometimes the Debt Counsellor DOES know what they’re talking about!

Debt and Marriage

As debt counsellors, we frequently encounter married couples who are unaware of the ways in which their individual debts affect their spouse. It is also important for people who are planning marriage to have this information. Rather than re-doing something of which someone else has already done an excellent job, I would rather credit Geraldine Macpherson for her comprehensive and easy-to-read article as it appeared in the Liberty newsletter, and encourage interested readers to read the article here :
http://yourlife.liberty.co.za/newsletter/2016-03/article-3.html?utm_source=newsletter&utm_medium=email&utm_campaign=mar16_eng
(readers should be able to copy and paste this link into their web-browsers to go straight to the article).

For anyone who has wanted to know :
(a) the implications of being married in Community of Property (COP) or ANC (with an ante-nuptial contract) ;
(b) how your individual debts affect you once you’re married, and
(c) what happens to your debts and estate when one spouse dies,
we highly recommend reading this article. It also gives useful advice on budgeting and how to work with your finances once you’re married.

Vehicle Repossessions

If you’re in arrears with your vehicle payments, can the creditor just send someone to collect the vehicle? Legally, NO. The creditor needs to follow the proper legal procedure (in terms of Section 130 of the National Credit Act), which means that they need to obtain Judgement and a Warrant of Execution (a Court Order which gives them the right to repossess the asset). In practice, however, creditors often try to avoid the time and expense which this legal process involves. Instead, they send a Collections Agent to the client, who tries to get the client to “voluntarily surrender” the vehicle. The Collections Agent will be strongly motivated to get the client to surrender the vehicle, as their payment is dependent on them returning the vehicle to the creditor. Collections Agents will usually make it sound as though the client is REQUIRED to surrender the vehicle (and may even resort to bulllying and intimidation), but if they do not have a Warrant of Execution AND are not accompanied by a Sheriff of the Court, the client CAN choose NOT to surrender the vehicle. Also, even if a Collections Agent has visited a client and told them that legal action has commenced, the Vehicle Finance agreement can usually still be placed under Debt Review, thereby protecting the vehicle from repossession and further legal action.

 

Debt Review vs Administration

As Registered Debt Counsellors, we’re probably biased, but we genuinely believe that Debt Review is usually the best mechanism available for resolving over-indebtedness. Before the National Credit Act was passed (in 2007), the only options for consumers who needed relief from their debt burden were Sequestration (also known as Bankruptcy) – which has serious long-term consequences – or Administration. Here are five reasons that we feel that Debt Review is a significant improvement on Administration :

  1. Debt Review doesn’t just aim to make a consumer’s debt repayments more affordable (although that IS a major focus) ; It also aims to assist the client to become completely debt-free. Debt Counsellors can generally re-negotiate interest rates and get them significantly reduced. Because Administration and other debt resolution mechanisms can’t do this, clients who are paying lower instalments could end up with ever-increasing balances, and never actually pay the debt off. Also, once a client’s debts have been settled via Debt Review, the Debt Counsellor will issue a Clearance Certificate and update the Credit Bureaus accordingly  ;
  2. Debt Counselling fees (as regulated by the National Credit Regulator) are lower than the fees which Administrator are allowed to charge. Both are a percentage of the client’s payments but, whereas Administrators can charge 12,5%, a Debt Counsellor’s fee is only 5% ;
  3. Administration can only deal with debts up to a maximum value of R75 000, whereas Debt Review has no upper limit, and can restructure (and protect from legal action including repossession) Home Loans, Vehicle loans, large Personal Loans and Credit Card debts, etc. ;
  4. Administrators are only obligated to make payments to creditors every three months, whereas Debt Review distributes payments every month. This results in less interest accruing between payments, thereby reducing the outstanding balance more quickly ;
  5. Debt Counsellors are monitored and regulated by the National Credit Regulator, while there is no monitoring body for Administrators. There is therefore the danger of less accountability, and greater difficulty in resolving problems and complaints for clients under Administration ;
  6. A good Debt Counsellor will also investigate other factors (such as Reckless Lending and Prescribed Debt), which could result in clients not being liable for certain debts.

We strongly believe that our National Credit Act has placed South Africa at the forefront of consumer credit protection world-wide. Even first-world countries (such as the U.K.) are only now waking up to the need for this type of legislation (to govern maximum interest rates, provide options for over-indebted consumers, etc.), whereas South Africa passed this Act eight years ago.

DC Workshop May 2016

Yesterday (Thursday the 12th of May 2016), we were privileged to attend a Debt Counselling Workshop organised by Alan Manshon of The Money Clinic. It was attended by representatives of Credit Providers, Payment Distribution Agencies, Insurance Companies and the National Credit Regulator, as well as other Debt Counsellors.

It was made clear up front that the aim of the Workshop was NOT to try to solve all of the problems and arguments inherent in the Debt Review process. I can imagine the heckler in the front row immediately jumping up to shout, “What’s the point, then?” Thankfully, we have an answer for our hypothetical heckler. The point was to allow the parties mentioned above to meet and engage with each other, to express and listen to each other’s concerns, frustrations and opinions, and in so doing to open broader channels of communication, thereby improving awareness of obstacles, facilitiating resolving of issues and creating a better understanding of the entire process.

From our perspective, it was a very encouraging and positive day. In my opinion, the most positive aspects of the day were :
* The willingness of all parties (including senior representatives of the major banks and retailers) to have a frank and rational discussion, and
* The tacit agreement of all parties that we’re actually all working together to achieve the purposes of the National Credit Act, which includes addressing the over-indebtedness of consumers.

The main reason that I wanted to post this update is that I feel it’s important for the South African public to know that Debt Counsellors, Credit Providers and other stakeholders are prepared to work together to assist those who need help. That can only be good news for the “person in the street” AND the South African economy.