DEBT REARRANGEMENT PROCESS

[Eugene]

(a) Voluntary Debt Rearrangement

Although the primary function of a debt counsellor is to relieve over-indebtedness in terms of the debt review process (detailed in section 86), the Act allows the assistance of consumers who are not over-indebted but who are " ... nevertheless experiencing or likely to experience, difficulty satisfying all ... [their] obligations under credit agreements in a timely manner, the debt counsellor may recommend that the consumer and the respective credit providers voluntarily consider and agree on a plan of debt rearrangement" (section 86 (7)(b)). The debt counsellor uses discretion to decide whether a consumer meets the debt re-arrangement requirements. The Act does not prescribe an application procedure for this remedy. It appears that the decision must be made based on the application for over-indebtedness that does not meet the necessary criteria. There is, therefore, no separate debt rearrangement process. Again, the discretion of the debt counsellor in this situation must be exercised in an objective manner.

Nature of a Voluntary debt rearrangement

The plan of voluntary debt rearrangement is not defined. However, it does generally refer to a contractual arrangement that is concluded between the consumer and the creditors on how payments will be made. In this situation, the debt counsellor cannot impose any condition, but is permitted to facilitate the conclusion of the agreement, in writing and signed by the consumer, all creditors and the debt counsellor (Regulation 24(9)). The role of the debt counsellor in the plan is decided at the discretion of the creditors and the consumer. If the parties agree, they can extend the debt counsellor's functions to include:
• collection of money from the debtor,
• payment of living expenses of the debtor,
• prioritising the payment of debts (which may be based on the duration of the debt)
• Monitoring of payments.

The Consent Order

As already indicated, the terms of the rearrangement agreement cannot be prescribed, but only proposed by the debt counsellor. If the parties agree, the debt counsellor may redraft the agreement as a consent order (similar to a Tribunal or court order). He is required to apply in terms of section 138 of the Act with the Tribunal or a court where it will be confirmed as an order of the Tribunal or a court. It should be noted that this is purely an administrative function and no evidence is necessary to support the confirmation. The format of such application may still be prescribed by the Tribunal or the Court. It should also be noted that the Tribunal and a court cannot comment or interfere in the agreement.

(b) Involuntary Debt Rearrangement

A debt rearrangement can become involuntary. This happens when the parties are unable to agree on a voluntary arrangement. In this situation, the debt counsellor makes a recommendation to the Magistrates' Court in terms of section 86(8) (b). The Magistrates' Court will have discretion in this matter.

There is no separate application for debt rearrangement. This matter is determined at the discretion of the debt counsellor. Any consumer encountering difficulty in paying debt should use the over-indebtedness process described below.

On receipt of the application the debt counsellor will inform all creditors that are listed in the consumer's application and every registered credit bureau, that an application has been submitted by the consumer to be declared over-indebted. The debt rearrangement will be finalised depending on whether it is voluntary or involuntary. The voluntary debt rearrangement is finalised and regulated in terms of the agreement. The consequences of an involuntary debt rearrangement in terms of a court order will depend on the decision of the Magistrates' Court.

[Eugene]

Debt Review Process

The primary purpose of debt counselling is to assist consumers who are over-indebted.

(a) Entry Points into the Debt Counselling

There are four points of entry for a consumer to enter the debt review process namely:

a) A referral by the Court;
b) A referral by the National Credit Regulator;
c) A referral by a credit provider; or
d) A voluntary application by a consumer

A debt review may be initiated by a magistrate in terms of section 85(a). Section 85(a) allows a magistrate to refer a customer to a debt counsellor if at any proceedings it is alleged that a person is over-indebted. A debt review can also be initiated by the National Credit Regulator in terms of section 139 (1) (b) of the Act. This will occur when the Regulator is of the view that complaint appears to relate to over-indebtedness.

Credit providers can also assist in initiating a debt review. Section 129 of the Act prescribes that if a consumer is in default of payment, the .credit provider can bring the default to the attention of the consumer and advise him that he/she can refer the matter to a debt counsellor should the consumer wish to be declared over-indebted. A credit provider is permitted to continue with legal action if:
(a) the consumer fails to respond to the notice of the creditor, or
(b) the consumer refuses the advice of the creditor and does not refer the matter to a debt counsellor

It is anticipated that most applications for debt review will be done directly by consumers in terms of section 86 (1) of the Act. There are no restrictions on debtors who can apply, or how many times they may apply. Anyone who is prepared to pay the prescribed fee may apply for debt review.

(b) Application process for Debt Review

Debt counsellors are required to receive and attend to all debt review applications that are sent to them. It should be noted that all credit agreements are subject to the debt review procedure. The only exception is if the credit provider has proceeded with legal action against the consumer in terms of section 129 of the Act. The debt review process will also apply to pre-existing credit transactions (except if they refer to reckless). The applicant is required to pay the application fee stipulated in schedule 2 of the Regulations (R 50.00). On receipt of the application, the debt counsellor is required to send the consumer proof of receipt of application. There is no prescribed time limit for this but it is suggested that this takes place immediately.

Any person who applies for debt counselling must complete Form 16 of the Regulations.

Once an application has been received by a debt counsellor, the requirement is to give notice concerning the application to all registered credit bureaus. Form 17.1 must also be sent to all credit providers listed on the application. Both notices must be sent within 5 days of receiving the application for a debt review. The notices can be sent via fax, e-mail or registered mail, provided the debt counsellor keeps proof that the notices were sent, and the date and time of sending.

The debt counsellor is required to verify all information contained in Form 16 by requesting documentary proof from the consumer, contacting the credit providers and employers, or by any other method.

A credit provider will have 5 days from receiving a request from a debt counsellor to verify any information. Should the credit provider fail to respond within the given 5 days, the debt counsellor may accept the information provided by the consumer as being correct. It is important to note that the credit provider may, at a later time, contest the information held by the debt counsellor.

The debt counsellor is required to make a ruling concerning the over-indebtedness of a consumer within 30 days of receiving the application for debt review. The debt counsellor has 5 days from the date of the decision regarding the over-indebtedness to advise the credit providers and all registered credit bureaus. If the consumer was found to be over-indebted, the debt counsellor will have 60 days from receipt of the application for debt review to provide a restructuring. The restructuring proposal may be by way of an agreement between the credit providers and the consumer, or alternatively by court order. Should a debt counsellor fail to do the debt restructuring within the 60 days allowed a credit provider may, on notice to the debt counsellor, proceed with legal action against the consumer. This is done in an attempt to avoid consumers from 'hiding' in the debt review process.

To determine whether a consumer is over-indebted a debt counsellor will need to consider the consumer's financial abilities to meet debt obligations in at the 'end of each month. This may include obtaining a credit bureau report containing information any possible bad debt/judgments the consumer has. A debt counsellor will make a decision based on the "the preponderance of available information at the time of determination" whether the consumer will be able to meet his/her financial commitments. Even if the consumer if able to meet financial commitments, but the debt counsellor is of the opinion that this may soon not be the case, the consumer may qualify for debt restructuring.

After considering the over-indebtedness application, the debt counsellor can make any of the following recommendations to the Magistrates' Court, or whilst attempting to obtain consensus amongst the credit providers on how to restructure the consumer's debt:

• Extending the period of the agreement and reducing the amount of each payment due accordingly
• Postponing, during a specified period, the dates on which payments are due under the agreement
• Extending the period of the agreement and postponing, during a specified period, the dates on which payments are due under the agreement; or
• Recalculating the consumer's obligations because of contraventions of amounts permitted in the Act

The debt counsellor may also make recommendations to the Magistrates' Court regarding possible reckless credit agreements. It will be left to the court to a) declare the agreement reckless and b) propose a manner in which to deal with the reckless agreement.

Any debt restructuring process ordered by the court will exclude all reckless credit agreements. However, where the credit providers and the consumer can come to a voluntary debt restructuring agreement, reckless credit will likely be included in the restructuring.

The Restructuring of Debt

The debt counselling according to the NCR, can be done in two ways. That is the informal 'non-statutory' route and the formal 'statutory' route which includes the provisions of the Act.

• The first option is an informal 'non-statutory' debt restructuring. This depends on the solution ¬acceptable to both the Consumer and the affected Creditors. The main characteristic of this phase is that the debt counselling are treated informally, ¬and does not lead to debt freezing and other implications as prescribed by the NCA.

• According to the NCR Process Framework, the informal may have two options. That is:
- The initial DIY route which involves a self-help pack provided to the consumer. This pack includes all the forms and the necessary instructions. The client in this case, is required to negotiate restructuring with the creditors without the help of the debt counsellor
- The second option is applicable when the client lacks the skills and the confidence to deal with creditors directly. He/she can then approach the debt counsellor to commence with the informal 'non-statutory' route.

• In the event that the parties cannot agree to a solution through the informal route, then the debt counsellor will then apply the formal/statutory route.

[Dave A]

A thought occurs reading this.

The debt counsellor is going to go through all this for R50.00? (The application fee). Surely not. What fees is a debt councillor actually entitled to, and who pays?

[Eugene]

Dave, currently, the National Credit Act provides for a R50 application fee for debt counselling, but the department of trade and industry is considering changes to debt counselling fees. (http://www.persfin.co.za/index.php?f...icleId=3851232).

In an article of Bussiness report (http://www.busrep.co.za/index.php?fArticleId=3820099) Mpho Thekiso, manager for the NCR's debt relief programme, said debt counselling fees would range from R500 to R1200, depending on the time it would take to review a consumer's debt.

[Eugene]

Might be a good idea to post the whole article:

(May 9, 2007 By Tonny Mafu; Business Report)

"Indebted to get help - at a steep price

Johannesburg - Counselling for heavily indebted people, which will be available with the introduction of the National Credit Act next month, will not come cheap.

Consumers would have to pay up to R1200 for the service or take as much additional debt with the counsellors to pay for the service, the National Credit Regulator (NCR) said yesterday.

Under the new credit law consumers will be able to get help to restructure their debt repayments. However, this process will require the services of debt counsellors, who will provide budget advice support and mediate with credit providers on behalf of the consumer. According to the NCR, debt counsellors would have to be remunerated on a cost recovery basis.

Mpho Thekiso, manager for the NCR's debt relief programme, said debt counselling fees would range from R500 to R1200, depending on the time it would take to review a consumer's debt.

She said research done by the regulator since 2003 had shown that it could take up to 13 hours to help review and reschedule the debt for a consumer with between seven and 12 credit agreements.

Thekiso said the regulator had proposed to the department of trade and industry that consumers be allowed to settle the counselling fees in instalments.

But Thami Bolani, chairman of the National Consumer Forum, said the fees would be expensive for low-income earners and so might discourage them from seeking help through debt counselling...."

[Dave A]

Perhaps justifiable if it reduces legal costs - but I can see this being a fly in the ointment at times.

[Eugene]

Very true Dave. The already over-burdened debtor now has to fork out up to R1500 to have his debt re-scheduled. According to the NCR Debt Cousnellor notes the debtor should be afforded the opportunity to pay of the R1500 to the debt counsellor. Now, say for instance a debt counsellor has 101 debtors paying their fees of and the debt counsellor decides to add only 1% interest per year - that makes him a credit provider and he has to register as such. BUT, according to the Act, any credit provider is disqualified from being a debt counsellor...

[Eugene]

My biggest concern with the debtre-scheduling process is the way that the assessment is done by the debt counselloras the the function of a debt counsellor is a limited statutory function. Whilst debt counsellors are expected to assist the public in their financial matters, they cannot act outside the parameters of that statutory functionas prescribed by the NCA. A debt counsellor MAY NOT provide financial advice unless registered with the Financial Services Board as a financial advisor in terms of the Financial Advisory and Intermediary Services Act, 2002 (FAIS).

Financial advice in terms of FAIS is defined as "... any recommendation, guidance or proposal of a financial nature furnished, by any means or medium, to any client or group of clients" concerning:
• the purchase of financial products,
• investments of any kind,
• any loan linked to an investment or financial product,
• The termination, replacement, or variation of financial products.

Therefore one might sit with the scenario where the debtor is highly over-burdened with, say 4 life policies or endownment policies or a medical plan (or any policy construed as a financial product) that makes up about 60% of his salary. The debt cousnellor MAY NOT give advise to have some of the policies amended or the like as he will be contravening FAIS.

Remember, the debt cousnellor is not barred from being an administrator (in terms of section 74 of the Magistrates Court Act) and I foresee that the easiest way for any debt counsellor would be is to place such a debtor under administration and that all adminitrations in future will be governed by debt counsellors. Sad, very sad... Problem is that administrations done by private individuals (non-attorneys) are presently not goverened by any Act and they still have carte blanche to a great extend. In an instance where a debt counsellor is also an adminsitrator he would legally be entitle to up to R1500 for the debt-review AND all fees of the administration!

[Dave A]

Therefore one might sit with the scenario where the debtor is highly over-burdened with, say 4 life policies or endownment policies or a medical plan (or any policy construed as a financial product) that makes up about 60% of his salary. The debt cousnellor MAY NOT give advise to have some of the policies amended or the like as he will be contravening FAIS.

Initially I was thinking this might be a stretch getting to this point without the financial advisor who sold the product being in trouble. But there are two scenarios where it could occur:

• As a result of escalation clauses - they really can add up over the years.
• As a result of a downward change in income.

Perhaps the solution for the debt counsellor would be to recommend a revue of the debtor' financial products by a financial advisor as per FAIS. And thinking about it, the outcome of that revue would be pretty interesting!

[Eugene]

Agreed, but then the price of a simple debt re-structuring with the use of a financial advisor will not be afforable to the already over commited debtor. Catch 22!