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The workings of debt mediation

Oct 10 2016 13:49
Carin Smith

A Fin24 wants to know how debt mediation works. He writes:

I would like to have more information about debt mediation.

Independent Debt Counsellor Renée Marais NCRDC1780 answers:

Thank you for your question. I shall attempt to answer it as comprehensively as possible. Debt review is not a one size fits all solution and the debt counsellor (DC) must apply his mind to the individual solution required for each consumer.

Debt review is a process that should be addressed by a duly registered DC. The National Credit Act (NCA) makes provision for three separate scenarios when a consumer is experiencing difficulties in repaying his or her debt.  

The DC starts for all three scenarios in the same way. The consumer fills in a Form 16 as prescribed in the NCA, which gives the DC certain limited powers: To obtain the consumer's ITC report; to notify creditors and credit bureaus in the prescribed way; to determine the consumers' state of over-indebtedness; investigate reckless credit; investigate unlawful interest and restructure/rearrange the consumer's debts.

The NCA does not allow a DC to engage creditors on behalf of a consumer except if the consumer mandates the DC to do so, but it is not a requirement by law.  

The information on the Form 16 must include the consumer’s income and statutory deductions, for example, PAYE, UIF and medical aid, as well as the consumer’s essential living expenses: housing, food, school fees, insurance, transport and banking costs, for example. It must also contain a list of the consumer's total balances outstanding (including arrears if applicable) and the monthly instalments required. The DC then uses this information to determine the consumer’s possible over-indebtedness.

Hereafter there are 3 scenarios:

Scenario 1

The DC finds, when doing the assessment, that the consumer appears to be able to afford his debt and is not over-indebted. A good DC can assist the consumer in this case to reorganise his budget as that is sometimes all that is required.

The DC must in this case reject the application and the consumer can, if still insisting that he is over-indebted, approach the court himself. This will be done by utilising the Form 18 in the NCA. The consumer can either approach the court himself or appoint a lawyer. This is not done by DCs.

Scenario 2

The DC finds that the consumer is not yet over-indebted, but finding it difficult to pay his debt. This is usually a short term solution and caused by something like divorce, medical problems or vehicle maintenance, which results in a temporary cash flow problem. The debts of a consumer who is not yet over-indebted should, in my opinion, not be rearranged over five years. If that is required, scenario 3 is applicable.

In this case the DC will find that the consumer is not yet over-indebted and assist the consumer to himself make arrangements or if the DC has a mandate specifically permitting the interaction and negotiation with creditors, to make arrangements on behalf of the consumer. These arrangements with creditors will typically be for one or more of the consumer’s credit agreements.

Scenario 3

The DC finds the consumer to be over-indebted. The DC then restructures/rearranges the debt (mind, it is not recalculated as neither the DC nor the magistrate or the lawyer representing the consumer is mandated by the NCA to do so). The amount the consumer has available should be distributed responsibly between all the creditors fairly.

In short, one creditor may not receive preferential treatment. As the consumer is over-indebted with only a specific amount available for distribution between creditors, negotiations are not required. If negotiations are possible, scenario 2 is applicable.

A consumer with a fixed salary and deductions cannot pay more when a creditor demands it as there are no funds available to negotiate with. Consumers are required to repay the total balance outstanding/contractual settlement value at the time the determination is made and that will include the contractual costs, fees, charges and interest.

If the creditors agree to reduce the interest, it will be a reduction of the contractual interest and must be reduced to writing and signed by all parties as this is a contractual alteration.   

In my opinion this will reduce the consumer’s liabilities in terms of the total balance outstanding/contractual settlement value to be repaid. Debt review does not change the contractual terms and conditions, but only extends the term and reduces the monthly instalment to assist the consumer to comply with the rest of the contractual requirements.

The amount available for distribution to creditors will usually determine the term. However, the DC must apply his mind as the consumer's specific set of circumstances will have an impact. For example, a consumer who receives a pension and is aged 70 cannot have a bond restructured over 230 months.

When a consumer is over-indebted the matter must be referred to the Magistrate's Court as only the court is mandated to declare the consumer to be over-indebted and then grants the order. In this case the credit bureau lists the consumer as being over-indebted.  

The NCA makes provision for one or more of the consumer’s credit agreements to be rearranged under debt review. Not every credit agreement needs to be included. The downside on this is that the consumer may not use any of the revolving credit facilities or apply for new credit as he may not incur any further debt whilst paying off the current debt.

Debt review is not a means to finance a consumer’s lifestyle, but to assist in repaying the consumer's debt in full to his creditors. It is also not a means for creditors to enrich themselves and charge additional interest on the extended term as that is not providing relief. Creditors are entitled to the contractual outstanding balance/settlement value under debt review.

The settlement value under debt review must not be confused with early settlement, which is something different. If debt review is done correctly everyone will be treated fairly and the consumer will pay his contractual obligations, the creditor will receive every cent owed, but just wait for the money a bit longer. The downside to this is that early settlement might not be possible as the act requires a consumer to have paid all debt in full as per the order or agreement before the clearance certificate may be issued.  

To exit debt review before a court order is granted the consumer ends the DC’s mandate and informs his creditors that he is no longer participating in the debt review process. This is sent to the credit bureau and a certified copy must be filed with the National Credit Registry (still to be implemented).

Upon receipt of the Form 19 clearance certificate, the credit bureau must expunge from their records all relevance to debt review within seven days. The same goes for a Tribunal Consent Order - except the NCA is vague as to what status a consumer who is part of scenario 2 enjoys.

Alternatively, the consumer can approach the court to have the court order set aside if he can prove that he is no longer over-indebted and in a position to honour his original credit agreements.

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