WHEN BAD DEBT BECOMES NO DEBT - BEWARE THE NATIONAL CREDIT ACT

INTRODUCTION

The National Credit Act No 34 of 2005 was signed into law by the President on 24 March 2006. Certain sections of this Act came into operation on 1 June 2006 and the remaining sections will come into operation on 1 September 2006 and 1 June 2007. This Act will have major implications for anyone who provides a service or supplies goods to a consumer on credit. The stated purpose of this Act is to promote and advance the social and economic welfare of South Africans, to promote a fair, transparent, competitive, sustainable, responsible, efficient, effective and accessible credit market and industry and to protect consumers by various methods. It is the protection of consumers which will cause credit providers much anguish. Two important consumer protection mechanisms created by this Act will be discussed in more detail in this newsletter, namely, over-indebtedness and reckless credit. We will also consider the effect of these protection mechanisms on credit providers.

OVER-INDEBTEDNESS

A consumer is over-indebted if the preponderance of available information at the time a determination is made indicates that the particular consumer is or will be unable to satisfy in a timely manner all the obligations under all the credit agreements to which the consumer is a party, having regard to that consumers:

• financial means, prospects and obligations; and
• probable propensity to satisfy in a timely manner all the obligations under all the credit agreements to which the consumer is a party, as indicated by the consumer's history of debt repayment.

When a determination is to be made whether a consumer is over-indebted or not, the person making that determination must apply the criteria set out above as they exist at the time the determination is being made. The effect of this is that a consumer who has entered into for example 10 separate credit agreements may be found to be over-indebted as a direct result of the conclusion of the 10th credit agreement. In other words the first 9 credit agreements would not have placed the consumer in an over-indebted position, but the conclusion of the 10th credit agreement will have caused this. The absurdity of this lies in the fact that all 10 credit providers will now suffer the same fate and penalties under the Act even though their credit agreements were not the cause of the over-indebtedness of the consumer.

RECKLESS CREDIT

A credit agreement is reckless if, at the time that the agreement was made the credit provider failed to conduct an assessment as required by the Act, irrespective of what the outcome of such an assessment might have concluded at the time, or the credit provider, having conducted an assessment entered into the credit agreement with the consumer despite the fact that the preponderance of information available to the credit provider indicated that the consumer did not generally understand or appreciate the consumer's risks, costs or obligations under the proposed credit agreement; or entering into that credit agreement would make the consumer over-indebted.

A credit provider must not enter into a credit agreement without first taking reasonable steps to assess, the proposed consumers general understanding and appreciation of the risks and costs of the proposed credit, and of the rights and obligations of a consumer under a credit agreement, the debt repayment history of a consumer under credit agreements, the existing financial means, prospects and obligations of the consumer.

EFFECT ON CREDIT PROVIDERS

In any court proceedings in which a credit agreement is being considered, the Court may declare that the credit agreement is reckless and may make an order setting aside all or part of the consumer's obligations under that agreement, as the Court determines just and reasonable in the circumstances; or suspend the force and effect of that credit agreement until a date determined by the Court when making the order of suspension. The ultimate penalty for providing reckless credit is that all the consumer's obligations under that credit agreement can be set aside by a Court. It is therefore vital that a credit provider must not enter into a reckless credit agreement with a prospective consumer, since the credit provider will risk not being able to recover any money from the consumer under that credit agreement. In this instance the bad debt will become no debt.

In any court proceedings in which a credit agreement is being considered, if it is alleged that the consumer under a credit agreement is over-indebted, the Court may refer the matter directly to a debt counsellor with the request that the debt counsellor evaluate the consumer's circumstances and make a recommendation to the Court; or declare that the consumer is over-indebted and make any order contemplated in section 87 to relieve the consumer's over-indebtedness.

A consumer may apply to a debt counsellor in the prescribed manner and form to have the consumer declared over-indebted. If the debt counsellor concludes that the consumer is over- indebted, the debt counsellor may issue a proposal recommending that the Magistrate's Court make either or both of the following orders:

• that one or more of the consumer's credit agreements be declared to be reckless credit, if the debt counsellor has concluded that those agreements appear to be reckless; and
• that one or more of the consumer's obligations be re-arranged by 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 the Act.

During the period that the force and effect of a credit agreement is suspended, the consumer is not required to make any payment required under the agreement, no interest, fee or other charge under the agreement may be charged to the consumer and the credit provider's rights under the agreement, or under any law in respect of the agreement, are unenforceable, despite any law to the contrary.

There is no doubt that the effect of this Act will change the credit lending landscape forever and credit providers will need to review and revisit their assessment criteria in order to meet the assessment obligations imposed under this Act. They will also have to keep full, proper and accurate records of all credit applications and transactions which fall under the ambit of this Act. This Act will create a fertile ground for litigation and it will be interesting to see how our Courts interpret certain controversial sections of this Act.

WRITTEN BY:
NIGEL PETZER
PETZER, DU TOIT & RAMULIFHO