Debt relief. Picture: ISTOCK
Debt relief. Picture: ISTOCK

The constitutionality of the proposed bill providing for relief for overindebted consumers has been questioned on the grounds that extinguishing debt would deprive creditors of property.

The Treasury has sought senior counsel opinion on whether the provisions in the draft National Credit Amendment Bill will have an unconstitutional effect on contractual relations and if it implies deprivation of rights.

While agreeing with the need for immediate relief for overindebted people who have no hope of repaying debt, the Treasury raised concern about the bill on Friday during a presentation at public hearings held by Parliament’s trade and industry portfolio committee.

The Association of Debt Recovery Agents said that the proposal to extinguish the debt of certain consumers after a long process was unconstitutional.

"There can be no doubt that by extinguishing a debt that is due and owing to a credit provider pursuant to a credit agreement amounts to a deprivation of the credit provider’s right to property," said the association CEO Marius Jonker.

Department of Trade and Industry acting deputy director-general for consumer and corporate regulation MacDonald Netshitenzhe said the department supported the bill "in its entirety". It would investigate the question of its constitutionality.

The banking and microfinance sectors are not in favour of the proposals, which they say will increase the cost of credit for all consumers.

Issues of concern raised by Treasury chief director for financial sector conduct Katherine Gibson included to a section of the bill to allow the minister of trade and industry to prescribe debt intervention to alleviate household debt in critical situations. She said this would introduce a "high level of uncertainty" for credit providers when they assessed the risk that they would not be repaid.

She agreed with the banks’ view that this section was likely to damp the appetite for risk, reduce credit extension and increase the cost to borrowers and called for a socioeconomic impact assessment of its  likely impact.

Gibson qualified the Treasury’s support for the permanent extinguishing of the unsecured debt of overindebted people by saying that it should be a once-off intervention.

The targeted group would be individuals with gross monthly income of not more than R7,500, who have no readily realisable assets (excluding exempted items), are not subject to debt review and have debt of less than R50,000.